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HMRC internal manual

Tax Credits Manual

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HM Revenue & Customs
Updated
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Payment - payment profile: Payment profile - how payments are profiled (Info)

Initial award
Revised award
Cross-year recovery
Cross award recovery
Cross award recovery - Reconciliation
Provisional payments
Other forms of overpayment recovery

Initial award

The total award amount is determined. This amount is divided by the number of days in the award period to establish a daily rate, rounded down to two decimal places.

The household pay day (Monday to Friday) and the required payment frequency are established.

Arrears are due for the period from and including the start date of the award period up to the day before the processing date. Arrears are calculated as the number of days multiplied by the daily rate and are issued immediately as a one-off payment.

The balance of the award amount (total minus arrears) is then apportioned over the number of pay days in the rest of the award period, rounded down to two decimal places. This is the amount of the regular payment that will be paid weekly or four-weekly.

The amounts of the scheduled payments are then added together and compared to the total award amount for the period. If there is a shortfall due to rounding differences, this is added to the first regular payment and becomes a one-off payment.

Note: If there is more than one entitlement period within the award period, the award amount for the appropriate entitlement period is apportioned as described above. This is repeated for each entitlement period. Any rounding difference for the whole of the award period is calculated and paid with the first payment in the first entitlement period.

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Revised award

If there is a change affecting entitlement within the award period, the revised award amount is determined and then divided by the number of days in the award period to establish a daily rate, rounded down to two decimal places.

The household pay day remains the same as the initial award.

The total amount of tax credits already paid is determined.

The total amount of tax credits due for the period from and including the award start date and the day before the processing date is determined (revised daily rate multiplied by the number of days)

  • if the amount due to date is greater than the amount paid to date, the difference (arrears) is issued as an immediate one-off payment. The balance of the award amount to be paid (total minus amount due) is then apportioned over the number of pay days in the remainder of the award period. If there are two or more entitlement periods within the remainder of the award period, payments are profiled by the entitlement period.
  • if the amount paid to date is greater than the amount due to date, the difference is recovered from future payments of that tax credit, reducing them to nil if necessary. This is known as an in-year adjustment. The balance of the award to be paid (total award minus amount already paid), if any, is apportioned over the remainder of the award period. If there are two or more entitlement periods within the remainder of the award period, payments are profiled by entitlement period.
  • adjustment is applied to the tax credit that has been overpaid first. If the overpayment is more than the balance of that tax credit to be paid, then the balance of the overpayment is first deducted from another tax credit payable to the same person, then to any other tax credit paid to the household until the whole overpayment amount is ‘recovered’.
  • if the overpayment is greater than the total outstanding award amount, the balance will be recovered from the next award.

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Cross-year recovery

If an overpayment cannot be fully recovered by in-year adjustment, or if an overpayment from an earlier period has not been fully recovered at the end of the previous award, the balance can be recovered from future awards of tax credit. This is known as cross-year recovery.

The rate at which the overpayment is recovered is dependent on the type of award the customer has. The rates of recovery are as follows

  • for a customer who is in receipt of an untapered award, 10% of their regular payments will be recovered until the overpayment is cleared
  • for a customer who is in receipt of a tapered award and whose total household income is £20,000 or less, 25% of their regular payments will be recovered until the overpayment is cleared
  • for a customer who is in receipt of a tapered award and whose total household income is more than £20,000, 50% of their regular payments will be recovered until the overpayment is cleared
  • for a customer who’s in receipt of the Family element, only 100% of their regular payments will be recovered until the overpayment is cleared.

Recovery is applied to each payment issued and is not accounted as having been made until the payment has been issued.

Recovery is only made against the tax credits that were overpaid. It is applied to another tax credit only when entitlement to the originally overpaid tax credit ends.

The amount of overpayment recovered from an award period is shown in the Amount recovered from this award field on the View Award Period Summary screen in Function VIEW HOUSEHOLD ACCOUNT. The amount of recovery made from other award periods that is allocated to an overpayment in another award period is shown in the Amount recovered from other awards field.

For example: £100 is recovered in the 2005-2006 award period to repay an overpayment in the 2004-2005 award period. The 2005-2006 View Award Period Summary screen shows £100 in the Amount recovered from this award field. The 2004-2005 View Award Period Summary screen shows £100 in the Amount recovered from other awards field.

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Cross award recovery

In some circumstances where a customer’s household has ended, an overpayment may still remain outstanding on the ended claim. If a new claim is made at a later date we may make recoveries from their new claims to recover the overpayment(s) from their old claim(s). This is known as cross award recovery.

Cross award recovery will take place when a ‘suitable ongoing claim’ with a ‘suitable household constitution’ has been identified.

A suitable ongoing claim is one where

  • there are current year payments still to be made
  • no payment suspensions exist
  • a previous claim exists
  • the household has not ended and the claim has not had entitlement ended
  • there is no In Year or Cross Year recovery taking place except where active Cross Award Recovery is already taking place
  • no pending change of circumstances have been captured but have yet to be processed.

