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tax credits guide
The Tax Credits system
Thoroughly revised and updated to reflect recent changes: 10 April 2012
PLEASE NOTE: This guide is currently being updated and still needs some changes
Introduction
This guide to Tax Credits will set out the background to the system, explain the process and entitlement and the common problems that are encountered.
This guide, which was originally written in 2007, has been thoroughly updated with a lot of extra information in January 2011, May 2011, August 2011 and now April 2012 by Victoria Todd of the Low Incomes Tax Reform Group - an initiative of the Chartered Institute of Taxation. W4MP is very grateful to them for their hard work.
With more significant changes still to be implemented, Tax Credits are likely to generate increasing casework for MPs and their staff and this guide will help you keep on top of it.
We are unable to answer detailed questions about the workings of the Tax Credit Office (TCO). If you work for an MP and need specific advice about casework you are handling, use our List of MP's Hotlines to contact their helpline. See also the advice available to all Members' staff, both at Westminster and in constituency offices, from a specialist in the Commons Library; contact information is in the Further help section below.
If you have any further information that you would like to add or if you see something here that is wrong or needs updating let us know, using the Feedback Form.
Index (click on the section you want):
1. Overview of the tax credits system
Tax credits are actually made up of two separate benefits – child tax credit (CTC) and working tax credit (WTC). Although tax credits are administered by HM Revenue and Customs (HMRC) and share many features of the tax system, they are generally regarded as benefits.
The original purpose of tax credits was twofold: to ameliorate and ultimately eliminate child poverty which had grown substantially in the previous two decades; and to make work pay by targeting welfare support at those responsible for children, low earners and working parents using formal childcare.
Child tax credit
Child tax credit, a means tested benefit, is paid in addition to child benefit (a non-means tested benefit also administered by HMRC). It is paid to those who are responsible for a child or young person. CTC is usually paid to the main carer of the child/young person.
Working tax credit
WTC gives additional support to low income workers, whether or not they are responsible for any children and to workers who use approved childcare.
The current tax credits system was introduced on 6 April 2003. Child tax credit (CTC) replaced the child premiums in income support, income-based jobseeker’s allowance and the child dependency increases in other benefits such as incapacity benefit and carer’s allowance. It also replaced children’s tax credit in the tax system.
Working Tax Credit (WTC) was introduced to encourage claimants to move from benefits into work. It replaced the new deal 50+ programme (although the 50+ element of WTC was abolished from 6 April 2012), disabled persons tax credit and together WTC and CTC replaced working families’ tax credit and disabled person’s tax credit. In an attempt to enhance work incentives, it is considerably more generous than any of its predecessors.
Tax credits were intended to help six million families, but initial problems with the IT, complexities of the rules and the natural design of the system have caused many families to be either over or underpaid. The latest overpayment statistics can be found on the HMRC website.
HMRC originally gave assurances that these initial IT problems were ‘teething errors’ which would be resolved as staff became more experienced in operating the new system, and as both they and customers became familiar with the new rules. Whilst the situation has improved, the design of tax credits means that some overpayments are inevitable even if everything is done by both HMRC and the claimant correctly. In addition, the sheer complexity of the current system means that both HMRC staff and claimants find it difficult to navigate which can often result in overpayments caused by errors.
The majority of problems arising now appear to have three key origins:
- The design of the tax credits system itself. Awards are annual and the system has an element of financial uncertainty built into it, sometimes causing significant problems for people who have to plan carefully to manage their family budgets;
- The delivery of tax credits has been designed to be wholly IT based and does not take proper account of the needs of customers.
· The complexity of the rules means that HMRC staff and claimants often make errors which lead to overpayments.
Tax credit entitlement rules are extremely complex. The following is a basic guide to CTC and WTC along with links to further information.
Basic entitlement rules
To be eligible to claim CTC and WTC, claimants must meet certain criteria relating to age, immigration status and presence in the UK (including tests for presence, ordinary residence and for CTC only right to reside).
Claims for both WTC and CTC can either be single or joint. It is very important that claimants make the right claim. Claiming as a single person instead or jointly, or vice versa, can lead to large overpayments and possible penalties.
The correct claim depends on the status of the claimant or claimant couple. Those who are married or in a civil partnership should make a joint claim unless they are separated under a court order or separated in circumstances that are likely to be permanent.
Those who are in a relationship with each other, but not married or in a civil partnership, should also make a joint claim if they are living together as husband and wife or civil partners. Those who are single must make a single claim. HMRC have produced some further guidance about making the right claim on their website. You can find detailed information about couples from the LITRG Revenuebenefits website.
The importance of claiming in the right capacity, and notifying HMRC promptly if one’s status changes, cannot be overstated. Substantial overpayments can arise through failure to do so.
Child tax credit
Child Tax Credit (CTC) can be claimed if a claimant (or their partner) is responsible for one or more children or qualifying young persons. The claimant does not have to be working to claim CTC.
There are very specific definitions in relation to CTC.
What is a child or qualifying young person?
In simple terms, a child is under the age of 16; between their 16th birthday and the following 31st August, they will be counted as a ‘qualifying young person’ without the need to be in full time education or training. To continue to be treated as a young person after this date, they must be under 20 and in full time education or training.
CTC claims can also continue where a young person is under 18 and leaves full time education or approved training providing they notify HMRC within 3 months of leaving that they are registered with the Careers Service (The careers service of the Department for Employment and Learning or an Education Board in Northern Ireland), Connexions Service, Ministry of Defence, or any corresponding body in another Member State and no more than 20 weeks has passed since that leaving date. During that time they must not have engaged in work of 24 hours per week or more, nor claimed certain benefits in their own right.
If a young person leaves full-time education or enrols on a training course, then takes up paid work for 24 hours a week or more, a claimant cannot normally continue to claim CTC for them for as long as they are engaged in that work. However, there are exceptions to this rule where the young person's work is:
- for a charity;
- as a carer;
- in pursuance of an Intensive Activity Programme or a sports award;
- as a participant in an Employment Zone programme.
