Tax credits entitlement rules
The two tax credits (Working Tax Credit – WTC, and Child Tax Credit – CTC) have separate qualifying conditions, but some conditions are common to both. These are that the claimant is:
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Overpayment?
So if the 2007-2008 income was £10000, and thus the 2008-2009 provisional award was based upon the £10000 figure. But in fact you tell us in your example, the 2008-2009 turned out to be £25000.
However as £25000 - £10000 = £15000, and £15000 is less than the leeway of £25000, the 2008-2009 award will not be adjusted. And also appreciate that the 2009-2010 provisional award will be based upon earnings of £25000.
However, initially, the 2009-2010 Tax Credits would have also been based upon £10000 earnings, and thus when the £25000 income figure is reported, the 2009-2010 Tax Credits will be adjusted to take account of the obvious overpayment will will have arisen since 06.04.09.
EEA Citizens!
Just to emphasise a point, British Citizens are EEA Citizens, and accordingly a "qualified person".
It therefore follows that under the Tax Credits legislation, that say a visa overstayer, with no right to live in the UK from the immigration point of view, is nevertheless deemed to have a "right to reside" under the Tax Credits legislation, if they are living with an EEA Citizen, including a British Citizen.
Accordingly it is the case that the couple, including the visa overstayer, are able to, and should, submit their Tax Credits claim jointly. It would be wrong for the EEA Citizen to submit a sole claim.