A suitable household constitution will comprise

  • single customer claims where the customer is currently a member of a suitable ongoing claim and the single household has a ‘relevant overpayment’
  • joint claims having the same household constitution as the suitable ongoing claim and the joint claim has a ‘relevant overpayment’.

A relevant overpayment is one which

  • does not have its recovery suspended for any reason
  • the Notice to Pay (TC610) relating to the year of the overpayment has an issue date recorded or the overpayment has been manually referred to Debt Management and Banking (DMB)
  • has been referred to DMB for direct recovery but DMB have confirmed that it can be returned to NTC.

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Cross award recovery - Reconciliation

Reconciliation is a process that occurs when an ongoing claim ends before the full amount of cross award debt amount is recovered.

When an ongoing claim, or entitlement ends, the cross award debt will be posted back to the original awards along with recoveries made in respect of that debt. The recoveries are made in the following order

  • the oldest ‘like for like’ Cross Award (household) debt is paid back first, Working Tax Credit (WTC) elements first followed by Child Tax Credit (CTC) elements. This continues in year order (earliest first) until all ‘like for like’ debt is paid off
  • then, any ‘like for like’ Cross Year overpayment that may have arisen during recovery is paid off next, WTC elements first followed by CTC, again considering the years in order of earliest first
  • then, we consider overpayments from single claims that were transferred from Cross Award Recovery. The remaining recoveries are split 50:50 for each customer’s single debt. Each single debt is paid off in the order of earliest first, and within those years WTC elements first followed by CTC elements.

Note: If only one customer has previous debt, then 100% of the available recoveries are used for that debt.

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Provisional payments

At the end of the tax year, provisional payments are set up for all households currently in receipt of tax credits. Provisional payments are based on projected household entitlement calculated from known household circumstances.

Each household keeps the same payment method, pay frequency and pay day.

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Other forms of overpayment recovery

Any re-profiling that takes place at the end of the year, either as part of the finalisation process or for any other reason, can trigger lump sum recovery overpayments. These can vary from very small amounts to very large amounts, and are known as reallocation and set off.

Reallocation takes place where there is an overpayment of one tax credit in an award period, and an underpayment of another tax credit in the same period.

An amount of the overpaid tax credit is deemed to have been paid as the underpaid tax credit, up to the amount of the underpayment. Any outstanding overpayment is recovered from future awards by cross-year recovery, or by set off. Any outstanding underpayment is issued to the customer as arrears, or is set off against any outstanding overpayment from earlier award periods.

For example: WTC is overpaid by £100. CTC is underpaid by £150. Instead of paying the customer £150 and leaving them with an overpayment of £100 for WTC, the £100 owed on the WTC is paid off using £100 from the CTC and the customer is paid £50 as arrears.

Note: Reallocation changes the amounts in the ‘Direct payments made to date’ field on the View Award Period Summary screen in Function VIEW HOUSEHOLD ACCOUNT. The amount of reallocation is shown in the View Award Period Postings screen.

Set off takes place when there is an underpayment in one award period and an overpayment for the same household in another award period. The principal is the same as for reallocation, except that it crosses award periods.

The amount set off from an award period is shown in the ‘Amount recovered from this award’ field on the View Award Period Summary screen in Function VIEW HOUSEHOLD ACCOUNT. The amount set off to an award period is shown in the ‘Amount recovered from other awards’ field.

For example: a £100 underpayment in the 2005-2006 award period is set off to repay an overpayment in the 2004-2005 award period. The 2005-2006 View Award Period Summary screen shows £100 in the Amount recovered from this award field. The 2004-2005 View Award Period Summary screen shows £100 in the Amount recovered from other awards field.

From June 2005, set off can also occur when there is an underpayment in an earlier award period and a notional overpayment for the same household in the current award period. The notional overpayment is reduced or cleared before issuing any arrears to the customer. The net effect of this is to cancel any in-year adjustment, thus increasing the regular payments made to the customer. This can be incorrectly perceived to be spreading the underpayment over the remainder of the award period.

For example: an overpayment in the 2003-2004 award period is disputed and remitted in full, though some cross-year recovery has been made. Re-profiling of the 2003-2004 award period takes place, creating an underpayment of £500. Of this, £200 is set off against a notional overpayment in the 2004-2005 award period, leaving £300 to be issued to the customer. Because the notional overpayment is cleared, the reduction in regular payments because of in-year adjustment is stopped, leading to an increase in regular payments.

Note: The amount of any set off or cross-year recovery is included in the total amounts in the ‘Amount recovered from this award’ field and the ‘Amount recovered from other awards’ field. The amounts set off are shown in the View Award Period Postings screen in Function VIEW HOUSEHOLD ACCOUNT.