Nor can a claimant continue to claim for a young person who becomes entitled in their own right to income support or income-based jobseeker's allowance or income-related employment and support allowance.
Responsibility for a child or qualifying young person
CTC can only be claimed if the claimant (or their partner) has ‘responsibility’ for the child or young person. In this context ‘responsibility’ has a very specific meaning. They are responsible for a child or young person if the child or young person normally lives with them. There are rules for interpreting the normally living with requirement, and for deciding between two or more individuals, couples, etc, when the child can be said to be normally living with more than one.
A claimant will no longer be treated as being responsible for a child or young person who:
- is in care
- is placed with others for fostering or adoption
- is serving a custodial sentence for life, for an unlimited time, or for a fixed term of longer than four months, or detained at Her Majesty's pleasure
- is 16 or over and being awarded CTC for a child of his or her own
- is 16 or over and in receipt of incapacity benefit or contributory employment and support allowance for himself or herself
- is 16 or over and awarded working tax credit in his or her own right
- has a spouse or civil partner or lives with a partner, and that spouse/partner is not in full time education or approved training
- is the spouse, civil partner or partner of the responsible person with whom they are living.
More detailed information about the qualification criteria for CTC can be found on the HMRC website or in the HMRC tax credits manuals (see TCTM 02200 onwards for CTC entitlement information).
Child tax credit and disability
Extra amounts are available in CTC if a child or young person is disabled and/or severely disabled. A child or young person is disabled if:
- disability living allowance (DLA) is payable for them, or is normally payable but has ceased because they are a patient in hospital; or
- they are registered (or certified) as blind, or have come off the blind register in the last 28 weeks immediately preceding the date of claim.
They are severely disabled if the care component of DLA is payable for them at the highest rate, or is abated while they are in hospital.
Working Tax Credit
There is only entitlement to WTC if the claimant (or their partner) are in ‘qualifying remunerative work’ (QRW). There are several conditions that must be met to be found in QRW, some of which relate to age and working hours. In brief these are:
In the
case of a single claim:
-
the
claimant is aged 16 or over and works at least 16 hours a week and:
is responsible for a child or qualifying
young person; or
-
qualifies for the
disability element of WTC; or
-
the
claimant is aged 60 or over and works at least 16 hours a week; or
-
the
claimant is aged 25 or over and works at least 30 hours a week.
In the
case of a joint claim where there is no responsibility for a child or
qualifying young person:
-
the
claimant is aged 16 or over and works at least 16 hours a week and
qualifies for the disability element of WTC; or
-
the
claimant is aged 60 or over and works at least 16 hours a week; or
-
the
claimant is aged 25 or over and works at least 30 hours a week.
In the
case of a joint claim where there is responsibility for a child or
qualifying young person:
-
the
claimant is aged 16 or over and works at least 16 hours a week and
qualifies for the disability element of WTC; or
-
the
claimant is aged at least 16 and is a member of a couple where one
partner works at least 16 hours a week and the total number of hours for
which the couple work is not less than 24 hours a week; or
-
the
claimant is aged at least 16 and is a member of a couple where one
partner works at least 16 hours a week and the other partner is
incapacitated, in prison, in hospital or entitled to carer’s allowance;
or
-
the
claimant is aged 60 or over and works at least 16 hours a week.
The requirement that couples with children must work at least 24 hours between them was introduced from 6 April 2012. Prior to that date, such couples could qualify for WTC by only working 16 hours per week. Both members of a couple who meet the 24 hour requirement are treated as being in qualifying remunerative work, even if one of them works less than 16 hours. HMRC stopped the WTC (from 6 April 2012) of all couples with children who did not meet this 24 hour requirement, even if one of them met one of the exceptions to the rule (incapacitated, in prison, in hospital or entitled to carer’s allowance). Those who qualified for WTC in another way (because they are aged 60 or over or qualify for the disability element) did not have their tax credits stopped. HMRC expected claimants to contact them before 6 April to tell them that an exception applies, however did not make the need for contact explicit in any communications prior to 6 April 2012. See the LITRG article for more information.
There are several elements within Working Tax Credit. Everyone who qualifies for WTC will have the basic element included in their calculation. The other elements will be included if the qualification criteria are met. The elements, along with links to further explanation, are:
This element is paid to those who meet the basic conditions for WTC and are in (or treated as in) qualifying remunerative work. If the claim is joint, only one basic element is included.
In certain circumstances a claimant can be treated as in QRW even if they are not actually working. These circumstances relate to periods of maternity leave, adoption leave, paternity leave and sick leave. There are also rules that treat them as in QRW for the first seven days prior to starting work andthe first four weeks after stopping work in certain circumstances.
· Couple/Lone Parent element (the second adult element)
The couple element is generally paid in WTC claims involving a second adult. The lone parent is paid to single claimants who have responsibility for a child or qualifying young person. There are some exceptions where the second adult element is not payable.
This element is paid where either the claimant or their partner is working at least 30 hours. If a couple have responsibility for a child or qualifying young person they can qualify for this element if between them they work at least 30 hours as long as one of them works at least 16 hours (but note the introduction of the new 24 hr requirement for couples with children). Even if both claimants work 30 hours, only one element is included.
There is entitlement to the disability element if a claimant (or their partner) works at least 16 hours per week, has a physical or mental disability that puts them at a disadvantage in getting a job and receives (or has recently received) a qualifying disability benefit. Further explanation of these terms is given below. If both people in a joint claim meet the criteria, each will have a disability element included in the claim.
