If you are insolvent and are considering entering into an Individual Voluntary Arrangement (IVA) you should check whether you have been overpaid Tax Credits in the past.
Any such overpayment may be entered as a debt in your IVA proposal provided the overpayment has been ‘determined’ prior to the date of approval of your IVA.
For Tax Credit purposes, ‘determined’ means that the overpayment was included in a Final Award Notice (FAN) or a Statement of Account (SOA).
If such a determination has not been made HM Revenue & Customs (HMRC) are unlikely to include any overpayment as a debt in your IVA regardless of whether any overpayment is being recovered (or could be recovered) by restriction of an ongoing Tax Credit award. The reason for this is that HMRC has no means of readily determining the balance (of overpayment) due.
Thus HMRC will claim to rank for dividend all (overpayment of) Tax Credit determined prior to the date of approval of the IVA. Furthermore, HMRC will not claim to rank for dividend any (overpayment of) Tax Credit determined after the date of IVA approval, regardless of whether it relates to a period prior to IVA approval or not. Such overpayment will be recovered from the debtor by HMRC as a post approval debt.
Where the debtor is married or co-habiting and the other party is solvent and is therefore not entering into an IVA, it is important to distinguish whether the Tax Credit overpayment was made to the insolvent debtor or the solvent partner or to both partners jointly. If made jointly to both parties and if the required determination as to the quantum of the overpayment was made prior to the date of approval of the IVA, HMRC will enter a claim for the full debt into the IVA and will rank for dividend with the claims of the other unsecured creditors. The solvent partner continues to be liable for repayment of the debt as a whole in accordance with the principle of joint and several liability and HMRC will pursue repayment from that source, mitigated to the extent of any dividend paid from the insolvent partner’s IVA.
Following the approval of the IVA and again provided the quantum of overpayment of Tax Credit was determined prior to the approval of the IVA then any restriction of an ongoing award of Tax Credit should cease and payment of the debtor’s Tax Credit award should revert to normal level without any deduction in respect of prior overpayment. This is in contrast to Bankruptcy where restriction of ongoing award may continue after the debtor is made bankrupt.