Tax Credits: Upper Tribunal decisions (by topic)

You can use the list below to view cases under each topic. In some instances, the cases cover more than one topic therefore some cases will appear in more than one topic group.

Children

Immigration & Residency

Income

Work

Backdating

Disability

Tax credit elements

Claims and processes

Notifications

Appeals

Official error

Concentrix - An update for advisers

HMRC/Concentrix telephones

Tax Credits: Dealing with overpayment debt

This section of the site provides advisers with information about repaying tax credit debt. Before agreeing to repay, it is worth considering whether the overpayment can be challenged.

Methods of recovery

As explained above, HMRC may recover overpayments under the TCA 2002, Section 29(3) to (5), in one of three ways:

It should be noted that claimants do not have a choice between ‘ongoing’ and ‘direct’ recovery. The recovery method used is determined by the claimant’s claim circumstances.

If the claim on which the overpayment occurred is still in payment, ongoing recovery will be used by the Tax Credit Office. If that claim has ended, or if the claim is a ‘nil’ award (entitlement exists but no payments are due as income is too high) then HMRC will send the debt to their Debt Management (DM) arm for collection by direct recovery. 

HMRC introduced new IT from October 2014 to allow ‘cross claim’ recovery whereby overpayments on a claim that has ended can be recovered from a subsequent new claim even if it is made in a different capacity (for example an overpayment from an old single claim can be recovered against a new claim as a couple). See below for more detail about how cross claim recovery works.

Tax credit overpayments can also be recovered from payments of Universal Credit and DWP have a power more widely to recover tax credit debts by any of the methods it uses to collect its own debt. You can find out more about the move of tax credit debt to Universal Credit in our Universal Credit section.

HMRC guidance

In 2011, following consultation with various representative groups, HMRC produced a detailed guide for intermediaries ‘How HMRC handle tax credit overpayments’. This guide was incredibly helpful in setting out the process that HMRC used to recover debts. This was withdrawn in 2014 and there is now very little published information for advisers in this area. We will continue to raise this issue with HMRC.

In the meantime, we suggest that advisers use the archived version of the guidance to negotiate with DM.

Direct Recovery

Direct recovery cases are dealt with by Debt Management (DM) which is a separate arm of HMRC to the Tax Credit Office (who deal with ongoing recovery issues). DM collect tax debt as well as tax credit debt although the processes for each are different.

The direct recovery process

The following table gives an overview of the direct recovery process.

  Process Explanation

Step 1

Notification of overpayment – TC610

When a claim ends, for whatever reason, and any overpayment is outstanding, the tax credit system will issue a TC610 notice to pay form once any appeal period has passed (normally 30 days).

 

The TC610 (see GOV.UK for an example) advises the claimant that the amount is owed to HMRC and normally gives 42 days to pay. It advises claimants that overpayments can be spread over a longer period. It encourages claimants to contact the payment helpline on 0345 302 1429. The payment helpline is part of the contact centre directorate in HMRC.

Step 2

Debt passed to Debt Management and Banking (DM)

If no response is received to the TC610, the debt will be passed from the Tax Credit Office system to Debt Management ‘s IDMS system. (A debt will transfer to IDMS 42 days after the TC610 or sooner if the claimant engages and agrees a payment plan).

Step 3

DM checks.

DM will check whether the debt can be passed to one of the private debt collection agencies (DCA) that HMRC uses. If the case has a domestic violence marker, or a claimant or partner has died recently, or there is an outstanding appeal the case will remain with DM otherwise it will be passed to the DCA.

Step 4

Debt Collect Agency recovery process

The DCA will attempt to contact the claimant to arrange payment. The claimant will need to speak to the DCA directly – they will arrange a time to pay and consider hardship requests (which are then referred back to HMRC – see below)

Step 5

Case passed back to HMRC

Eventually, after at least 12 months, if there has been no contact with the claimant the debt will be passed back to HMRC. The case will be reviewed by a HMRC debt officer and they will attempt to contact the claimant to arrange recovery.

Step 6

Legal proceedings

If no contact can be made, or the claimant refuses to make a payment arrangement, HMRC may consider using one of their enforcement powers such as taking control of goods (distraint) or county court action to recovery the debt.

Time to pay arrangements

The TC610 (see Step 1 in the table above) normally gives claimants 42 days to pay the amount stated. Often in tax credit cases the amount due can be several thousands and most claimants will not be able to pay it immediately.

The TC610 informs claimants that the debt can be repaid over a longer period, but does not set out any specific timescales or options. Instead it encourages claimants to contact the payment helpline. 

What claimants are not told at this point is that DM have a time to pay system that allows repayments over much longer periods.

The following time to pay options are available:

  1. 12 months
    HMRC should readily accept an offer to repay the debt in twelve monthly instalments. No additional questions should be necessary. 
     
  2. Over 12 months up to 10 years
    Claimants can ask HMRC to repay over any period up to 10 years without providing full income and expenditure details.

    HMRC will not automatically accept any offer up to 10 years and they will want to confirm income/expenditure. HMRC staff will try and negotiate a time to pay arrangement for the shortest possible time, however claimants should ensure what they agree to is affordable and realistic based on their income/expenditure.  

    Staff are encouraged to try and set up a direct debit arrangement for any time to pay agreements. Generally, repayments of less than £10 per month will not be accepted unless the debt will be cleared in 3 years. Income and Expenditure will be required to justify any arrangement of less than £10 per month if the debt is not cleared within 3 years.  If a claimant cannot afford £10 per month, then DM should suspend recovery for twelve months and then review the situation at the end of that period. If the claimant is still unable to pay more than £10 per month following their twelve-monthly review, HMRC should consider remitting the debt on grounds of financial hardship.
     
  3. 10 years or more
    DM staff are instructed to get a full income/expenditure breakdown where claimants request time to pay agreements that will last longer than 10 years. This is most likely to be needed where the overpayment debt is large and the claimant has a low income. As with shorter arrangements, payments of less than £10 per month will not normally be accepted and HMRC should suspend the debt in those cases and review after twelve months. HMRC may accept payments of less than £10 if the expectation is the amount can be increased at a later date.

    In assessing ability to repay, HMRC state that they will compare actual expenditure with figures produced by the Office of National Statistics and seek an explanation from the claimant where their figure is higher. This should not be done for expenditure that the claimant does not have any control over unless they appear excessive. This includes things like rent, mortgage, secured loans, council tax, court fines, pension payments, life assurance, HP or conditional sale, TV licence, maintenance and child support.

Other methods of recovery

HMRC have the power to use charging orders against a claimant’s residence where a debt is owed. Our understanding is that this will not be considered in stand-alone tax credit debt cases but may be considered if there is another HMRC tax debt as well.

Enforcement proceeding and taking control of goods (distraint)

The final step in the direct recovery process involves HMRC commencing legal proceedings, normally in the county court, to obtain judgement for the debt.

Previously, HMRC’s preferred approach was to take claimants to the County Court and obtain a County Court Judgement (CCJ). However, in the last year HMRC have changed their approach and their preferred method of enforcement is taking control of goods (distraint) which involves the seizing of goods where HMRC believe the person has the means to repay but refuses.

It should still be possible to negotiate a time to pay arrangement right up until the very last stage of the recovery process, although it is advisable that claimants make some attempt to discuss their case with HMRC rather than ignore the demands. If the claimant thinks they should not have to repay, a dispute can be lodged, but it may be necessary to liaise with DM to ensure they know what is happening and negotiate suspension of recovery directly with them. Although official policy by TCO is not to suspend recovery when a dispute is received (policy implemented 15 July 2013), it is still worth asking DMdirectly if they will suspend recovery. Note that there is no obligation on them to suspend recovery and if they refuse, then it is crucial that the claimant set up a time to pay arrangement otherwise DM will continue with their recovery action. This is especially important if taking control of goods (distraint) is the next step in the process.

Although taking control of goods (distraint) is now the preferred method of enforcement, HMRC still reserve the right to take claimants to County Court.

In the past, some claimants who were taken to county court were not given the opportunity to challenge the recovery of the overpayment or even explain if they didn’t understand why they had been overpaid. Even at this stage it is possible that HMRC have given an incorrect explanation or have made a mistake in dealing with the overpayment. Some judges treated tax credit cases in the same way as ordinary tax debt, which meant that if HMRC produced a certificate of debt that was enough to gain judgement against the claimant.

This approach is incorrect. Tax debt cases follow a special procedure called CPRPD7D meaning they do not follow the normal allocation process. Critically CPRPD7D does not apply to tax credits overpayments which basically means that the claim should follow the normal court processes including allowing the claimant to raise a defence and requiring HMRC to answer the points of that defence. A full explanation of the importance of this can be found in an article we wrote in 2008 which explains the procedure.

We still strongly caution against allowing overpayments to reach the county court, but clarification of the status of tax credit debt cases means that claimants may have an opportunity to challenge aspects of HMRC’s case. It remains far from clear how far the courts will go in examining the papers and whether they will consider the test under COP 26. On that basis we prefer to ensure cases are dealt with before proceedings are started.

From April 2012, HMRC began charging costs on cases entered in the county court in England and Wales. Alternative arrangements are in place in Scotland and Northern Ireland.

Debt collection agencies

HMRC practice is now to refer the majority of tax credit debts to a private DCA. This approach was piloted in 2011, and in the Autumn Statement 2012 HMRC confirmed they would once again pilot payment by results using a third party DCA. You can find a list of agencies used by HMRC on the GOV.UK website. It should be noted that the debt remains a HMRC debt, the debts are not sold to the DCA.

Once the debt is passed to the DCA the same time to pay guidance should be followed as outlined in this section. Where a claimant states they are in hardship the DCA will gather information and then refer the case back to HMRC.

Financial hardship in direct recovery cases

The information in this sub-section applies to direct recovery cases. Information about hardship in ongoing recovery cases can be found below. Some claimants will not be able to afford to make any repayments to HMRC or will only be able to offer less than £10 per month (which will take longer than 3 years to clear). If that is the case, there are two potential options available. The first involves getting HMRC to suspend recovery of the overpayment until the financial situation improves or, in cases where there is unlikely to be any improvement in the claimant’s financial situation, the second option is to ask HMRC to remit the debt on financial hardship grounds. Debts remitted due to hardship remain recoverable but may be pursued until later review of financial circumstances.

Prior to March 2010, HMRC’s policy on financial hardship was practically non-existent. It was unclear to advisers when HMRC would remit overpayments on grounds of financial hardship and very few claimants were successful when requesting this. In addition, there was no clear process for such requests which meant they were often left for months with a back office team with whom neither advisers nor claimants could make any contact.

Since March 2010, DM has revised its approach to the recovery of tax credit overpayment debt, which includes a much clearer policy on financial hardship and also more clarity around how this should be requested. This was set out in HMRC guidance which has since been withdrawn, however as far as we can ascertain DM still follow the same processes.

Claimants who are unemployed with no assets or savings

In such cases, HMRC should suspend recovery for 12 months. At the end of that period, the case should be reviewed and if there is no likelihood that circumstances will improve, consideration should be given to remitting the overpayment or, at the very least, suspending it for a further 12 months. If circumstances have improved, HMRC will seek a time to pay arrangement (see above for more details). If a claimant becomes entitled to universal credit then the tax credit debt can be collected by DWP from the UC award.