This element is payable in addition to the disability element. You do not need to qualify for the disability element to get the severe disability element, you can qualify for either or both of them depending on your circumstances. It is distinct from the disability element in that there is no work requirement. This element is awarded if the claimant or their partner are in receipt of the care component of Disability Living Allowance (DLA) at the highest rate or an attendance allowance payable at a higher rate. They are still entitled even if their DLA or AA is suspended whilst they are in hospital. If both people in a joint claim meet the criteria, each will have a severe disability element included in their claim.
The 50+ element was awarded when a person returned to work after a period on certain benefits. The criteria was very specific and the element was paid for a maximum of 12 months. This element was abolished from 6 April 2012, even for those who had not received a full 12 months worth of the element. This meant that some people would lose their entitlement to WTC (including the basic element) unless they increased their hours to 30 or more, others (who continue to qualify for WTC by working at least 16 or 24 hours) are likely to have seen a reduction in the amount they received from 6 April 2012.
· 50+ element (30+ hours). This element was also abolished from 6 April 2012.
The childcare element is surprisingly part of WTC and not CTC, although it is paid alongside CTC to the main carer. The reason for this is that you must meet the basic criteria for WTC, alongside other criteria specific to the childcare element, to qualify. More detailed information about the childcare element is included below. From 6 April 2012, the childcare element has been extended to those where one person works at least 16 hours and the other is entitled to carer’s allowance.
Disability element
HMRC set out the full criteria in the factsheet TC956.
In brief, the disability element criteria are as follows:
CONDITION 1: Claimant must work at least 16 hours a week
The disability element is only for those who are working. If the claimant is part of a couple, and one of them is disabled but not working, they won’t get the disability element included. If they both meet all three conditions, they will qualify for two disability elements.
CONDITION 2: The disability must place the claimant at a disadvantage in getting a job
The meaning of this expression, in tax credits terms, is that the claimant has one of a number of disabilities which HMRC have set out in a list. You can find that list on leaflet TC956 produced by HMRC. The claimant must meet one of the descriptions on the list to pass this part of the test.
CONDITION 3: The claimant must receive or have previously received a qualifying benefit
A list of disability-related benefits is set out in the law, at least one of which the claimant must be receiving now, or have received at some time in the past.
The benefits, and the rules for each, are set out below. The claimant doesn’t need to meet them all, as long as they meet at least one of the bullet points below, they will satisfy condition 3.
Case A:
The claimant must have received higher rate short term or long term
incapacity benefit, severe disablement allowance, employment and support
allowance (ESA) or a limited capability for work credit for at least one day
in the previous 182 days. If they qualify because they are receiving (or
have received) ESA or a limited capability for work credit, there is a
further condition. They must have been entitled to either ESA , that credit,
statutory sick pay, higher rate short-term incapacity benefit, long term
incapacity benefit, severe disablement allowance, or income support (payable
in accordance with paragraphs 10(1)(b) or 2(b), 11 or 12 of Part III
Schedule 2 to the Income Support (General) Regulations 1987) for a period of
28 weeks, which must comprise either one continuous period or two or more
periods which are linked together.
Case B:
The claimant must have received, on at least one day in the previous 182
days, the higher pensioner or disability premium in income support,
income-based jobseeker's allowance, housing benefit or council tax benefit.
Case C:
The claimant must currently receive disability living allowance (DLA) or
attendance allowance (AA). They can also qualify if you currently receive a
mobility supplement or constant attendance allowance paid in conjunction
with a war pension or industrial injuries disablement benefit. For the
disability element only (not the severe disability element) any rate of DLA
will qualify them. If their DLA, AA, mobility supplement or constant
attendance allowance stops the disability element will cease immediately.
Case D:
The claimant must have an invalid carriage or another vehicle provided under
the Invalid Vehicle.
Case F:
They qualify if they have undertaken 'training for work' for at least one
day in the previous 56 days, and within 56 days before the first day of
training for work they have received either:
·
short-term incapacity benefit at the higher rate, or
·
long-term incapacity benefit, or
·
severe disablement allowance, or
·
contributory ESA or a limited capability for work credit.
Again, they must have been entitled to contributory ESA, that credit,
statutory sick pay, higher rate short-term or long term incapacity benefit
or severe disablement allowance for a period of 28 weeks, comprising one
continuous period or two or more periods which are linked together. If
statutory sick pay was payable, they must have satisfied the required
contribution conditions.
'Training for
work' means
training under certain statutory arrangements on a course whose primary
purpose is the teaching of occupational or vocational skills. The claimant
must attend for at least 16 hours a week.
Case G:
The claimant qualifies if they have been entitled to the disability element
of WTC itself at any time in the previous 56 days. But if the reason they
were entitled to the disability element was that they were getting DLA or AA
or under the invalid vehicle scheme, they will not qualify under this head.
It is important to be aware that this rule also applies when a claim is
renewed each tax year as it is counted as a new claim. Before April 2003
entitlement to disabled person’s tax credit was the qualifying condition.
They can also satisfy
condition 3 by qualifying under Case E often called the ‘fast track’ rules.
Although it is called the fast track, it requires them to be off work sick
for quite a long time and be in receipt of certain benefits during that time
to qualify.
To meet the fast track rules
they must meet all three numbered points below:
Case E:
This case is often referred to as the ‘fast track’ rules, although this is
somewhat of a misnomer. To qualify under this route, the claimant (or their
partner) must meet all 3 of the following requirements:
1.
(a) on account of
their incapacity for work, they received statutory sick pay, occupational
sick pay, short term incapacity benefit payable at the lower rate or income
support, for a period of 140 days where the last of those days fell within
the previous 56 days or they have been credited with Class 1 or 2 National
Insurance contributions for at least 20 weeks where the last of those weeks
fell within the previous 56 days.
OR
(b) on account of their
incapacity for work or having limited capability for work they received an
employment and support allowance, or any of the pay or benefits in paragraph
(a) above, for a period of 140 days where the last day fell in the previous
56 days or they have been credited with Class 1 or Class 2 contributions on
account of having incapacity or limited capability for work for a period of
20 weeks where the last of those weeks fell within the previous 56 days.
