Trying to Keep Tax Credits in an IVA

It is natural to be afraid of the unknown but it is far better to deal with the unfavorable aspects of any undertaking than to avoid confronting the difficulties totally. The Individual Voluntary Arrangement (IVA) process is just one of those that a person might have an irrational fear of. One of the things that an insolvent person, who is considering entering into an IVA, should verify is whether they might have been overpaid Tax Credits in previous years. If they learn that they have been paid such an overpayment, if they generate a proposal for an IVA, they can and in fact must enter the overpayment as a debt in their IVA proposal, subject to one particular condition. The overpayment will need to have been ‘determined’ prior to the date of acceptance of the IVA. Anybody who is convinced that they may have been overpaid tax credits ought to communicate with HM Revenue & Customs otherwise known as HMRC at their nearest tax office and convey their concern to HMRC authorities. When asked for, HMRC can provide a Statement of Account also called a SOA, and will do so as quickly as possible in accordance with the latest earnings data provided by the individual in question. You don’t have to be insolvent to sort out this matter. Every person has the right to clarity with regards to their right to receive tax credits.

Exactly what does the word ‘determined’ signify in the circumstance of Tax Credits? The word ‘determined’ simply means that the overpayment of Tax Credits was included in a Final Award Notice (FAN) or in a SOA given by HMRC.

If such a determination hasn’t been made, HMRC are unlikely to incorporate any overpayment as a debt in the IVA, irrespective of whether any overpayment is currently being recovered (or could be recovered) by restriction of an ongoing Tax Credits award. The reason for this is that HMRC has no way of conveniently determining the amount (of overpayment) owing.

HMRC will claim to rank for dividend all overpayment of Tax Credits determined prior to the date of approval of the IVA. Furthermore, HMRC will not claim to rank for dividend any overpayment of Tax Credits determined after the date of IVA acceptance, no matter if it was related to a period of time prior to IVA acceptance or not. Such overpayment will be reclaimed from the debtor by HMRC as a post approval debt. It is obvious for that reason that it is in the debtor’s financial interest to have any such overpayment joined as a debt in their IVA rather than to have to manage it separately.

In situations where the insolvent debtor is married or co-habiting and where their partner or spouse is solvent and is for that reason not going into an IVA themselves, it is important to discern whether the Tax Credits overpayment was made to the insolvent person in debt or to the solvent partner or spouse or in fact jointly to both parties. If an overpayment was made jointly to both parties and if the required determination as to the quantum of the overpayment was made ahead of the date of acceptance of the IVA, HMRC will normally input a claim for the debt, in the amount of the full overpayment, into the IVA and HMRC will also rank for dividend with the claims of the other unsecured creditors. The solvent partner continues of course to be liable for repayment of the joint liability in its entirety in accordance with the principle of joint and several liability and HMRC will go after settlement from that source, mitigated to the extent of any dividend paid from the insolvent partner’s IVA.

Following the acceptance of the IVA and once again provided the amount of overpayment of Tax Credits was established before the approval of the IVA, then any limitation of an ongoing award of Tax Credits ought to discontinue right away and payment of the debtor’s Tax Credits award should revert to the normal level with no reduction in respect of previous overpayment. This is in contrast to Bankruptcy where restriction of ongoing award might keep on after the borrower is made bankrupt.

If these HMRC rules and procedures are confusing to the insolvent debtor, the Insolvency Practitioner who is acting for them in the preparation of their IVA proposal, should clear up all of these issues well in advance of their making a decision to proceed or not with an IVA. Going into an IVA ought not leave the borrower any worse off financially in so far as tax credits go and in a lot of cases they will be better off, particularly if they have been given substantial overpayments of tax credits before.

National Debt Relief help people with their financial problems when they face trouble. We provide several formal and informal debt solutions. If you have any queries you can make an Individual voluntary arrangement or Bankruptcy Enquiry by contacting us via phone, email, or through our website.

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Debt Consolidation

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