Claimant is on sickness/incapacity benefit

Where a claimant is in receipt of a sickness benefit such as employment and support allowance, cannot afford to offer any repayment to HMRC and there is little prospect of them ever gaining employment, HMRC should remit the outstanding overpayment. If there is some prospect that the claimant may be able to enter employment in the future, recovery should be suspended for 12 months and the situation reviewed at the end of that period. If the claimant becomes entitled to universal credit then the tax credit debt can be collected by DWP from the UC award.

Claimant unable to meet living expenses

In situations where a claimant cannot meet essential living expenses such as water, gas and electricity, they should request that the overpayment recovery be suspended until their circumstances improve. Where there is no likelihood that this will happen, a request for the overpayment to be remitted on financial hardship grounds should be made. In our experience this is most likely to succeed where evidence of their current situation is given to HMRC.

Financial hardship process

For those in the direct recovery process, DM are tasked with recovering the debt and it is with them that initial contact should be made to discuss financial hardship. Specifically claimants or their advisers should contact the Debt Management Telephone Centre (DMTC) (0345 3021429) and the case should then be referred to a Debt Technical Officer. The DTO should then assess the case based on the information received or by contacting the claimant for further information. Any letter sent to the claimant should include a phone number for the DTO dealing with the case. The claimant should be informed by letter of the outcome, regardless of whether the decision is to temporarily suspend recovery or to remit the overpayment in full.

If DMTC refuse to consider hardship or make a referral to a DTC a complaint should be made.

Recovery via PAYE tax code

Section 29 Tax Credit Act 2002 has always contained a provision allowing HMRC to recover tax credit overpayments by adjusting the person’s tax code. The legislation states that in this respect tax credit overpayments are to be treated the same as underpayments of tax.

HMRC never used this method of recovery until 2011 when they set up a small pilot which was rolled out in 2013/14, However, HMRC have stopped using this method from 6 April 2016 in order to prepare for the transition of debt from HMRC to DWP with the introduction of Universal Credit.

Ongoing recovery

The ongoing recovery process

The Tax Credit Office is responsible for ongoing recovery cases. Ongoing recovery is used where there is an ongoing claim still in payment following the claim which gave rise to the overpayment.

In the legislation, there are certain limits on the amount by which payments of tax credits can be reduced in order to recover an overpayment which arose in the previous year (cross-year overpayment). Those limits depend upon household income . From April 2016, the limits are as follows:

The 50% rate was introduced from 6 April 2016.  In assessing whether the claimant has income over £20,000, HMRC will use the latest held income figure. This could be a current year estimated figure or the previous year income figure. This may not be the same figure as the claim is based on. It also means that claimants may delay reporting changes in income to HMRC where such a rise will take them into the 50% recovery rate.

In addition, from October 2015, HMRC began to recover WTC overpayments from CTC awards and CTC overpayments from WTC awards. Prior to that date, WTC overpayments were only recovered from WTC and CTC overpayments from CTC.

In-year recovery

Sometimes HMRC adjust an award during the award period to try to prevent or reduce an overpayment from accruing by the end of the tax year. Potential overpayments that are identified during the award period in this way are loosely termed in-year overpayments. In such cases, the limits above also apply.  

However, since October 2015, tax credits payments are now stopped in-year where, due to a change in circumstances, an award is reduced to the extent that the claimant has already been paid their full year’s entitlement for that award. This is to prevent a build-up of overpayments by the end of the year. Previously, HMRC continued to make payments to claimants in this situation (unless they specifically asked HMRC not to) all of which became recoverable overpayments at the end of the year.

Ongoing recovery of old tax credits debt (cross-claim recovery)

In the Chancellor’s 2012 Autumn Statement, he announced that tax credit overpayments from old claims that had ended would be able to be recovered from a claimant’s ongoing tax credit payments. This change was introduced from October 2014.

Essentially, it means that any households with outstanding overpayments from ended claims that include the same household member(s) will have those old debts recovered from the new ongoing award.

Cross claim recovery will only take place when there is a suitable ongoing claim. This is one where:

Not all old overpayments can be recovered, the debt must be a ‘relevant overpayment’ which means:

Cross-claim recovery can apply in these situations:

Where an old debt is already being repaid directly, it will not be included in this ongoing recovery.

Ongoing tax credit payments will generally be reduced by 50%, 25% (or 10% if maximum award, see above) until the old debt is repaid.

Where there are a number of old overpayments from different years, awards or households, these will all be moved to the ongoing award and collated as one single overpayment amount.

But if the ongoing award ends before the total overpayment is repaid, the outstanding debts will be returned to their original awards. If there is more than 1 award involved, HMRC will apply a process called ‘reconciliation’ to apportion the amount repaid in a set order to the different overpayments and the outstanding debts will then have to be repaid by direct recovery (see above).

HMRC have produced a more detailed note about recovering old tax credits from ongoing awards, including full details of how the payments will be reconciled. More information can also be found in the Tax Credits Technical Manual.

Financial hardship in ongoing recovery cases

In certain circumstances, HMRC will agree to reduce the recovery percentages from the figures set out above.

Any financial hardship in ongoing recovery cases is dealt with by the Tax Credit Office. The first step is for the claimant to contact the tax credit helpline (0345 300 3900) to ask that the recovery percentage is reduced. The helpline should refer the case to the hardship team in the Tax Credit Office

If the claimant receives the family element only, HMRC will not normally adjust the rate of recovery. Nor will they do so if the overpayment was caused by deliberate error or fraud.

Once a referral is received by the hardship team, they will send out an income and expenditure form to the claimant along with a letter stating what evidence they require. Once the form is returned, HMRC will compare the income and expenditure figures against figures they hold for various household expenses and make a decision. Sometimes HMRC may contact the claimant by phone or letter for more information or evidence before making a decision.

If the claimant has disposable income of £20 a month or more, HMRC will refuse to change the recovery rate.

If the claimant has disposable income of less than £20 a month, the recovery rate will be reduced in 5% increments until the disposable income figure reaches £20 a month.

Any arrangement will only last until the end of the current tax year. It appears there is no way to challenge a refusal to reduce the percentage recovery rate, but a fresh hardship request can be made. If the cases warrants it, a complaint could also be made.

Couples

Couples and overpayment recovery

The law says that an overpayment debt for a couple can be collected by HMRC in full (but only once!) from either the claimant or their partner. The stated policy of HMRC where this has happened following a household breakdown is to write to both members of the former couple (making every effort to trace any former partner for whom they do not have an up-to-date address).

If the claimant believes that there should be a difference in what they and their former partner should pay, then HMRC will take into account the circumstances of both of them and may ask each of them to pay a different amount, or one of them to pay the full amount. Alternatively, they can agree between them to pay different amounts and inform HMRC of this decision.

Prior to August 2009, HMRC policy was to allow each party to repay 50% of the overpayment. However, when confirming this agreement in writing, HMRC reserved the right to return to the partner who was engaging with them for the other 50% if they could not trace the other partner.

LITRG, along with other representative bodies, expressed concern that HMRC often pursued the engaging partner with vigour whilst the other partner remained ‘untraceable’. This often meant the mother with care of the children had to repay the whole joint overpayment debt where the absent partner was difficult to trace. Since August 2009, HMRC have implemented a much fairer policy in these situations. As before, provided a person engages with HMRC, they will allow repayment of 50% of the joint debt. Provided that this 50% is paid (either by lump sum or on a payment plan) HMRC will not pursue that person for the remaining 50%. Instead they will pursue the other partner, and if they cannot collect the money will not go back to the engaging partner to collect it.

It is important to note that the law still allows HMRC to pursue either partner for the full amount of the joint debt. Also, this process is not well advertised by HMRC, so you should ensure that you ask Debt Management and Banking if you think it applies to your client.

Offsetting

Notional offsetting

Sometimes, tax credit claimants who form a couple or who become single, either because they separate or because one partner dies, are slow in reporting the change to HMRC. Yet in many cases, if they had acted promptly they would have continued to be entitled to tax credits, albeit in a different capacity. Until 18 January 2010, HMRC would recover the whole of any overpayment arising on the old claim, but give no credit for what the claimant would have received had they made a new claim at the right time.

From 18 January2010, HMRC introduced a new policy that means tax credits recipients who start to live together, or who become single after being part of a couple, but are late reporting the change to HMRC, can reduce the overpayment on their old claim by whatever they would have been entitled to had they made a new claim promptly.

This new policy applies to overpayments arising from 18 January 2010, but also to overpayments that were still outstanding as of that date. So, if an overpayment has been repaid in full prior to 18 January 2010, the new policy will not apply. However, if any part of it remains unpaid, offsetting can be applied to it. To request notional offsetting, claimants should contact the tax credit helpline to ask for their case to be referred to the ‘notional offsetting (or notional entitlement)’ team in the Tax Credit Office.

Note that the notional entitlement set-off will not cover the one month by which the claimant will be able to backdate their new claim. Normally HMRC will grant the one month's backdating automatically, but if that doesn’t happen, they will need to ask for it.

HMRC will not allow notional offsetting in cases of deliberate or repeated error. In the last two years, we have seen an increase in the number of cases categorised as ‘deliberate error’ as a result of compliance checks. If advisers think that a case has been classified incorrectly, they should lodge a complaint (even if the decision is correct) if they believe the action was not deliberate but rather due to misunderstanding or mistake.

See our understanding couples section for more information about how to request notional offsetting.

Income Support / NTC Nominal set-off

In cases where a claimant has reduced their working hours to below 16 hours a week and would have been entitled to Income Support instead of working tax credit, had they made a claim, HMRC can reduce the amount of the tax credit overpayment by ‘off-setting’ the amount of Income Support the claimant would have been entitled to against the overpaid tax credit. HMRC call this type of off-setting Class 11 remission. It is not widely known and for that reason can often be overlooked. Claimants and their advisers may need to ask HMRC to consider Class 11 remission, rather than rely of HMRC to automatically apply it. Further information is available in the tax credit manual.

Dual recovery

Some people will be paying back two overpayments, one via ongoing recovery and another via direct recovery. This often happens where there is an overpayment on an old claim, and a new overpayment on a current claim. Since August 2009, HMRC have implemented a new policy which means that any direct recovery action should be suspended until the ongoing recovery ends.

Whilst we welcome this policy, HMRC are not proactive in telling claimants about it. If this applies, you should ask Debt Management and Banking to suspend the direct recovery action. Further details can be found in the Debt Management Banking Manual Online.

DWP and tax credits debt

When a person claims Universal Credit, any outstanding tax credit overpayments will at some point be transferred from HMRC to DWP. This includes any overpayments where claimants have already agreed time to pay arrangements with HMRC. DWP can recover tax credit overpayment debts automatically from Universal Credit awards and will also consider separate time to pay arrangements. See our Universal Credit section for more information.

New regulations from 1 April 2015 allow DWP to recover tax credit debt. These regulations are made under Section 126 Welfare Reform Act 2012 (which allows any tax credit functions to be transferred to DWP). The regulations allow DWP to recover tax credit by any of the methods it uses to collect its own debt, including deduction from benefit and Direct Earnings Attachment. Once a tax credit debt has transferred to DWP, it will remain with DWP even if the claimant no longer claims UC.

See our transition to UC section for more detail.

Special circumstances

Cases involving mental health issues

HMRC have produced some information for cases involving claimants with mental health issues. The following is reproduced from the intermediaries guidance:

HMRC will deal with mental health cases carefully and sympathetically to avoid distress to the customer.

HMRC will need a letter from a health care professional or mental health social worker explaining the mental health problem to enable it to deal with these cases. The evidence should include the nature of the illness and as far as possible, whether the illness is likely to be long-term (for example, schizophrenia) or where the prospects for recovery are expected to be good.