2. The claimant has a disability that is likely to last for at least six months, or for the rest of their life if their illness is terminal and they are not expected to survive for six months.
3.
Their gross earnings
have dropped by at least 20% following their disability, with a minimum
reduction of £15 per week.
In certain circumstances the 140 days (or 20 weeks) can be made up of two periods.
Childcare element
Although childcare relates to children, it is part of working tax credit not child tax credit which means that it can only be claimed if the basic WTC conditions outlined above are met. It is generally paid with CTC to the main carer.
The childcare element can be included if the claimant is:
- a lone parent engaged in qualifying remunerative work; or
- part of a couple one or both of whom is responsible for a child or young person, and both are working at least 16 hours a week; or
- part of a couple in which one member is engaged in qualifying remunerative work, and the other is either incapacitated, a hospital in-patient, in prison or entitled to carer’s allowance (from 6 April 2012);
The claimant must be incurring relevant childcare charges for a child of a prescribed description for whom either the claimant or their partner is responsible.
Relevant childcare charges will only apply where the childcare used is ‘registered’ or ‘approved’. What is counted as registered or approved depends on which part of the UK the claimant lives. Full lists are set out in WTC 5 produced by HMRC.
Claimants are eligible for childcare support only until the 1 September following their child's
- 15th birthday, or
- 16th birthday if the child is registered as blind or has ceased to be so registered within the 28 weeks before the claim, or they receive disability living allowance for the child (or would receive it but for the child being a patient in hospital)
One point to note about childcare is that claimants must actually incur the childcare costs themselves. If the childcare costs are paid directly or indirectly by someone else then the childcare element is unavailable. Thus, if a claimant receives childcare vouchers from their employer (often under a salary sacrifice arrangement) they cannot claim childcare element of tax credits for the costs covered by the vouchers. The voucher amount must therefore be deducted when calculating childcare for tax credits. (The vouchers can also be deducted when calculating taxable income for tax credits purposes). Due to the tax credits changes from April 2012, some claimants will be better off not accepting childcare vouchers from their employer and claiming full help through the tax credits system although some claimants will benefit from taking the vouchers. Every case is different and the right decision will depend on their family circumstances. Specialist help should be sought to carry out a better off calculation. HMRC also produced a calculator to help claimants determine whether to take vouchers or not, however it does have some limitations which are noted on the home page.
HMRC have produced guide WTC5 which explains the childcare element rules in full.
The amount of tax credits a person receives is based on their circumstances and household income (either for the current year or previous year). The actual calculation is quite complex.
Although WTC and CTC are two separate tax credits, they are calculated together and entitlement to WTC can affect CTC even if no WTC is payable (for example because income is too high).
The first step in calculating entitlement is to add together all of the WTC and CTC elements (except for the childcare element of WTC) that are applicable. This produces the maximum entitlement which is then reduced depending on the household income.
The rates for 2012/2013 are:
WTC
Basic
2012/13 annual rate £1,920
2012/13 daily
rate £5.27
Couple
and lone parent
2012/13 annual rate £1,950
2012/13 daily rate
£5.35
30 hour
2012/13 annual rate £790
2012/13 daily rate £2.17
Disabled worker
2012/13 annual rate £2,790
2012/13 daily rate £7.65
Severe
disability
2012/13 annual rate £1,190
2012/13 daily rate £3.27
CTC
Family element
2012/13 annual rate £545
2012/13 daily rate £1.50
Child element
2012/13 annual rate £2,690
2012/13 daily rate
£7.37
Disabled child
2012/13 annual rate £2,950
2012/13 daily rate
£8.09
Severely disabled child
2012/13 annual rate £1,190
2012/13
daily
rate
£3.27
You should note that tax credits are paid at a daily rate throughout the award period. This means that the annual amounts announced at Budget time and shown in the tables below have to be subdivided into daily amounts. This is done by dividing the annual rate by 365 days (366 days in a leap year) and rounding up to the nearest penny.
Bear in mind however that this does not include the WTC childcare element because this is worked out on a weekly basis. Often for simplicity, HMRC and other websites show calculations using annual figures.
Claimants who are in receipt of income support, income-based jobseeker’s allowance, income-related employment and support allowance and pension credit will receive their maximum entitlement regardless of any other income (except during the ‘four-week run-on’ period when the normal income test applies).
For everyone else, the maximum amount is reduced once income goes above certain thresholds. The thresholds used depend on if there is entitlement to CTC only or WTC and CTC.
CTC only 2012/13 threshold £15,860
WTC only 2012/13 threshold £6,420
WTC and CTC 2012/13 threshold £6,420
In all cases, the maximum amount of tax credits is reduced by 41p for every £1 that household income goes above the threshold.
A full set of rates and thresholds going back to 2003-2004 are
available on
Revenuebenefits.
[VT1]
One important point to note is that for 2011/12 the family element of CTC (£545 per year) was protected until income reached at least £40,000. If by the time income reached £40,000 all other elements had been reduced by income, the family element was reduced by 41p for each £1 of income over £40,000.
If by the time income reached £40,000 the other elements had not
all been fully reduced, the family element was only tapered away once those
other elements had been reduced to zero. This generally happened where
people had high maximum awards which included more than one child and very
high childcare costs.
This protection of the family element was abolished from 6 April
2012. This means that the family element is now reduced by 41p in the £1
straight after the other elements of tax credits have all been tapered away.
For some families, this means they will lose payments of tax credits much
lower down the income scale.
You can find useful tables that show the incomecut-off limits in various circumstances on Revenuebenefits. You can also find a full explanation of how to calculate tax credits in 2011-2012 and earlier years and from 2012-2013 under the new rules in the ‘calculating tax credits’ section of that site.
