If you made a mistake on your Tax Credits application form or failed to inform HMRC that your circumstances changed you may have been overpaid. As a result you will be asked to give back the overpayment.
If you are still eligible for Tax Credits then HMRC will usually just reduce the future payments you receive so that the overpayment is gradually repaid. If you are no longer eligible for creditors then HMRC will simply pursue you to repay the debt.
Either way the debt is probably putting a significant strain on your family finances. We explain if an Individual Voluntary Arrangement (IVA) can be used to resolve the problem and consider other factors that may influence your decision.
Can an IVA help if my Tax Credits have been overpaid?
An IVA is a legally binding contract with your creditors to help you repay unsecured debts based on affordable payments. A significant advantage of this solution is that the payments you make will generally last just 5 years. After this any remaining debt will be written off.
Because overpaid tax credits are an unsecured debt these can (and in fact must) be included in the Arrangement. In addition once the solution is agreed by the majority of your creditors the others are also legally obliged to abide by the decision.
As such even if HMRC do not agree they are not allowed to continue trying to collect their debt directly from you once an IVA is in place. However whether using this solution is suitable for you will depend on several factors.
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Should I start an IVA for my tax credits overpayment?
One of the first things you need to consider is how much debt you owe overall. If you only owe your credits overpayment it will normally be best to allow HMRC to reduce your future payments or agree a reasonable repayment payment plan directly with them yourself.
However if you have other unsecured debts that you are struggling with and the fact that you now owe money to HMRC has made these even more difficult to repay then an IVA may be an ideal solution for you.
The Arrangement will overturn any collection action that may have been started against you. You may be threatened with legal action by HMRC and this will also be stopped once the agreement is set up.
BMD Tip: If HMRC is currently deducting money from your ongoing payments to pay off the arrears once your IVA starts this deduction will stop. The overpayment debt is included in your IVA and you will start to receive your full tax credit entitlement.
Will my home be at risk if I start an IVA?
You may have read or have been told that as a home owner if you start an IVA your property will be at risk because you will be forced to sell your home. However this is not the case.
It is true that you will need to agree to try and release equity from your property in the last year of the Arrangement to increase the amount that you repay to HMRC and your other creditors. However this is very tightly controlled.
If you cannot release the equity in your home by remortgaging or with a secured loan then your IVA will be extended for another year to compensate your creditors. However any equity in the property is then protected and yours to keep.
BMD Tip: An IVA actually provides legal protection from your property. Because HMRC are no longer allowed to take legal action against you it also prevents them from applying to secure their debt against your home with a Charging Order.
Will HMRC agree to my IVA proposal?
HMRC have every right to turn down your IVA proposal and demand that you repay any overpaid Tax Credits in full. However not all your creditors need to agree for the Arrangement to be accepted and so even if HMRC reject it is still likely to go ahead.
The only time when HMRC could successfully block the agreement is if the total of the debt you owe them in overpaid Tax Credits is 25% or more of your total debt. However given that this is not the case then it is extremely unlikely that HMRC will be able to stop your IVA from going ahead.
It is important to find a reputable company to implement your proposal as they will work hard to negotiate on your behalf with HMRC and it is equally important to make sure you are not forced into paying more than you can realistically afford or this will ultimately lead to failure of your IVA and leave you back at square one.
If you are unsure whether an IVA is the right solution to help with your tax credits overpayment you should get advice from one of our experts who will help you clarify your options and talk you through the process.
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