If the information has not been provided HMRC will need to write to the claimant or third party asking for the documentary evidence. Only in exceptional circumstances will the evidence received be insufficient to relieve the claimant from responsibility for payment.

If the mental health problems existed at the time the overpayment occurred then Benefits and Credits can consider whether exceptional circumstances are such that writing off the overpayment is appropriate. If the mental health problems exist at the time the overpayment is being recovered then DM will review the circumstances:

Further guidance for cases involving claimants with mental health issues can be found in the tax credit section of the DM manual. Further information about the manual can be found in section 5.1.

Exceptional circumstances

In exceptional circumstances, for example where a claimant is seriously ill or a close family member is ill, a request can be made to HMRC to suspend recovery of the overpayment until such time as the claimant is able to discuss their financial situation fully with HMRC. Claimants or their advisers should phone the debt management payment helpline (0345 302 1429) to explain the situation if this applies.

National Minimum Wage: Rates over the years

National minimum wage rates are updated every 1 October. The rates are dependent upon age with a special rate for apprentices.

The new national living wage was introduced from 1 April 2016.

The current rates from 1 October 2015 are:

Previous rates can be found on the GOV.UK website.

For the rates of earlier years back to 1999 go to the Low Pay Commission website.

Universal credit: Rates

The rates for elements of Universal Credit are subject to annual uprating.

The Chancellor has also announced changes to the additional first child premium and restrictions on the addition of the child element for 3rd and subsequent children born after April 2017. You can read more about these changes in our policy section.

Universal credit annual rates pdf

Tax Credits: Upper Tribunal decisions (chronological)

In this section you will find all Tax Credit decisions from the Upper Tribunal, listed in chronological order.

Childcare provided in another EU Member State

Self-employment: Minimum income floor

How the MIF works
Problems with the MIF
Exceptions to the MIF

How the MIF works

The amount of the MIF is, very broadly, equivalent to the statutory hourly pay-rate  for each hour that the claimant is expected to work – usually 35 hours a week. Initially, this meant the relevant rate of national minimum wage but, from April 2016, this is the relevant national minimum/living wage hourly rate relating to the age of the claimant. From that is deducted a notional amount to reflect the income tax and national insurance for which the claimant would be liable if they had earned income of that amount. Note however that there is currently no deduction allowed from the MIF for pension contributions meaning that those who are subject to the MIF in reality will not get a true deduction for their pension contributions as their employed counterparts will.

Example

Jack is a 30 year old window cleaner who works full time in his trade. His individual earnings threshold (ie the minimum wage for the number of hours the claimant is expected to work) is based on the national minimum wage of £7.20 an hour for a 35 hour week:

£7.20 x 35 = £252.00 per week

His minimum income floor for any assessment period, using current figures, should therefore be:

(£252.00 x 52)/12  = £1,092.00 minus notional tax and NI (say £86) = £1,006.00

Where a claimant is a member of a couple, and the claimant’s gross profit for an assessment period is lower than the MIF, then the MIF only applies to the extent that the earnings of the couple taken together do not amount to the couple’s combined earnings threshold. The earnings threshold, broadly, is the number of hours both members of the couple are expected to work times the national minimum wage. Where the couple’s earnings exceed the couple’s earnings threshold, the MIF for the self-employed partner is reduced or eliminated accordingly.

Example

Jack’s self-employed earnings for assessment period A are £600. His wife Jill is employed full-time in a bank and earns £15,000 a year (say, net earnings of £1,113.93 a month). The combined earnings threshold of the couple for a month is, say, £2,012.00 (35 hours a week each at the NMW of £7.20 an hour, less tax and NI)

Their actual combined earnings are £600 + £1,113.93 = £1,713.93

Applying Jack’s MIF of £1,006.00, their combined earnings for the month would be £1,006.00 + £1,113.93 = £2,119.93, which exceeds their combined earnings threshold by £2,119.93 - £2012.00 = £107.93.

Jack’s MIF is therefore reduced as follows: £1,006.00 - £107.93 = £898.07

Problems with the MIF

The MIF, and other aspects of the way self-employed earnings are calculated for UC, potentially present several problems for those who are starting out in business.

Exceptions to the MIF

There are three situations in which the MIF does not apply at all:

More information about the Minimum income floor, together with examples, can be found in ADM Chapter H4060.

Reminder to tell HMRC about 16+ year olds staying in education or approved training

What to do if you missed the renewals deadline

Tax Credits: Discovery

This section of the website provides information about HMRC’s powers of discovery.

Discovery powers are set out in Section 20 Tax Credits Act 2002. They allow HMRC to get a second bite of the cherry after the period allowed for opening an enquiry has expired. The circumstances within which this can occur are very limited.

HMRC may re-open a tax credits award if the claimant's income tax liability is 'revised', but must do so within one year of the income tax revision, and can only do so if the enquiry window has passed. This process is known as 'discovery'.

An income tax decision is revised if a SA return is amended, whether by the taxpayer or by HMRC, and whether during or following an enquiry or independently of any enquiry; or if HMRC raises an assessment to make good a loss of tax; or vacates an assessment or return; or grants error or mistake relief; or an appeal is settled following any of the above.

Alternatively, if HMRC have grounds for believing that a tax credits decision is wrong owing to fraud or negligence by the claimant or any person acting for the claimant, they can re-open an award within five years after the end of the year to which it relates.

More information about Discovery can be found in the HMRC compliance manual.

Tax Credits: Penalties and interest.

This section of the website provides basic information about penalties and interest.

It is worth having a quick look at the HMRC guide on this - WTC 7 Tax Credit Penalties.

HMRC has power to seek or impose financial penalties for various types of default. The penalties and their maximum amounts are:

Failure or delay penalties can only be exacted from the person directed to supply the information, ie the claimant or the employer, but penalties for fraudulent and negligent mis-statement can be levied on any person who makes an incorrect statement or declaration in or in connection with a claim for a tax credit, a notification of a change of circumstances, or in response to an end-of-year notice. This can in particular include an agent.

Initial penalties for failure to supply or delay in supplying information can only be imposed by the First-tier Tribunal, to which HMRC must apply, and against whose decision a right of appeal lies to the Upper Tribunal. All other penalties can be determined – i.e. directly imposed – by the Board of HMRC.

The maximum penalty for fraudulent or negligent mis-statement by a couple in a joint claim may be imposed on both partners provided that in aggregate the penalty does not exceed £3,000. In other words, they cannot between them be required to find more than £3,000. But by statute if one of them was not, and could not reasonably have been expected to be, aware of the default by the other, that one is not liable to a penalty.

HMRC have the power to mitigate penalties or remit any penalty. For enquiries or examinations started after 6 April 2008, the level of penalty will depend on the behaviour involved. The claimant compliance manual gives further information.

Interest

Under the tax credit regime interest can only be charged in two circumstances.

Tax Credits: Examinations

This section of the website provides information about examinations.

Examinations are one of the compliance powers that HMRC can use to check tax credit claims. Examinations can be carried out:

Examinations can start with a simple letter, or a formal notice seeking information. There is no right of appeal against the issue of a notice seeking information, and therefore little recourse if HMRC decide to question the claimant about things which do not strictly relate to their tax credit entitlement (known as 'fishing expeditions'). However, instructions to compliance staff discourage such actions. Also, by statute the purpose of an examination is:

'to provide any information or evidence which [the Board] consider they may need for making their decision',

There are penalties for failure to comply with a formal information notice.

HMRC have the power to suspend tax credit payments where they have made a formal request for information and the person has not provided the information asked for. This is a very wide power, and the legislation has no ‘reasonable excuse’ or similar defence for not providing the information requested.

The power to suspend payments applies only to requests for information during the tax year (not examinations prior to the first decision, nor any requests made after the end of the tax year). HMRC have produced leaflet WTC/FS9 that deals with this process.

HMRC practice in conducting examinations is set out in their Claimant Compliance Manual CCM4000ff .

Official leaflets are the factsheets FS2 (Tax credits examinations) and FS3 (Tax credits formal request for information).

Tax Credits: Enquiries

This section of the website provides basic information about enquiries.

The 'enquiry window'

The statute defines the period during which HMRC is allowed to open an enquiry, and any enquiry begun before the start of that period, or after its end, is invalid. That period is known as the enquiry window.

The earliest time for starting an enquiry

An enquiry may not be started before the date of HMRC's formal decision on the claimant's final entitlement for the tax year. This is usually given after the claimant has returned all their renewal papers. Normally, renewal papers should be returned by 31 July in the following tax year (so the renewal papers for 2015/16 should be sent in by 31 July 2016). In a small minority of cases the renewal deadline may be different and will be shown as such on the Section 17 notice.

Where the claimant is not at that stage ready to state what their income was for the year, and shows an estimated income figure in their renewal papers, no enquiry may be started before the estimate has been confirmed, or the actual amount substituted. This should be done by 31 January in the following tax year. So an estimate for 2015/16 should be confirmed, or actual 2015/16 income notified, by 31st January 2017.

See our section on renewals for more information about the finalisation process.

The latest time for starting an enquiry

The latest time for starting an enquiry depends on whether the claimant has also filed a self-assessment (SA) return for ordinary tax. Where they have, and the return is not subject to a SA enquiry, a tax credit enquiry may not be started later than the date on which the SA return becomes final. This is usually 12 months after the date of filing, if the return is filed on time (ie on or before 31 January following the end of the tax year to which the return relates), but there are important exceptions; see the LITRG website for the detailed rules.

In the case of a joint claim where both claimants are SA taxpayers, and there are different final dates for each partner, the later of the two dates is taken for the couple.

Where the return is subject to a SA enquiry, the latest date for starting a tax credit enquiry is the date on which the SA enquiry is brought to an end (or the later date in the case of joint claimants). This is of course much later than the normal SA enquiry window. Where the claimant has not filed a SA return, a tax credit enquiry must be begun within one year of the date shown on the end-of-year notice as the date by which income details must be returned. In practice this date is 31 July, or the following 31 January if an estimate is returned.

Closing the enquiry

A tax credit enquiry ends when HMRC issues a 'closure notice'. But the claimant may apply to the Appeal Tribunal at any time for a direction that the Board must give a closure notice; in which case the Tribunal must do so unless the Board can show that they have reasonable grounds for continuing the enquiry.

This can be a useful tool in the claimant's hands if HMRC are dragging their feet, or refusing to be forthcoming about the nature and purpose of their enquiry.

Link with self-assessment

We have already said quite a lot about the links between the time-limits for opening and closing self-assessment and tax credit enquiries. Where the claimant is also a self-assessment taxpayer, the one may give rise to the other and it is important for the adviser to bear in mind the implications of both when negotiating with HMRC.

When a self-assessment enquiry is opened and the taxpayer is also a tax credit claimant, a tax credit enquiry may also be opened and HMRC may work the two together. Needless to say, if a self-assessment enquiry results in an increased profit figure, the trading income figure for tax credits may similarly be increased. It follows that no self-assessment enquiry should be concluded without considering its effect on the tax credits claim, and seeking simultaneous closure of any related tax credit enquiry.

Similarly, where the self-assessment enquiry covers more than one year and it is sought to apportion the adjusted income figure between the years, care should be taken in agreeing any such apportionment to maximise the potential for the annual disregard for increases in tax credit income.

Income discrepancy enquiries: gift aid and pension contributions

One of the grounds for starting an enquiry is that the income details supplied for tax credits do not match those held for income tax purposes. This can affect both self-assessment (SA) and PAYE taxpayers.