This is a very brief overview of how tax credits are calculated. More information about calculating tax credits can be found:
HMRC tax credit manual (including a worked example)
Income
Tax credits entitlement is based on household income. Whilst this sounds like a relatively simple concept, it is one of the most confusing parts of the system.
Initially, claims are based on previous year income. For 2011/2012 and
claims for earlier years, If current year income was expected to be lower
than previous year income, or higher by more than £10,000, HMRC could amend
the claim to be based on an estimated current year income. From 6 April
2012, HMRC have introduced a second disregard for falls in income. How this
works is explained below.
After the end of the tax
year, HMRC finalise tax credit claims by asking claimants to confirm their
actual income for the year just ended. They then apply the following rules to
determine what household income to use in finalising the claim.
These rules apply to the calculation of 2012-2013 claims:
- If current year income is greater than previous year income by no more than the £10,000, previous year income is used.
- If current year income is greater than previous year income by more than £10,000, the income used is the current year income less £10,000.
- If current year income is less than previous year income, by £2,500 or less then the previous year income is used.
- If current year income is less than previous year income, by more than £2,500 then current year income plus £2,500 is used.
The effect of these rules is to create two income disregards. The first, for
rises in income, allows claimants to have a rise in income between one year
and the next without it impacting on their tax credit claim immediately. The
second, means that claimants must have a fall in income of more than £2,500
(between current year and previous year or current year estimate and
previous year) in order for their tax credits to be re-calculated. In other
words the first £2,500 of any fall in income is disregarded.
The following example shows how the disregard works:
Paul claims tax credits on the 10 May 2012. His income for the
previous tax year, 2011-2012, was £10,000, and his claim is initially
calculated based on that amount. Paul moves into a new higher paid job on
1st June and by the end of the 2012-2013 tax year he works out his actual
income for that year as £18,000. Paul’s tax credits for 2012-2013 are
finalised using his previous year income of £10,000 because the £8,000
increase between previous year and current year is disregarded. But his
initial award for 2013/14 is based on his actual income in 2012/13, ie
£18,000.
Similarly, if Paul’s friend Peter also claimed tax credits on 10
May 2012. His income for the previous tax year, 2011-2012, was £10,000 and
his claim is initially calculated based on that amount. Peter loses his job
and moves into lower paid work on 1st June and by the end of the
2012-2013 tax year he works out that his actual income for that year will be
£8,000. Peter’s tax credits for 2012-2013 are finalised using his previous
year income of £10,000 because the £2,000 decrease is less than £2,500 so
his current year tax credits are not re-calculated as the fall is not great
enough. However his initial award for 2013/14 will be based on his actual
income in 2012/2013 ie £8,000.
Had Peter’s income fallen to say £7,000, his 2012-2013 award
would have been finalised on £9,500 (his actual income of £7,000 plus the
disregard of £2,500). His initial award for 2013/14 would be based on his
actual income in 2012/2013 ie £7,000.
There are numerous issues surrounding the operation of the disregard. This
is because if claimants believe their current year income will be less than
in the previous year they can contact HMRC and ask for their claim to be
revised to be based on an estimate of their current year income. This will
lead to an increase in tax credits (subject to the £2,500 disregard for
falls in income from April 2012). However, if the estimate turns out to be
too low, they will most likely have an overpayment. This is because the
disregard only applies to rises in income between the actual levels of
previous year and current year income. If the actual level of previous year
income exceeds the claimant’s own estimate of current year income, the
disregard cannot apply to the excess. This was a frequent problem in the
early years of tax credits as the disregard was only £2,500. It was
increased substantially to £25,000 in 2006-2007. From April 2011 it was
decreased to £10,000 and will fall again in 2013-2014 to £5,000 making it
likely that disregard related overpayments will again occur more frequently.
Determining which year’s household income to use is only one of the challenges relating to income in the tax credits system. No matter which year is used, there are certain rules which determine what is counted as income for tax credit purposes.
The following websites explain what constitutes income:
5. Claims and changes of circumstances
Initial Application and changes of circumstances
Claim packs can be requested from the Tax Credit helpline on 0345 300 3900 (textphone 0345 300 3946). New security procedures on the helpline mean it can sometimes be difficult to obtain a claim pack. Claimants will normally be asked security questions based on data obtained from Experian (the credit reference agency). If those questions are answered incorrectly then the claimant may be asked to attend an interview at a local HMRC office in order to verify their identity. HMRC are currently piloting a new process which allows claimants to receive a claim pack without this additional security.
Initial applications must be made by post but any subsequent changes and
renewal of claims can be made over the telephone although it is advisable
for claimants to keep detailed notes of all telephone calls including the
date, time, operator name and brief notes of the detail of the call. A
limited number of claimants can make initial claims
via the
telephone.
This is necessary should there be any later dispute. However, given that
many claimants have had problems with changes not being made in accordance
with their instructions, it is advisable that all changes be confirmed in
writing and sent using a service which requires a HMRC signature upon
delivery.
The information that customers are asked to provide is based on their
current circumstances and their income from the previous tax year. For
example, claims made during the 2012-2013 tax year will be initially based
on 2011-2012 tax year income.
After the end of the year, HMRC will finalise the claimant’s entitlement for
the year. See above for more information about income figures used in
finalisation and the income disregards.
Some changes of circumstances must be notified to HMRC within one month of
them occurring. Alternatively, most changes of circumstances can be notified
within one month after the claimant has become aware of the change.
A full list of changes that must be reported can be
found on the HMRC website.
Changes which increase a person’s award should be notified within one month
in order to ensure full backdating is received. This was three months prior
to April 2012.
Although it is not obligatory to notify HMRC of changes in income, it is
generally desirable to report income changes to minimise overpayments as
much as possible. There are certain circumstances, such as if income falls
and is expected to rise again or if other means-tested benefits are claimed,
where it may not be desirable to report a change in income immediately but
expert welfare rights advice should be sought in these situations.
