These are a nightmare – the legislation is contradictory.
On the one hand, as you say, common sense tells you they haven’t been overpaid at all and s138(1)(b) of the Administration Act backs this argument up by characterising a payment of CTB as a reduction in the amount that a person is liable to pay. In other words, it’s not a matter of crediting some money against the liability on the account, the liability is just never the full amount in the first place. the rebate is an integrated billing function. Take away the liability and you have nothing to reduce so it’s impossible to overpay the claimant.
But on the other hand you have the CTB Regs which seem to insist that you go through the formality of saying yes there has been an overpayment, but it is automatically recoverable: Reg 82(a) says that excess benefit includes excess arising where there is a reduction of liability, and Reg 83(4) makes it recoverable in every case. This would presumably require a quick submission and she gets her day at the Tribunal. I guess even if you go with the s138(1)(b) approach, you still have to do an out of jurisdiction referral – ultimately it is for the Tribunal Service to have the final say.
Lapsing the appeal is an interesting thought. You notified an excess benefit decision, relying on Reg 82; the appeal will lapse if you revise in her favour. Could you say that you have taken a more fundamental view and decided that there is no excess benefit because of s138? Consequently you are revising your excess benefit decision in her favour, from some to none. But she would then have a fresh right of appeal against the decision so revised – she could appeal on the grounds that she insists she has been overpaid.
What does she want anyway? The cash refunded? Or does she just want reassurance that she isn’t going to get a bill? Maybe she just doesn’t understand that you aren’t actually asking her to give back 50% of her Council Tax
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