Gross gift aid payments and gross pension contributions are deducted from tax credits income. Because such deductions are not separately identified on the claim form TC600, it is not unknown for TCO to start a tax credit discrepancy enquiry when the income declared for income tax and for tax credit purposes differs by the amount of the gross deduction.

Advisers should look out for such risk assessment-based enquiries which ought to be subject to a 'sanity check' by a human before being started, but have in the past appeared not to be.

Potential conflict of interest where a SA enquiry gives rise to a tax credit enquiry and the tax credit claim is a joint one

Where a tax adviser is acting for a taxpayer facing a SA enquiry, the result of which is likely to impact on the tax credit claim which the taxpayer has made jointly with his or her partner, a conflict of interest may well arise. There is an obvious conflict between the demands of taxpayer confidentiality, in respect of the SA enquiry, and joint and several responsibility of both members of the couple for the accuracy of the tax credit claim. In some cases it may be necessary for the practitioner not to act, or to cease acting, for both parties, and to arrange for the non-SA client to be independently advised on the tax credits enquiry.

HMRC guidance on enquiries

See:

Tax Credits: Other Government research and reports

In addition to reports published by HMRC, other parts of the Government have also produced reports about the tax credits system.

Public Accounts Committee Reports

The Public Accounts Committee has produced several reports on the tax credits system.

Public Administration Select Committee

The Public Administration Select Committee has produced two reports in relation to the ‘Tax Credits – Putting it right’ report from the Ombudsman:

Treasury

HM Courts and Tribunal Services

National Audit Office

NB - the National Audit Office website is available at https://www.nao.org.uk

See also

Tax Credits: Adjudicator’s Office and Ombudsman’s reports

The Adjudicator’s Office investigates complaints about HMRC, and the Ombudsman’s office investigates complaints made against a wide range of Government departments including HMRC.

More information about the Adjudicator complaints process and about taking a case to the Ombudsman can be found in the tax credits guidance section of this website.

Adjudicator’s Office

Each year, the Adjudicator’s Office publishes a report which sets out the number of complaints dealt with (including tax credits) and the number that were upheld. The report also highlights key areas of concern as well as a series of case studies showing the outcome as well as the reasoning for each example.

2016 | 2015 | 2014 | 2013 | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | 2006 | 2005 | 2004 | 2003

Ombudsman’s reports

Ombudsman Annual Reports -

2012/2013 | 2011/2012 | 2010/2011 | 2009/2010 | 2008/2009 | 2007/2008 | 2006/2007 | 2005/2006 | 2004/2005

Tax Credits: HMRC annual reports, performance reports and business plans

Annual reports and Autumn Performance Reports

Business Plans

You can find all of HMRC’s archived reports and plans on their web archive and current reports and plans on GOV.UK.

Transition to universal credit: Miscellaneous and Consequential Amendment Regulations

In this section you will find miscellaneous and consequential amendment regulations relating to Universal Credit.

Social Security (Miscellaneous Amendments) No.1 Regulations (SI.No.443/2013) (Amends SI.No.380/2013)

HTML | Explanatory memorandum

Universal Credit (Consequential, Supplementary, Incidental and Miscellaneous Provisions) Regulations 2013 (SI.No.630/2013) (Amends SI.No.376/2013)

HTML | Explanatory memorandum

Universal Credit (Miscellaneous Amendments) Regulations 2013 (SI.No.803/2013) (Amends SI.No.376/2013 and SI.No.386/2013)

HTML | Explanatory memorandum

Social Security (Miscellaneous Amendments) (No.2) Regulations 2013 (SI.No.1508/2013) (Amends SI.No.376/2013)

HTML | Explanatory memorandum

Universal Credit (Transitional Provisions) and Housing Benefit (Amendment) Regulations 2013 (SI.No.2070/2013) (Amends SI.No.386/2013)

HTML | Explanatory memorandum | Correction

Housing Benefit and Universal Credit (Size Criteria) (Miscellaneous Amendments) Regulations 2013 (SI.No.2828/2013)

HTML | Explanatory memorandum

Welfare Benefits Up-rating Order 2014 (SI.No.147/2014)

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Universal Credit and Miscellaneous Amendments Regulations 2014 (SI.No.597/2014) (Amends SI.No.376/2013, 380/2013 and 381/2013)

HTML | Explanatory memorandum

Universal Credit (Transitional Provisions) (Amendment) Regulations 2014 (SI.No.1626/2014) (Amends SI.No.1230/2014)

HTMLExplanatory memorandum

Universal Credit (Digital Service) Amendment Regulations 2014 (SI.No.2887/2014) (Amends SI.No.376/2013)

HTML | Explanatory memorandum

Universal Credit and Miscellaneous Amendments (No.2) Regulations 2014 (SI.No.2888/2014) (Amends SI.No.376/2013, SI.No.380/2013)

HTML | Explanatory memorandum

Welfare Benefits Uprating Order 2015 (SI.No.30/2015)

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Social Security (Information-sharing in relation to Welfare Services etc.) (Amendment) Regulations 2015 (SI.No.46/2015)

HTML | Explanatory memorandum

Universal Credit (Work-Related Requirements) In Work Pilot Scheme and Amendment Regulations 2015 (SI.No.89/2015) (Amends SI.No.376/2013)

HTMLExplanatory memorandum

Universal Credit (Surpluses and Self-employed Losses) (Digital Service) Amendment Regulations 2015 (SI.No.345/2015) (Amends SI.No.376/2013)

HTML | Explanatory memorandum

Universal Credit (EEA Jobseekers) Amendment Regulations 2015 (SI.No.546/2015) (Amends SI.No.376/2013)

HTML | Explanatory memorandum

Universal Credit (Waiting Days) (Amendment) Regulations 2015 (SI.No.1362/2015)

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Universal Credit (Work Allowance) Amendment Regulations 2015 (SI.No.1649/2015)

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Universal Credit and Miscellaneous Amendments Regulations 2015 (SI.No.1754/2015)

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Universal Credit (Transitional Provisions) (Amendment) Regulations 2015 (SI.No.1780/2015) (Amends SI.No.1230/2014)

HTML | Explanatory memorandum

Universal Credit (Surpluses and Self-employed Losses) (Change of coming into force) Regulations 2016 (SI.No.215/2016)

HTMLExplanatory memorandum

Universal Credit (Transitional Provisions) (Amendment) Regulations 2016 (SI.No.232/2016)

HTMLExplanatory memorandum

Social Security (Jobseeker’s Allowance, Employment and Support Allowance and Universal Credit) (Amendment) Regulations 2016 (SI.No.678/2016)

HTML | Explanatory memorandum

Social Security (Treatment of Postgraduate Master’s Degree Loans and Special Support Loans) (Amendment) Regulations 2016 (SI.No.743/2016)

HTML | Explanatory memorandum

Transition to universal credit: Scotland

This page sets out legislation that is relevant to welfare reform and universal credit specifically relating to Scotland.

The Welfare Reform Act 2012 broadly applies only to England, Wales and Scotland. There are a couple of exceptions to this set out in Section 149 Welfare Reform Act 2012:

The Scotland Act 2016 received Royal Assent on 24 March 2016. The Act sets out the powers that are being transferred to the Scottish Parliament or Scottish Ministers. Part 3 of the Act relates to welfare benefits with Sections 29 and 30 relating specifically to Universal Credit. There is also a power to create other new benefits under Section 28.

You can find the Bill as introduced, amendments, debate transcripts and explanatory notes on the Parliament UK website.

The first set of regulations, laid on 14 July 2016, set out the timetable for the transfer to Holyrood of a number of welfare powers, including the ability to:

The majority of these powers transfer on 5 September 2016. Discretionary housing payments transfer on 1 April 2017.

Secondary Legislation

Scotland Act 2016 (Commencement order 1) Regulations 2016 (SI.No.759/2016)

Tax Credits: Social security income

For tax credit purposes, taxable social security benefits are taken into account as income and non-taxable benefits are ignored. The TC600 guidance notes (page 11) show which benefits to include.

State retirement pension is not included here as social security income but HMRC ask for it to be included under 'other income' in box 5.6 of the claim form (see below) - the significance is that the other income category is broadly the Step One equivalent and therefore eligible for the £300 deduction.

Specifically, the following benefits are disregarded for tax credits, together with any child dependency increases payable with them – arranged alphabetically rather than in the order given in the Income Regulations:

* Note - statutory maternity, paternity, adoption, shared parental & sick pay are disregarded as social security income but treated as employment income.

Tax Credits: The four steps

The Income Regulations prescribe a series of four steps to work out income for tax credits purposes. The claim form does not require this, but we have set out the steps below in order to give a complete picture of the legislative method.

NOTE: This section of the site explains what is income for tax credit claims. Where a claimant has their tax credits terminated because they are moving to universal credit, there are new rules on how to calculate income. Please see our transition to universal credit section for more information.

For joint claims, the joint income for the relevant tax year of both partners (or of all members of a polygamous unit) should be used, as in the example below. Only the income of the partners in the couple, or members of the polygamous unit, is aggregated; any income belonging to any children in the household is left out of account, except in certain circumstances where a claimant artificially transfers income to a child in an attempt to maximise their tax credits entitlement.

Step 1. Add together:

  1. pension income 
  2. investment income
  3. property income
  4. foreign income
  5. notional income 

If the total is £300 or less, it is ignored completely. Otherwise, £300 is deducted from the total. There is no notional capital rule as for social security benefits - only the actual income from savings is counted. The rationale of the £300 was to protect the position of former benefits claimants whose savings were small enough to come within the £3,000 capital limit applied by the DWP at the time WTC and CTC were introduced.

Step 2. Add together:

  1. employment income
  2. social security income
  3. student income
  4. miscellaneous income 

Step 3. Add together the amounts in Step 1 and Step 2.

Step 4. Add trading income to - or if there is a loss subtract the trading loss from - the total in Step 3.

Then deduct:

If a claimant has sustained a loss in a UK or overseas property business (‘property loss’) it can be set against total income for tax credits purposes.

Unlike mainstream tax, income for tax credits includes all worldwide income, whether or not it is remitted to the UK or is exempt under the terms of a double taxation treaty. ‘Unremittable’ income is an exception to this rule (explained below).

Where a claimant would be chargeable to income tax but for some special exemption or immunity from income tax, tax credits income must be calculated on the basis of the amount which would be so chargeable but for that exemption or immunity. In other words, income must be taken into account for tax credits even if it is exempt from tax, unless it is specifically disregarded under the Income Regulations.

Income paid in a foreign currency must be converted into sterling using an average of exchange rates in the 12 months up to 31 March in the tax year in which the income arises. HMRC publish the exchange rates at www.gov.uk/government/collections/exchange-rates-for-customs-and-vat

Tax Credits: Income from self-employment (or trading income)

Trading income for tax credits is the claimant’s taxable profits as defined in Part 2 of ITTOIA 2005. This is broadly the same as the business profits appearing in the claimant’s self-assessment return. See page 15 of TC600 guidance notes.

However, the income tax rules on the averaging of trading profits which apply to farmers and creative artists do not apply to tax credits.

Note also that relief for trading losses is computed differently from tax - see below.

If the claimant is a partner in a trading partnership their trading income for tax credits is the taxable profit arising from their share of the partnership’s trading or professional income.

Relief for trading losses

While the calculation of trading profits and losses is the same for income tax and tax credits, there are important differences in the way the relief is calculated for tax and tax credits.

Where the trader is making a joint claim with their partner, a trading loss must be offset, for tax credits, not just against the trader's current year income but against the joint current year income of the trader and their partner.