Backdating
Initial claims can be backdated up to 31 days (93 days prior to 6 April
2012), or longer in certain cases involving the disability element or those
granted refugee status. Changes of circumstances can be backdated up to one
month (3 months prior to 6 April 2012). HMRC will backdate most claims
automatically. However those entitled to WTC only (without any CTC) must ask
for backdating by contacting the helpline as soon as they receive their
first award notice or by sending an appeal against that first notice.
More information about backdating
longer than 31 days/1 month is available on revenuebenefits.
Award Notices
Following the initial application, an award notice is sent which sets out the details on which HMRC have based the claim and shows the entitlement for the current tax year. This entitlement is provisional and will not be finalised until the tax year has ended and actual income details are known. The figure is based on information claimants have provided about their personal circumstances and it is imperative that the claimant checks what is on this notice. Claimants have one month from receiving the notice to check the details and tell HMRC about any mistakes. As the initial application forms are often ‘computer-read’, mistakes are made and incorrect information is often submitted on their file.
The claimant must check the award notice thoroughly. A new award notice will also be sent each time customers advise the Tax Credit Office of a change in their circumstances. Claimants receive a checklist from HMRC (TC602SN) to help them check the award notice.
Renewals process
After the tax year has ended, claimants go through the ‘renewals’ process. The renewals process has a dual purpose. It finalises the claim for the year just ended and acts as a claim for the new tax year. However the term ‘renewals’ can be misleading as not all claimants will be renewing their claim for the coming tax year.
There are two forms – the TC603D (declaration form) and TC603R (review form). Where a reply is required by the TCO, claimants will receive both forms. The process can be completed over the telephone or by returning the forms. Some claimants (mainly those who receive the maximum family element) may only receive the TC603R and are often called ‘auto-renewal’ cases. These claimants will have their claim renewed automatically unless they report certain changes to TCO.
The declaration form allows customers to provide their exact earnings details for the year just ended. The information on this form is used to calculate the final award and whether the customer has been overpaid or underpaid. The details will then be used as the basis for their claim for the new tax year.
Many overpayments are caused by claimants failing to renew. Often this happens because claimants think they are no longer eligible or because they don’t understand the importance of the forms. Failure to renew means that any payments made by HMRC between April and the time HMRC terminate payments (August) for non-renewal will be overpaid. This is because without completing the renewals process there is no claim for the new tax year.
If HMRC do terminate payments for failure to renew by the deadline (normally
31 July following the end of the tax year although some people may have a
different deadline noted on their forms), claimants can have their claim
reinstated (from the previous 6th April) providing they contact HMRC within
30 days (for renewals during summer 2011 this was temporarily extended to 60
days) of the date on their statement of account (the form which is sent when
payments are stopped). After the expiry of this 30 day grace period, the
claim can only be reinstated if there was good cause for the failure to
renew and even then only if they renew by the following 31st
January. After that date, or if there is no good cause, a full
new claim needs to be submitted which can only be backdated for 31 days. Any
overpayment from provisional payments on the old claim will need to be dealt
with.
In March 2012, HMRC wrote to 1.3 million tax credit claimants who were Nil
awards (entitled but receiving no payments) or who they thought may be Nil
award from April 2012 following the Budget changes. These letters stated
that if claimants did not contact them by 31 March 2012, their claim for
2012/2013 would not be renewed. The letters contained misleading information
about the income cut off for CTC and claimants may have left the system
unaware that if their circumstances were to change they would still have
entitlement and may have benefited from a ‘protective claim’. More
information about these letters and action that may need to be taken can be
found on
Revenuebenefits.
[VT1]
More information about the renewals process is available from the following sources:
When a constituent comes to an MP about problems they are having with the Tax Credit Office it is usually because they are not being given the information they have requested and, more often than not, this relates to overpayments.
For those cases where overpayments are not an issue, and where your constituent has had problems either changing personal details, making a claim to begin with or having their payments stopped, a letter from an MP will often get the reply or details they need. In more difficult cases involving entitlement decisions, it may be necessary to appeal. The appeal route is explained below under challenging overpayments.
However with over a million overpayments each year, it is likely that this is the reason for your involvement. It is very easy to listen to a constituent’s case and agree that it was the TCO’s fault that this occurred and that they should not have to repay the overpayment, but there is a Code of Practice (COP 26) which governs overpayment disputes. In addition, although disputes are the most common route for tax credit claimants, there may be a right of appeal or other mechanisms that can be more effective. The section below on challenging overpayments briefly explains each avenue open to claimants with overpayments.
Finding out how the overpayment occurred is often the biggest problem. Regardless of whether or not it is recoverable, the constituent will want to know how much they owe and how it happened. A simple letter to the Tax Credit Office asking for an explanation of how it occurred is a good first step.
Inevitably the reply will be brief and simple as they have a range of ‘standard sentences’ that they can use. You then need to write back querying specific points e.g. the exact amount of the overpayment or the dates of telephone calls or recordings of conversations.
If you are querying entitlement without actually disputing the overpayment, HMRC will not suspend recovery of the overpayment. It is important that letters are sent to the dispute team in order to have recovery suspended. Explanation requests alone will not suspend recovery of the overpayment.
If necessary, you can ask HMRC to supply you with copies of all of the documentation relating to a particular claimant, including the original application forms and even transcripts of telephone conversations (although these are usually sent separately, on a CD-ROM).
If these have all been exhausted and the information is still not forthcoming, you could put a phone call through to Paul Gerrard, the Director of the Tax Credit Office (TCO), who can help things along. After many phone calls and Parliamentary Questions trying to establish why he doesn’t take phone calls all TCO staff have been issued with guidelines that they can put MPs through to his office; so it is worth persevering even if you get stopped by the first set of gate-keepers. [Editor's note mid-January 2011: this was correct previously but we are awaiting confirmation.]