There is no ‘carry-back’ of losses for tax credits – see example below.

Any surplus may be offset against profits of the same trade in future years for tax credits.

Unrelieved losses of 2001-02 – that is, losses which could not be fully relieved in that year – can be carried forward to 2003-04 and beyond for tax credits; but losses incurred in years prior to 2001-02, or in 2002-03, cannot. These are effectively 'non-years' for tax credits, because the income of those years is not used for any tax credit purpose.

Trading losses cannot be carried forward for tax credits unless the trade in which they were incurred is being undertaken on a commercial basis and with a view to realising profits.

HMRC have produced worksheet TC825 which gives guidance on certain deductions and trading losses.

Example

Bill has the following trading results from 2011/12 to 2015/16. His wife Emily has employment income of £10,000 for each of those years.

Tax year

Profit/(loss)

£

Bill – taxable

£

Emily salary

£

Bill/Emily tax credits income

£

2015/16

5,000

NIL

10,000

10,000

2014/15

(15,000)

NIL

10,000

NIL

2013/14

3,000

NIL

10,000

13,000

2012/13

2,000

NIL

10,000

12,000

2011/12

5,000

NIL

10,000

15,000


As can be seen, Bill makes modest trading profits in 2011/12, 2012/13 and 2013/14. He then sustains a serious loss in 2014/15.

The £15,000 loss is offset against the couple’s current year income i.e. Emily’s earnings, leaving £5,000 to be carried forward and set against Bill’s £5,000 profits of the following year. Their income for tax credits for 2015/16 is just Emily’s salary of £10,000.

For tax purposes, however, the loss can only be set against Bill’s profits of the previous three years (i.e. the ‘carry back’) and any surplus carried forward against future years’ profits. The £15,000 loss is, therefore, sufficient to reduce Bill’s profits from 2011/12 to 2015/16 to nil.

Legislation: Income Regulations (SI 2002/2006), reg 3(1), Step 4.

Tax Credits: Student income

The only student income taken into account for tax credit purposes are the adult dependants’ grants, payable under section 22 of the Teaching and Higher Education Act 1998 (in England and Wales), under the Student’s Allowances (Scotland), Regulations 2007 and under equivalent provisions in Northern Ireland .

Non-taxable interest payable on repayment of loans to the student (ITTOIA 2005, section 753) and scholarship income (ITTOIA 2005, section 776) are disregarded.

Tax Credits: Pension income

Pension income for tax credits mirrors the tax treatment.

It includes the following taxable pension payments and annuities:

In calculating pension income for tax credits, the following are disregarded:

  1. a wounds pension or disability pension paid to members of the armed forces (ITEPA 2003, section 641);
  2. an annuity or additional pensions payable to the holder of an award for bravery e.g. Victoria Cross (ITEPA 2003, section 638);
  3. a pension in respect of death due to military or war service (ITEPA 2003, section 639), together with any pension or allowance by reason of which such a death pension is abated or withheld (ITEPA 2003, section 640);
  4. a mobility supplement, or constant attendance allowance, paid with a war pension;
  5. that part of a pension awarded at the supplementary rate under Article 27(3) of the Personal Injuries (Civilians) Scheme 1983 which is specified in paragraph 1(c) of Schedule 4 to the Scheme;
  6. the exempt amount of a pension awarded on retirement through disability caused by injury on duty or by a work-related illness as calculated in accordance with ITEPA 2003, section 644(3);
  7. the tax-exempt part of a lump sum paid under a registered pension scheme (ITEPA 2003, section 636A);
  8. coal or smokeless fuel, or allowances in lieu of coal, given or paid to former colliery workers or their widows or widowers, to the extent that it is exempt from income tax under ITEPA 2003, section 646(1).

Donations to charity under the payroll deduction scheme (ITEPA 2003, section 713) may be deducted from any pension payment.

Pension withdrawal flexibilities

From April 2015, individuals aged 55 or over will have more flexibility around when and how they can make withdrawals from their pensions funds.

The changes bring more choice about how to use or spend the pot of money accrued in a pension fund but there are no changes to the way income from pensions is taxed and no change in how pension income affects tax credits or other social security benefits.

For this reason it is important that claimants who find themselves in the position where they are making decisions about whether and how to use their pension fund in light of the new flexibilities should not overlook the implications for their tax credit awards, benefits and overall household income.

The tax-free element of pension withdrawal is ignored as income for tax credit purposes but any amount over that limit should be declared as pension income in the usual way, as with interest on savings and investments. Both are classed as ‘other income’ and the total amount of ‘other income’ (which also includes foreign, property and notional income) which is over £300 is taken into account in assessing income for tax credit purposes.

Tax credit awards are assessed against income from the previous year as well as the current year and increases and decreases up to £2,500 are disregarded in the comparison between current year and previous year (see our understanding the disregards section). So a modest taxable pension income in current year (within the £2,500 increase disregard) shouldn’t affect the tax credit award that year, although it may impact on the amount of tax credits the following year.


 

Tax Credits: Notional income

Under section 7(9) of the Tax Credits Act 2002, HMRC can treat a person:

The intention is to prevent people from manipulating their income to claim more tax credit than they would otherwise be entitled to.

There are four categories of notional income:

  1. Certain sums deemed to be income for income tax purposes. In the tax system, there are so-called anti-avoidance rules which aim to prevent people manipulating their income in order to pay less tax.
  2. Income claimants have deprived themselves of in order to claim/increase entitlement to tax credits (known in social security shorthand as income deprivation).
  3. Income which would be available to claimants if they applied for it.
  4. A reasonable rate of pay where work is done at less than the going rate, and the recipient of the service can afford to pay it. This does not apply to volunteers working free of charge for a charitable or voluntary organisation.

Sums deemed to be income for income tax

Certain sums which are deemed to be income for income tax purposes in order to counter tax avoidance are also to be taken into account for tax credits purposes.

These sums are the amounts charged to income tax under the following tax provisions:

See also page 16 of the TC600 guidance notes.

Income deprivation

If a claimant deprives themselves of income for the purpose of securing entitlement to, or increasing the amount of, a tax credit, the claimant can be treated as still having that income.

It should be noted that the restriction should only apply where the claimant deprives themselves of income for the purpose of securing entitlement to, or increasing the amount of, a tax credit.

So, a company director who waives a dividend in order to retain the profits within the company to aid future growth ought not to be caught by this provision. However, if the same director waived the dividend solely in order to increase their tax credit entitlement, the amount of the dividend may be treated as the director’s notional income.

The Tax Credits Technical Manual (TCTM 04803)  states:

“the claimant may have more than one reason for disposing of income, only one of which is to obtain tax credit or more tax credit. Securing or increasing entitlement to tax credit may not be a claimant's main motive, but it must be a significant one.” [italics supplied.]

Thus a carer who stopped claiming carer’s allowance so that the person in their care, who was not a member of the carer’s family, could claim the severe disability premium in income support, was held not to have notional income by the equivalent social security provision (CIS/15052/1966).

Income available on making of a claim

If income would be available to a claimant on making an application for it, the claimant is treated as having that income.

There are exceptions:

Claimants providing services to others for less than full rate of pay

If a claimant provides a service to someone, and

  1. that person makes no payment, or pays less than that paid for a comparable employment or self-employment in the area, and
  2. HMRC are satisfied they have sufficient means to pay for the service, or pay more for it,

the claimant is treated as having as much employment income, or trading income, as is considered reasonable for that service.

There are exceptions:

Tax Credits: What is income

A tax credits award is based on the income of the claimant, or of both claimants if the claim is a joint one. You can find out how to calculate tax credits in the calculating tax credits section of this site.

What constitutes income is set out in the Tax Credits (Definition and Calculation of Income) Regulations 2002, SI 2002/2006 , as amended (referred to in this section as ‘the Income Regulations’). We explain in this section the detailed rules on what counts as income.

NOTE: This section of the site explains what is income for tax credit claims. Where a claimant has their tax credits terminated because they are moving to universal credit, there are new rules on how to calculate income. Please see our universal credit section for more information

Tax Credits: Investment income

There is no capital limit for tax credits; the value of any savings/capital is ignored.  However, any taxable income from savings and investments is taken into account as investment income.

Investment income is the gross amount of:

The following are disregarded:

Certain payments made from government trust funds or from the Eileen Trust, the 1992 Fund, the Macfarlane Trust or the Independent Living Funds to persons diagnosed with variant Creuzfeldt-Jakob disease or haemophilia, or to their partners, are disregarded. Payments made to the parents of a diagnosed person after their death are also disregarded for a period of two years from the date of first payment. Payments out of the estate of a diagnosed person, up to the amount of trust payments that person had received, are disregarded if paid to their partner, or disregarded for two years if paid to a parent.


 

 


 

Tax Credits: Foreign income

Foreign income for tax credits means income arising in the tax year from a source outside the UK. It does not comprise employment income, trading income, or chargeable event gains which are taken into account as investment income. It does include profits from property overseas, overseas investment, pension and social security income.

The losses of an overseas property business which can be carried forward against future profits of that business under ITA 2007, sections 118 and 119 are also taken into account in calculating foreign income.

The tax rules allowing foreign income to be taxed only to the extent that it is remitted to the UK does not apply to tax credits – all of a tax credit claimant’s worldwide income must be taken into account, even if it is exempt under the terms of a double taxation treaty.

The following are disregarded:

Also disregarded is any unremittable foreign income but this is taken into account in the main calculation rather than in the foreign income part.


 

Tax Credits: Employment income

See pages 12-16 of the TC 600 guidance notes. HMRC have produced worksheet TC825 to help with calculating deductions.

‘Employment income’ broadly follows employment income for tax purposes, so most employees can use the amounts given on their P60 or P45. However, there are a number of minor differences between the two, particularly in the treatment of benefits in kind.

‘Employment income’ means:

Employment income does not include pension income.

Where a member of the Brigade of Gurkhas is subject to the voluntary settlement of tax liabilities by the Ministry of Defence to HMRC, his employment income from that employment for a tax year is the amount published by the Ministry of Defence as the UK equivalent rate in his case.

Benefits in kind and similar payments

In calculating the value of a benefit to be included in employment income for tax credits, the higher of the following two figures is used: the monetary value of the benefit to the employee; or the cost to the employer of providing it (less any contribution by the employee).

Taxable benefits included in employment income are broadly the cash equivalent of company cars and fuel, taxable expenses payments and mileage allowances, cash and non-cash vouchers and credit tokens, and money's worth – broadly, anything that can readily be converted into cash.

Taxable benefits that are not counted are living accommodation, vans, beneficial loans, taxable sick pay, and scholarships.

Other payments and benefits that are disregarded for calculating income tax on income from employment are generally disregarded in assessing employment income for tax credits.

The disregarded benefits are:

At the end of each tax year, claimants who have received benefits in kind should receive a P11d or P9d from their employer listing the value of the benefits they have received. The TC600 guidance notes (page 14) instruct claimants to gather various figures from boxes on the P11d/P9d when working out their total income.

The normal process of paying tax on benefits in kind involves HMRC adjusting a person’s tax code in the following year to recover the tax owed on those benefits. However, there are a small number of employers who tax benefits in kind by including them in weekly or monthly pay. Although they still issue a P11d/P9d at the end of the year, it means that when a claimant receives their P60 or P45, the total income figure will include some benefits in kind.

Prior to April 2012, tax credits guidance notes were silent on what to do in this situation. From April 2012, HMRC instruct claimants to deduct the benefits in kind figure from their P60/P45 income before entering it into the relevant box on the tax credits claim form or renewals form. They should then enter the figure relating to the benefits in kind (from their P11d/P9d) into the relevant box. This avoids double counting of the benefits in kind.

Deductions from employment income

The following tax-deductible items are also deducted from employment income for tax credits:

IR35

'Deemed payments' under the IR35 rules for income tax are not included in employment income. The IR35 rules come into play if you are an employee of your own company, and have to pay tax not only on the dividends and salary you receive from the company, but also on the payments your clients make to your company.

Share Incentive Plans (SIPS)

There is no deduction from earnings for any amount of pay that the claimant saves into a Share Incentive Plan (SIP).

Where a person who participates in a SIP exits the plan within 3 years, not for reasons of ill-health, incapacity or redundancy, they must declare the market value of their shares as employment income (under Part 7 ITEPA). This means that for tax credit purposes, not only do they not receive any deduction from income for any contributions they make to the scheme, but if they leave the scheme early, they also have to include the market value of the shares they have acquired as employment income. This is the case even though the money they used to buy those shares has already been declared.

For example:

A person earns £15000 gross per annum and pays £50 gross per month into their SIP, they declare their employment income as £15000 for tax credit purposes as no deduction for the SIP is permitted in tax credits.

The SIP builds to acquire shares to the value of £1200 (£50 per month for 2 years) before the person exits the SIP within 3 years. On leaving the SIP, the shares are transferred to the person and the £1200 is subject to tax under Part 7 ITEPA and they must declare the same money again for the tax credits claim. So their income in the year they leave the scheme will be increased by £1200.

More information about SIPs and the impact on benefits can be found in HMRC’s leaflet IR177 - Share Incentive Plans and Your Entitlement to Benefits.
 

Tax Credits: Disregarded income

Income which arises outside the UK and is ‘unremittable’ for the purposes of ITTOIA, Part 8, Chapter 4, is disregarded for tax credits.

Income is ‘unremittable’ where

The following types of income are also disregarded:

Tax Credits: Calculating tax credits income

This section of the site explains about how to calculate income for tax credit claims. Its important to note that where a claimant has their tax credits terminated because they are moving to universal credit, there are new rules on how to calculate income in those cases. Please see our universal credit section for more information.

Unlike most social security benefits, for tax credits the gross income is used (i.e. before tax and national insurance contributions are deducted).

This will sometimes necessitate a calculation to add the tax back to income which is received, or deductions from income which are paid, net. This is shown in the example below.

Example

James and Jemima have the following sources of income for 2015/16.

 

£

James’s salary

16,000

Profits from Jemima’s business

18,000

Army disability pension*

2,300

Net bank savings interest (joint)

760

ISA dividend (joint)*

140

Rental income/profit (joint) **

 3,500

Total

40,700


James paid a net amount of £2,305 into a stakeholder pension, and he and Jemima jointly made gift aid donations of £702 net.

Their initial 2016/17 tax credits award will be based on their joint income for 2015/16 (as above) and is calculated as follows.

Step 1

Investment income (bank savings)

£

£760 x 100/80***

950

Property income

3,500

Sub-total

4,450

Less disregard

-  (300)

Total

4,150


Step 2

Employment income (James)

16,000


Step 3

Total of steps 1 and 2

20,150


Step 4

Add trading income (Jemima)

18,000

Total

38,150


Less deductions

Pension contributions (James) grossed up****:

£2,305
x 100/80

2,881

Gift aid donations grossed up****:

£702
x 100/80

878

Total deductions

 

- (3,759)

Total joint tax credits income

 

34,391


*Both Jemima’s army disability pension and the joint ISA dividend are disregarded for tax credits purposes.

**This is rental income from a property James and Jemima do not live in and is, therefore, not eligible for rent-a-room relief.

*** A gross income figure is used for tax credits, i.e. before tax and national insurance contributions are deducted. Income from savings is paid net, after deduction of basic rate tax at 20%. To arrive at the gross amount, apply the fraction 100/80 to the net payment.

****Similarly, pension contributions and gift aid payments are made net by the contributor or donor and the amount needs to be ‘grossed up’ at the basic rate of 20%.

Specific income categories

The guidance notes provided by HMRC follow the claim form TC600 and show the claimant the information to include when making a claim.

Tax Credits: CTC elements

Both WTC and CTC comprise a number of elements. CTC can be claimed by people who are responsible for one or more children or qualifying young persons. It can be claimed by joint claimants (couples or polygamous units) where at least partner has responsibility for a child or young person, or by lone parents. It is immaterial whether the claimant is in work. This section of the site explains the qualifying criteria for CTC elements.

Being responsible for a child or young person

In order to claim CTC a person must be responsible for a child or qualifying young person. There are two tests that are relevant in determining responsibility – the ‘normally living with’ test and the ‘main responsibility’ test.

Normally living with test

The basic test is that a person is responsible for a child or qualifying young person (QYP) if that child or QYP is normally living with them.

The legislation gives no further guidance on what this means. The HMRC guidance manual states that it should be given its ordinary meaning which is ‘regularly, usually, typically lives with them which allows for temporary or occasional absences’. (TCTM02202)

Main responsibility test

The ‘normally living with’ test is supplemented with the ‘main responsibility test’ where a child or QYP usually lives with two or more people in different households or where they live in the same household where those persons are not limited to the members of a couple.

If two or more people make separate claims for CTC for a child or QYP, only one claimant can be treated as responsible for the child or QYP, for tax credit purposes. In such cases, the CTC will be awarded to the person who has main responsibility. Normally both (or all) claimants will decide between them who has main responsibility and make a joint ‘election’ as to who should receive the CTC. However, if agreement cannot be reached, HMRC will make the decision.

Similarly, ‘main responsibility’ is also not defined in legislation. HMRC guidance states that it should also be given its ordinary everyday meaning of ‘someone who is normally answerable for, or called to account for, the child or qualifying young person’.

This can be quite a difficult test to apply in practice and HMRC have developed a list of factors that can be considered in determining who has main responsibility. The list is not exhaustive but includes the following factors:

Exceptions to the responsibility rules

There are exceptions to the normally living with and main responsibility test. A claimant cannot be responsible for a child or QYP in the following circumstances:

Case A:

The child or QYP is provided with, or placed in,  accommodation under Part III of the Children Act 1989, Parts 4 or 6 of the Social Services and Well-being (Wales) Act 2014, Part II of the Children (Scotland) Act 1995 or Part IV of the Children (Northern Ireland) Order 1995, and the cost of that child's accommodation or maintenance is borne wholly or partly –

Case B: The child or QYP is being looked after by the local authority and has been placed for adoption in the home of a person proposing to adopt them. This applies if the local authority (or authority in Northern Ireland) is making a payment in respect of the child or QYP’s accommodation or maintenance under section 22C(10) (for England) of the Children Act 1989, or section 81(13) of the Social Services and Well-being (Wales) Act 2014, or section 26 of the Children (Scotland) Act 1995 which gives rise to regulation 33 of the Looked After Children (Scotland) Regulations 2009 or in Northern Ireland, Article 27 of the Children (NI) Order 1995.

Case C: The child or QYP is serving a custodial life sentence (without limit of time), is detained at Her Majesty’s pleasure (or in Northern Ireland at the pleasure of the Secretary of State), or is detained for a term of more than four months.

Case D: A QYP is awarded CTC in their own right for a child they are responsible for.

Case E: A QYP is awarded contributory employment and support allowance in their own right. This also applied to Incapacity Benefit. There is an exception to this rule for certain people whose period of incapacity for work began before 6 April 2004.

Case F: A QYP claims and receives WTC in their own right.

Case G: The QYP has a spouse, civil partner or partner with whom they are living and that person is not in full-time education or approved training. Both concepts are explained below. This case does not apply to people in receipt of CTC for a QYP who is living with a partner before 1September 2008.

Case H: The responsible person is the spouse, civil partner or partner of a QYP with whom they are living. This case does not apply to people in receipt of CTC for a QYP who is living with a partner before 1September 2008.

Special cases

Where a child or QYP is in residential accommodation defined in regulation 9 of the Child Benefit (General) Regulations 2006 and in the circumstances prescribed in paragraphs (a) or (b) of that regulation, they are treated as being the responsibility of any person who was treated as being responsible for him immediately before they entered that accommodation.

Where a claimant is treated as responsible for a child or QYP based on the rules outlined above and that child or QYP has their child normally living with them, the claimant should also be treated as responsible for e.g. their grandchild. The HMRC manual gives the following example:

A seventeen year old girl and her baby live with her mum. The young mum attends full-time non-advanced education at the local college so she remains a qualifying young person for child tax credits. Grandma can claim for both her daughter and grandchild unless the young mum claims CTC for herself and baby in her own right. (TCTM02206)

What is a child or qualifying young person?

For CTC purposes a child is under the age of 16. CTC can be claimed for a QYP from their 16th birthday until the following 31 August. During this period there is no requirement that the young person be in full time education or training.

From 1 September following the QYP’s 16th birthday CTC can continue if the QYP is under 20 and in full time, non-advanced education, approved training or registered with a qualifying body for work or training (where the education/training is not provided as part of their work).

The upper age limit was increased from 19 to 20 on 6 April 2006 to enable a young person who started a course before their 19th birthday to continue until they reach 20 without their parents or carers losing CTC. But young persons who were 19 before 6 April 2006 do not qualify.

However, the young person will no longer be a QYP during this time if they start remunerative work and cease full time, non-advanced education or approved training or they claim income-based job seeker’s allowance, income-related employment and support allowance, income support or Universal Credit in their own right. This means that the claimant can no longer claim CTC for that young person. In this context, remunerative work means work done in expectation of payment for not less than 24 hours a week.

From summer 2013, the Government started to raise the age of participation in England. This means that pupils who left year 11 in summer 2013 have to stay in education or training until the end of the academic year in which they turn 17. This increases to age 18 from 2015. The new rules allow 16-17 year olds to remain in full-time study or training, full-time work/volunteering with part-time study or training or undertake an apprenticeship. Many of the terms used in defining a child and QYP have very specific legal definitions. These are explained briefly below.

Full time education

To be in full-time education, the young person must be receiving full-time, non-advanced education. They must be studying at a school or college, or elsewhere providing they were studying there prior to their 16th birthday and it is approved by HMRC or it is part of a Study Programme (England only). The course of study must also not be one that the young person is pursuing because of his or her employment

Full-time study means on average not less than 12 hours a week spent during term-time in tuition, supervised study, exams and practical work. The 12 hours includes gaps between courses, but not meal breaks or periods of unsupervised study or homework undertaken outside normal hours. The Child Tax Credit Regulations 2002 (SI 2002/2014) defines full time education as:

‘education received by a person attending a course of education where, in pursuit of that course, the time spent receiving instruction or tuition, undertaking supervised study, examination or practical work or taking part in any exercise, experiment or project for which provision is made in the curriculum of the course, exceeds or exceeds on average 12 hours a week in normal term-time, and shall include gaps between the ending of one course and the commencement of another, where the person is enrolled on and commences the latter course.’

Non-advanced education

A young person is only a QYP if they are in full time education that is not at an advanced level. The legislation does not define non-advanced education, but instead defines advanced education. If the education does not fall under the advanced heading, it is by definition non-advanced. Advanced education means full time education for the purposes of a course in preparation for a degree, a diploma of higher education, a higher national diploma, a higher national diploma or higher national certificate or Edexcel or the Scottish Qualifications Authority, or a teaching qualification. Alternatively it means any other course which is of a standard above ordinary national diploma, a national diploma or national certificate of Edexcel, a general certificate of education (advanced level) or a Scottish national qualifications at higher or advanced higher level.