The TCO MPs' hotline is another useful resource, especially if you have a simple query which does not require a written response. However, they are also able to help with more detailed enquiries, if you are able to provide them with sufficient information about the case. However, if the constituent is vague about how a problem with their claim has occurred, these queries are more difficult to untangle and may result in 'telephone ping-pong', where you have to keep phoning the Constituent to ask them further questions.
Another common problem is being given conflicting advice, either in writing, by telephone or information previously given to a constituent. This is an issue we are told is being improved and arises because of the complexity of cases and that problems usually occur for many reasons. It is another reason why putting things in writing is often best practice.
Most advisers who deal with tax credits are likely to have dealt with a claimant who has been overpaid. The nature of the tax credits system means that overpayments are a natural part of it and can arise without fault by either the claimant or HMRC. However, many overpayments occur as a result of an error by HMRC or a mistake by the claimant.
There are six options to consider when a claimant has an overpayment. It may be necessary to pursue one or more options at the same time depending on the case. Although disputes are the most common route to take, other options (such as appeals and official error requests) can be more successful because they are legislative routes.
It is important that cases are examined carefully to ensure the right action is taken, particularly with regards to whether to file an appeal or send in a dispute. This is because appeals have strict time limits and outside of these limits it may no longer be possible to appeal.
Each of these options is explained very briefly below along with links to more detailed information.
The Low Incomes Tax Reform Group have written a detailed 42 page guide which outlines all of these options and explains in detail the issues that arise in relation to Challenging overpayments.
- Appeal
A claimant can appeal a tax credit decision which they think is wrong. Not all tax credits decisions are appealable. A full list of appealable decisions is available on the revenuebenefits website. Decisions by HMRC to recover an overpayment are not appealable, but the underlying decision that led to the overpayment may be appealable.
Appeals should be sent to HMRC within 30 days of the date of the HMRC decision (this will normally be the date on the tax credits award notice). Late appeals may be allowed up to 13 months from the date of the decision. Appeals must be made in writing (or on form WTC/AP) to the Tax Credit Office. If the TCO don’t agree with the appeal, or agreement cannot be reached, the appeal will be referred to an independent tribunal. It is for this reason that having a right of appeal can be more powerful than a dispute.
More information about appeals can be found on the following websites:
The dispute process is used where there is an actual overpayment (the claimant has received more than their actual entitlement) but the claimant does not think it should be repaid.
Code of Practice 26 governs disputes. Prior to January 2008, there was a reasonable belief test which stated that if a mistake was made by HMRC and the claimant reasonably thought their payments were right, the overpayment would be written off. The latter part of this test was very difficult to overcome.
In January 2008, the old reasonable belief test was replaced by a new test based on responsibilities. COP 26 sets out the responsibilities of both HMRC and the claimant. In brief:
· If HMRC have met their responsibilities and the claimant has failed to meet theirs, the overpayment will remain recoverable in full.
· If HMRC have failed to meet their responsibilities and the claimant has met theirs, the overpayment will be written off in full.
· If both sides have met their responsibilities, the overpayment will remain recoverable (and is likely to be caused by the natural workings of the system).
· If both sides have failed to meet their responsibilities, the part of the overpayment attributable to HMRC’s failure will be written off.
One particular point to note from COP 26 is the introduction of ‘notional offsetting’. This practice was reinstated from 18th January 2010 and applies to any overpayments outstanding as of that date. Where a claimant delayed reporting a change of household status (either from couple to single status or single to couple), there will be an overpayment from the old claim. If the delay was longer than three months (the maximum a new claim can be backdated) notional offsetting may help. Providing there was no deliberate error on the part of the claimant, HMRC will offset what the claimant would have been entitled to had they made their new claim at the correct time against any overpayment on the old claim. This is an extremely useful provision.
Disputes can be sent to HMRC using form TC846 or in writing.
More information about disputes:
· LITRG overpayment guide for claimants (March 2011)
· LITRG challenging overpayments guide for advisers (Feb 2011)
-
Official Error
This is not the 'official error' test as understood by those who have experienced tax credit overpayments due to HMRC error or delay. Official error in this context is defined as an error relating to tax credit made by:
· an officer of the Board;
· an officer of the DWP or Department for Social Development (in Northern Ireland); or
· a person providing services to any of those departments (eg the IT contractor),
to which neither the claimant nor any person acting for the claimant materially contributed. A decision may be revised by reason of official error at any time within five years of the date of decision. Prior to 6 April 2010, the time limit was five years from the end of the tax year to which the decision related.
This is a useful alternative to an appeal where the only problem is a clear mistake in the award on which both sides can agree and which HMRC can simply correct retrospectively without the panoply of an appeal.
More information about official error is available on revenuebenefits website.
- Complaint
Where HMRC has handled a case badly or if a dispute has failed, there is a complaints procedure which also provides for payment of compensation if a claimant has lost out financially, or suffered anxiety or distress, as a result of HMRC's error or delay.
The HMRC complaints process is set out on the HMRC website and also in factsheet C/FS.
It is important to note that overpayment recovery will not be suspended whilst claimants pursue a complaint even if it goes further to the Adjudicator or Parliamentary Ombudsman. Only a first dispute (or a second dispute with new evidence) or appeal will suspend recovery of an overpayment.
There are two tiers to the complaints process that are dealt with within HMRC. If the claimant is still not happy the case can be referred to the Adjudicator’s Office. Following a decision by the Adjudicator, the case can continue to the Parliamentary Ombudsman with the support of the claimant’s MP.
In 2009 HMRC introduced ‘Your Charter’ which sets out standards that claimants can expect in their dealings with HMRC. It has statutory backing in Finance Act 2009 and although it doesn’t replace existing rights and remedies, it is a useful addition especially in complaints. When sending a complaint to HMRC it can be helpful to refer specifically to the Charter.
More information on complaints is available from the following websites:
- Repayment/Hardship
Before agreeing repayment of a tax credits debt, it is worth considering whether there is an appeal, dispute or official error route to pursue as outlined in points 1-3 above. If these routes are not successful then it may be necessary to consider repayment of the debt. Repaying a debt is not necessarily an admission of liability, and claimants can continue to pursue the complaints or dispute processes even after repaying. However, as HMRC do not generally suspend recovery for complaints, claimants often have to consider repayment options whilst that process continues in order to avoid county court action.
HMRC have recently updated their recovery policy and produced a detailed guide outlining their current recovery processes. Although their letters generally ask for repayment immediately or spread over 12 months, time to pay arrangements can be made over periods up to 10 years without requiring detailed income and expenditure information. Even repayment arrangements over 10 years are possible with income and expenditure information.
If claimants are suffering financial hardship or in receipt of certain benefits it may be possible to get an overpayment debt written off on grounds of financial hardship.
More information about dealing with overpayment debt is available on the following websites:
- Judicial Review
Although there is no statutory right of appeal against HMRC’s exercise of their discretion to recover an overpayment, there is the remedy of judicial remedy, exercisable by the High Court. Judicial review is a form of court proceeding in which a judge reviews the lawfulness of a decision, action or inaction by a public body.
Judicial review can be an expensive process and legal advice should be quickly sought if this option is being considered. There are strict time limits within which an action for judicial review must be brought.
More information can be found on the Public law Project website.
9. Investigations and penalties
HMRC announced a joint error and fraud strategy with DWP in October 2010. As a result, HMRC are carrying out many more checks on tax credits claims and it is therefore likely that you will encounter constituents who have had their payments stopped or reduced as a result of a compliance investigation.
HMRC have a range of powers to check claims and request further information. Investigations into current year claims are generally called ‘examinations’ and those that look at claims that have ended and been finalised are called ‘enquiries’.
HMRC also have powers to charge claimants penalties.
More information can be found on the following websites:
- HMRC website information on penalties
- HMRC website information on checks
- HMRC leaflets
- Revenuebenefits
Several changes to the tax credits system were announced in the emergency
budget in June 2010 and the Comprehensive Spending Review in October 2010.
Some of those changes came into effect from April 2011 and others in April
2012. Some further changes are planned for 2013-2014. In addition the
eventual introduction of Universal Credit will bring about the end of the
current tax credits system by 2017-2018 as claims are transferred across to
UC.
The Revenuebenefits website contains detailed information about all of
the changes introduced from April 2011 and
April 2012
as well as
information about future changes.
The tax credit system is extremely complex and the above information only covers the main points very briefly. There are many important rules that have not been covered. The following sources of information will provide much more detailed information on various aspects of the system:
-
Links to HMRC Manuals:
- Tax Credit Technical Manual. This manual sets out how HMRC interpret the law on tax credits.
- Tax Credit Manual. This manual sets out the processes HMRC follow when dealing with tax credit matters.
- Claimant Compliance Manual. This manual sets out HMRC’s approach to tax credit compliance cases. -
www.revenuebenefits.org.uk
- A partnership between the Low Incomes Tax Reform Group and
Rightsnet, funded by HMRC,revenuebenefits is designed to provide
advisers with access to the latest information on the range of HMRC
'products', including tax credits, child benefit and guardian’s
allowance, national minimum wage and more. The site has over 10,000 visitors a month and
includes legislation, caselaw, detailed guidance and information as well
as useful links. There is also a
Blog
which gives regular updates that are useful for advisers.
The Commons Library specialist on Tax Credits is Steven Kennedy who has written a Standard Note: Constituency casework: tax credits. You can see it on the intranet at http://intranet.parliament.uk/briefing-papers/SN05402. Dated 12 March 2010, it is currently being revised. See the 'Answering your enquiries' page on the intranet for full contact information. Library specialists are available to all staff of MPs, both at Westminster and in constituency offices. We at W4MP have said it before and we will go on saying it: the Commons Library is your best friend. Try them and see!
As mentioned earlier, if you have exhausted all avenues trying to resolve your constituents Tax Credit problem then there are further routes to try:
The Adjudicator’s Office
The Adjudicator acts as a fair and unbiased referee, investigating complaints about various organisations after their own efforts to resolve matters have failed.
They investigate complaints about the organisations and compare what they have done against their own published standards and Codes of Practice. They look to ensure that, during their handling of your affairs, the organisations have followed their standards and instructions fairly and consistently.
The Parliamentary and Health Service Ombudsman
The Parliamentary Ombudsman can carry out independent investigations into complaints about government departments, agencies and some public bodies.
The Ombudsman will consider each complaint and whether or not they can investigate it. If an investigation is to take place then the Ombudsman’s staff can look through Tax Credit files and interview staff about the case.
Owing to the high number of complaints about Tax Credits, the Ombudsman will not consider a case unless it has been investigated by the Adjudicator's Office first.
Useful Addresses
-
Parliamentary Correspondence - Customer Support Unit
Tax Credit Office, Preston, PR1 0SB -
Data Protection Subject Access Unit
TCO SAR Team, Section 5, AREA E, FLOOR 1, St Marks House, St Marys Street, Preston, Lancs PR1 5LL. -
The Adjudicator's Office
6th Floor, Haymarket House, 28 Haymarket, London SW1Y 4SP
www.adjudicatorsoffice.gov.uk
Tax
Credit Office
www.hmrc.gov.uk/menus/credits.htm
Provides basic information on entitlement, how to make an application and
details about your renewal.
Direct
Government
www.direct.gov.uk
Provides more detailed information about the Tax Credit system and includes
copies of their help leaflets.
Treasury
www.hm-treasury.gov.uk
Policy information; details of how to make a complaint and what they can to do
help.
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