Non-advanced education includes qualifications such as A-levels (As and A2 levels), Scottish Highers, NVQ at level 3; ordinary national diploma; a national diploma or national certificate of Edexcel; GCSEs; International Baccalaureate; Study Programme (England only); Scottish national qualifications at advanced or higher level. It does not include university courses.

There is some information about the definition of a qualifying young person and education levels on the GOV.UK website.

Approved training

This is defined by reference to various training programmes arranged by the Government. It has the same meaning given by regulation 1(3) Child Benefit (General) Regulations 2006. Generally, approved courses don’t pay wages and teach skills needed to do a particular job. Training must not be provided under a contact of employment.

HMRC guidance (TCTM 02230) defines approved training as:

Note: There should be no new starts on 'Skillbuild' or 'Skillbuild+' from 1 August 2011, only starts prior to 1 August 2011.

Note: The West Lothian Council Skills Training Programme should be treated as ‘Get ready for work’.

Unlike non-advanced education, there is no requirement to attend approved training for a minimum number of hours.

Registered with a qualifying body

If a young person is under 18 and has ceased full time education or approved training, , CTC can continue to be paid for up to 20 weeks. This only applies if the QYP has registered for work or training with a qualifying body and the CTC claimant has notified HMRC of the change within 3 months of the leaving date..

A qualifying body for this purpose is the Careers or Connexions Service, the Ministry of Defence, the Department of Employment and Learning or an Education and Library Board established under article 3 of the Education and Libraries (Northern Ireland) Order 1986 or any corresponding body in a member state where Council Regulation (EEC) No. 1408/71 and Regulation (EC) No 883/2004(h) of the European Parliament and of the Council applies. More information about what constitutes a Careers or Connexions Service can be found in TCTM02230.

Interruptions to education

The regulations allow for certain periods to be disregarded when determining whether a person is undertaking full time education or approved training. A period of up to 6 months can be disregarded if HMRC decide it is reasonable to do so. Any period due to illness or disability can also be disregarded, again if HMRC decide this is reasonable.

According to the HMRC manual, this provision allows for interruptions such as school holidays, moving location or illness as long as there is an intention to continue full time education or approved training.

Practical aspects

In practice, the HMRC computer system is set up to stop the CTC child element from 1September following the child’s 16th birthday. The claimant is then required to inform HMRC, both TCO and CBO, that the child is either staying on in full time education or approved training in order for CTC to continue. However, it is not unknown for the computer system, to fail to stop CTC so this should not be relied upon and claimants should inform HMRC if their child is not staying on in full time non-advanced education or approved training so that they no longer qualify for CTC for that child.

Additionally, from September 2014, the HMRC computer system automatically stops the CTC child element on the 31st August following the respective 18th and 19th birthdays of any qualifying young person. This means that HMRC must be notified annually when a young person who turns 18 or 19, respectively, remains in full-time non-advanced education or approved training, otherwise the award will be reduced prematurely. There is a concern that claimants may not be fully aware of this change in approach and could therefore see their tax credit award reduced, or in some cases, end, early. To ensure entitlement continues correctly, claimants need to notify HMRC if the young person on their claim is continuing in full-time non-advanced/approved training. As mentioned above, HMRC’s computer may fail to stop CTC in some cases so this should not be relied upon and claimants should still inform HMRC if their young person leaves full-time non-advanced education or approved training so that they no longer qualify for CTC for them.

One particular area of difficulty for claimants is determining when CTC stops if a young person plans to continue to advanced level education e.g. by going to university. HMRC guidance states that in such cases, CTC can be paid to 31 August (the last day of the academic year) unless the young person changes their mind and decides not to remain in education before that date. For example:

A claimant telephones on 27 August to inform tax credits that her daughter has found work. The claimant states that although her daughter had originally intended to go to university, following her exam results she had decided to look for a job instead and has now found work. She is asked what date her daughter made the decision to look for work and not go to university. This date is given as the 21 August. CTC can therefore be paid to the 20 August. (TCTM02230)

Once the claimant can no longer include their only or last QYP in their CTC claim, entitlement to WTC can also be affected as they will need to work number of hours that apply to a person who is not responsible for a child/QYP.

Death of a child or young person

If a child or QYP dies, CTC should continue for a period of 8 weeks following the death. In the case of a QYP, it will continue for 8 weeks or until they would have reached the age of 20, if earlier.

Family element

The family element is paid to each family entitled to CTC, irrespective of the number of children or QYPs in the family. Only one family element is payable on each claim.

Child element of CTC

For each child or QYP that the claimant is responsible for, a child element is included in the award. There are three rates of the child element and which one is payable depends on whether the child has a disability. The three levels of child element payable cover:

Sometimes, the three rates are referred to as three different elements. However, when calculating daily rates and awards, the HMRC system follows the legislation which has only 1 child element payable at one of three rates.

Disabled child

The child element is paid at a higher rate for each disabled child or QYP that a claimant is responsible for. This is sometimes referred to as a ‘disabled child element’ but the true description, in line with the legislation, is that the value of the child element is higher in these circumstances.

A child or QYP is disabled for tax credit purposes if any rate of DLA or Personal Independence Payment (PIP) is payable for the child or QYP, or has ceased to be payable solely because they are a hospital in-patient.

A child or QYP will also qualify if they are certified as severely sight impaired or blind by a consultant ophthalmologist, or has ceased to be registered or certified as blind within the 28 weeks immediately preceding the date of claim.

Severely disabled child

The child element is paid at a higher rate for each severely disabled child or QYP that a claimant is responsible for. As suggested above, this is sometimes referred to as a ‘severely disabled child element’ but the true description, in line with the legislation, is that the value of the child element is higher in these circumstances and is, in fact, a higher amount than the value of child element for a disabled child or QYP.

A child or QYP is severely disabled for tax credit purposes if the highest rate care component of DLA, the enhanced rate daily living component of Personal Independence Payment (PIP) or any component of Armed Forces Independence Payment (AFIP) is payable for them, or would be payable but for a suspension or abatement due to hospitalisation.

Note: If a new claim for DLA/PIP or AFIP is made whilst a child is in hospital, it cannot be paid until the child is discharged.  However, HMRC should be notified of any successful claim as soon as possible (especially if the highest rate care component or enhanced rate daily living component has been awarded).  This is because the CTC severe disability element can be included whilst the child is in hospital, even though DLA has never been in payment.  The same does not apply to the CTC disability element.

Baby element

For historical purposes only, this paragraph discusses the baby element of child tax credit. This element was available to CTC claimants from 6 April 2003 to 5 April 2011. It ceased from 6 April 2011, even for families whose children had only received it for part of the 2010/11 tax year.

The baby element was paid in addition to the family element to families until a child’s first birthday. Only one element was payable no matter how many children under one were in the family.


 

Tax Credits: HMRC calculators

HMRC have produced various tax credits related calculators which are on their website.

This section of the site gives links to these calculators with a brief description of what they are about.

Tax Credits – Do you qualify questionnaire

HMRC produced this brief questionnaire to help people see if they may be entitled by answering a few questions. There are some people who cannot use the calculator such as those who qualify for the severe disability elements or those who have a partner with a disability.

Tax Credits Calculator

A much more detailed calculator which seeks to give claimants an estimate of their entitlement.

Childcare vouchers and tax credits – better off calculator

Some employers offer employees childcare vouchers either in exchange for some of their salary (known as ‘salary sacrifice) or in addition to their salary. It is not possible to claim help with childcare costs for any childcare covered by these vouchers. This means that claimants need to work out whether they are better off accepting vouchers or claiming their childcare costs through the childcare element of Working Tax Credit (or in some cases a combination of both).

This calculator seeks to tell claimants which scenario is the most favourable based on the information entered.

As with the other calculators, HMRC state that certain people cannot use the calculator.

Childcare costs calculator

This calculated was added in March 2012 to help claimants calculate their childcare costs more accurately. This is an area identified by HMRC as high risk in terms of error and fraud. You can find out more about calculating childcare costs in our understanding childcare section.

Tax Credits: How do tax credits work?

In this section you will find information about how the tax credits system works.

The annual cycle: Unlike other benefits, tax credits are based on a tax year. This section explains the yearly cycle and critical dates during the tax year including claims starting , changing , renewals and finalisation.

Forms, notices and checklists: In this section you will find links to the most common current forms and notices used by HMRC to communicate information to claimants. You will also find archived versions of forms, notices and checklists used in previous years.

Calculating tax credits: Calculating tax credit awards can be complicated. This section explains how awards should be calculated under the legislation as well as quicker ways for advisers to do calculations that are still accurate.

Making a claim: In this section you will find information about the different ways of making a claim for tax credits including protective claims . It also explains how claims are processed once received by HMRC and what steps need to be taken to request backdating.

Entitlement: This section provides information about the rules concerning entitlement to tax credits and the various elements

Payments: This section of the site explains how payments of tax credits are made, how tax credits interact with national insurance contributions and the rules around bank accounts.

What is income: A tax credits award is based on the income of the claimant, or of both claimants if the claim is a joint one. This section provides information covering the detailed rules on what counts as income.

Real Time Information and tax credits: HMRC are able to use Real Time Information provided by employers and pension providers for tax purposes to help finalise some tax credit claims. This section explains more about RTI and how it will be used for tax credits.

Who can claim: To be entitled to tax credits, a claim must be made. Without a claim, there can be no entitlement. This section provides information about the rules regarding who can claim tax credits

Changes of circumstances: Some changes of circumstances affect the amount of tax credits payable and some must be reported to HMRC within a certain timeframe. This section explains what changes must be notified , other changes that can be notified and how to notify changes.

Understanding the disregards: The disregards for rises and falls in income are unique to the tax credits system and cause a great deal of confusion amongst claimants. This section explains in detail how the disregards work and includes several examples.

Understanding childcare: Childcare is one of the most complicated parts of the tax credits system for claimants, advisers and HMRC. This section of the site explains the law relating to the childcare element and also covers how to calculate childcare costs.

Understanding disability: A claimant with disabilities may not necessarily be disabled for tax credits purposes. This section explains the disability elements of working tax credit and child tax credit in detail.

Understanding couples: A claim for tax credits must be made jointly by a couple or by an individual. Making the wrong claim can have severe consequences in terms of overpayments and penalties. This section explains the concept of a couple and outlines the consequences of making the wrong claim. It also explains ‘notional offsetting’ and how this can help overpayments relating to wrong capacity claims.

Understanding self-employment: This section of the site explains parts of the tax credits system relevant to self-employed claimants. It includes detailed information about self-employment compliance investigations.

Special circumstances: In this section you will find information about foster carers and shared lives carers , how the tax credits system works for those with mental health conditions and special provisions for situations involving domestic violence.

Overpayments and underpayments: Overpayments and underpayments are built into the tax credits system and can occur naturally even if everything is done correctly by HMRC and the claimant. This section explains the most common causes of overpayments and underpayments.

Tax Credits: Current leaflets

This section gives details of all leaflets produced by HMRC in relation to tax credits.

The leaflets listed below are all current versions, if you would like to see archived versions of the leaflets or leaflets that are no longer published you can use the navigation to the left. 

You can request printed versions of the following leaflets by calling the tax credits helpline on 0345 3003900

Tax Credits: Archived leaflets

This section of the website contains past versions of tax credits leaflets. These can be useful when dealing with old overpayments.

We will continue to add earlier versions of the leaflets as we receive them. In some years, HMRC did not update certain leaflets therefore there may not be a version for each year. Some of the earliest versions of the leaflets below are scanned copies of the original leaflet and therefore may be of a reduced quality.

You can find archived versions of COP 26 in the Codes of Practice section.

Click on the leaflet number below to go to the archived versions:

WTC 1 | WTC 2 | WTC 3 | WTC 4 | WTC 5 | WTC 6 | WTC 7 | WTC 8 | WTC 9 | WTC 10 | WTC AP | WTC FS 1 | WTC FS 2 | WTC FS 3 | WTC FS 4 | WTC FS 5 | WTC FS 6 | WTC FS 9 | WTC E6 | Tax Credit Annual Review Help Sheets | How HMRC handle tax credits overpayments | Penalty determinations

WTC 1 – Child and Working Tax Credits

WTC 2 – A guide to Child Tax Credit and Working Tax Credit

WTC 3 – Tax credits penalties: examinations

WTC 4 – Tax credits penalties: enquiries

WTC 5 – Working tax credit help with costs of childcare

WTC 6 – Other types of help you can get

WTC 7 – Tax credits penalties

WTC 8 – Why do overpayments happen?

WTC 9 – Could you get help with your everyday costs?

WTC 10 – Tax credits help us to help you get it right

WTC AP – What to do if you think our decision is wrong (appeals)

WTC FS 1 – Tax credits enquiry

WTC FS 2 – Tax credits examinations

WTC FS 3 – Tax credits formal request for information

WTC FS 4 – Tax credits meetings

WTC FS 5 – Coming to the UK

WTC FS 6 – Leaving the UK

WTC FS 9 – Suspension of payments

Note: This leaflet was introduced in 2010-2011

WTC E6 - Employers

Tax Credits Annual Review Help Sheets

How HMRC handle tax credits overpayments

Tax Credit Penalty Determination

Universal credit update

New universal credit postcode web tool

Tax Credit Renewals - HMRC extend helpline opening hours

Transition to universal credit: DWP Advice for Decision Making (ADM)

DWP benefits have long been administered by decision makers following the DWP’s decision makers guidance (DMG). For new benefits introduced from April 2013, including Universal Credit, DWP has decided to set out their guidance in a newly named ‘Advice for Decision Making’ – ADM for short. ADM will cover new benefits including Universal Credit and Personal Independent Payment as well as Jobseeker’s Allowance and Employment and Support allowance (following changes to them by the Welfare Reform Act 2012).

This section of the site covers the ADM for Universal Credit only. You can find the ADM for other benefits on the Gov.UK website. Guidance from HMRC relating to stopping tax credits can be found in our HMRC guidance section.

ADM guidance
Getting updates
Helpful documents

ADM guidance

The guidance is split into 12 sections covering Universal Credit as well as some common subject areas.

A: Decision Making and Appeals

B: Subjects common to UC, PIP, ESA AND JSA (includes payments, restrictions of benefit and evidence of age and death)

C: International issues

D: Subjects common to UC, ESA AND JSA (includes overpayments, recoverability, third party deductions, loan interest payments)

E: Universal Credit: basic entitlement, awards and restrictions

F: Universal Credit: elements

G: Universal Credit: capability for work or work-related activity

H: Universal Credit: capital, income and students

J: Universal Credit: claimant responsibilities

K: Universal Credit: sanctions

L: Universal Credit and hardship

M: Universal Credit: transition

You can find ADM memos on the GOV.UK website:

Advice for Decision Making and memo updates

Getting updates

Advisers can get updates to the ADM and other Decision Makers Guidance (DMG) by emailing dma.leedsmailinglist@dwp.gsi.gov.uk

Helpful documents

To aid advisers in understanding the ADM, DWP have produced two PDF’s that explain abbreviations and reference the legislation referred to in the ADM.

List of abbreviations
List of statutes and statutory instruments

Universal credit: Leaflets and factsheets

This section gives details of current leaflets about Universal Credit which are published by DWP and can be found on the GOV.UK website.

Currnet leaflets for claimants

Universal credit: Tax credits and UC

This page explains the relationship between tax credits and Universal Credit and looks at how claimants can move from UC back to tax credits and vice versa.

The general rule
New tax credit claims
Existing tax credit claimants
Claims for tax credits by UC claimant
Treated as entitled to tax credits
Moving back to tax credits from UC

The general rule

The general rule is that you cannot claim tax credits (working tax credit and/or child tax credit) at the same time as Universal Credit. There are exceptions to this rule:

New tax credit claims

Whether a person can make a tax credit claim depends on the status of UC in their area. If UC has not reached their postcode then they can claim tax credits as normal. If UC has reached their postcode area then whether they can claim depends on if their area is a digital service area or a live service area. See ‘current eligibility to claim’ to find out more.

We have created a a postcode checker - universalcreditinfo.net - that shows who can claim UC and the status of tax credit claims and other benefits in that postcode area.

Enter your postcode in the box below to find out about your area:
 


Existing tax credit claimants

At present, existing tax credit claimants are not currently affected by the roll-out of UC. From July 2019, DWP will start to move existing tax credit claimants across to UC. This will be completed in 2022 based on current plans.

The only way existing tax credit claimants can move to UC is if they choose to do so or if they have a change in circumstances that ends their tax credit award or in digital areas if they need to make a claim for another legacy benefit. First, the person needs to understand whether they are in a live service area or a digital service area. See 'current eligibility to claim' to find out more.

Claims for tax credits by UC claimants

A UC claimant cannot make a claim for tax credits. DWP treat a person as a UC claimant if:

This rule, where a UC claimant cannot make a claim for tax credits, also applies even if a claim for the benefit is made or treated as made at a time when the claimant was not a UC claimant. This specifically refers to the normal tax credit rule which allows backdating of claims up to 31 days. Similarly, a claim for WTC may not be made where backdating is claimed due to being awarded a qualifying disability benefit or refugee status that gives entitlement to longer backdating of WTC.

Where a person is treated as making a claim for tax credits under certain provisions, the above rule will not apply. This means that in some cases, a UC claimant can make or be treated as making a claim for tax credits. This applies where the tax credit claimant is treated as a new claimant partner in UC or where the person is treated as making a tax credit claim under UC legislation. See below our section on people treated as entitled to tax credits.

A new claimant partner for UC refers to a tax credit claimant who forms a couple with an existing UC claimant. The couple are treated as having made a claim to UC providing they both meet the basic conditions (except the claimant commitment requirement). The tax credits award will terminate the day before the UC award as a couple starts. If this happens during the renewals period, UC legislation treats this person as making a claim for tax credits for the current year. They will not be affected by the general rule above that says a tax credit claim cannot be made by a UC claimant.

Treated as entitled to tax credits

Under normal tax credits legislation, there is no entitlement to tax credits without a claim. Due to the annual cycle of tax credits, there are periods where potentially a person (or couple) could be receiving payments of tax credits but not have ‘entitlement’ to tax credits under the Tax Credits Act 2002. Much of the UC legislation refers to people who are ‘entitled’ to tax credits and so to address the differences legislation was introduced in the Universal Credit (Transitional Provisions) Regulations 2014 which treats certain people as having made a claim for tax credits for the current year for UC purposes (even if they technically have not for tax credit legislation purposes).

The general rule noted above is that a UC claimant cannot make a claim for tax credits. However this rule does not apply where someone is treated as claiming tax credits under UC legislation. This ensures that people do not lose out on tax credits for a period before they claim UC.

A person is treated as entitled to WTC or CTC (or both) with effect from the start of the current tax year even though a decision (a Section 14) decision has not been made on their claim providing they were entitled to WTC or CTC (or both) for the previous tax year and:

Moving back to tax credits from UC

Often referred to as the ‘lobster pot’ – the principle is that once a person is entitled to UC, they stay on it even if their circumstances change or they move to an area where UC has not yet been introduced.

One of the questions that advisers often have is ‘is there any way for someone claiming UC to go back to tax credits?’. The answer is potentially yes, whilst HMRC are accepting tax credit claims, it is possible for someone to leave UC (escape the lobster pot) and return to tax credits.

Before moving from UC to tax credits or vice versa, advice should be taken from a welfare rights specialist so that the full range of implications can be understood. Some people will be better off on UC than legacy benefits (including tax credits) whereas others will be worse off. The complexity of the roll-out of UC means that until claims for legacy benefits are completely closed off it may be necessary to carry out a ‘better-off’ calculation. However this is not just restricted to which is financially the better choice, but other factors may affect the decision such as passported benefit entitlement, conditionality in UC, monthly payments in UC as well as a host of other points. This is an extremely complex area and advice should be sought before withdrawing a claim for UC.

It will not come as a surprise to find that the situation is complex. We have tried to summarise the current situation in this section, however there are still a number of unanswered questions and we will update once we have answers.

UC claimants cannot claim tax credits

We have explained above that anyone treated as a ‘UC claimant’ cannot claim tax credits. If a claimants falls into one of those categories moving will not be an option unless they fall out of that criteria so that they are no longer a UC claimant.

UC claim ends naturally

Where a claim for UC comes to an end (for example because the claimant has capital over £16,000, becomes a full time student, reaches state pension credit age) then whether a person can then claim tax credits depends on whether they live in a live service area or digital service area. The only exception to this is in live service areas where UC has ended to an increase in earnings – in those cases the person may still be treated as a UC claimant and so not able to claim tax credits for 6 months.

Existing UC claimants

In response to a Freedom of Information request DWP confirmed that it is possible for a UC claimant to end their award.

No provision in the Universal Credit Regulations or Commencement Orders explicitly permits or prohibits the relinquishment of a Universal Credit award. In the absence of such a prohibition, a person receiving Universal Credit who wished to end their award could contact this Department in the usual way when they have a question concerning their award. Once this Department has received the claimant’s notification that they wish to relinquish their award, the necessary work would be taken to end it.

So, presuming a claimant can convince DWP to end their UC award – can they claim tax credits? The answer depends on their postcode.

However, before withdrawing a UC claim, a better-off calculation should be performed and consideration should be given to timing (due to the rules on assessment periods in UC) as well as other rules that exist under UC (such as conditionality, waiting days, monthly payments) that don’t exist on tax credits.

NOTE: This section and indeed the whole site is about the interaction between UC and tax credits. There are similar considerations in relation to other benefits which UC is replacing and the rules about switching between them may be different.

Universal credit: Roll-out timetable

Universal Credit is being introduced over a number of years. To further complicate matters, two different IT systems are being used and different rules apply to each. There are frequent developments in the Universal Credit landscape – we advise that you check our blog for the latest news.

Live service roll-out

Universal Credit was introduced in April 2013 in four postcodes in the North West. Between April 2013 and July 2013, further postcode areas were added. Only people who lived in the relevant postcodes and who met strict conditions were able to claim. These areas were called ‘Pathfinder’ areas. Generally only single jobseekers with no children were eligible to make a claim in the pathfinder areas.

Progressive roll-out of live service UC started in October 2013 and gradually more postcodes were added to the Pathfinder areas.

From 16 June 2014, new rules called ‘gateway conditions’ were introduced. These rules set out whether or not a person living in a designated postcode area is able to make a claim for UC. If the person meets the gateway conditions and lives in a postcode that is accepting UC claims, then they are able to submit a claim. However the gateway conditions should not be confused with the entitlement conditions of UC. Even if a person meets the gateway conditions, it does not mean they will be entitled to UC. We explain the main entitlement conditions for UC in our entitlement to universal credit section. The initial set of gateway conditions were the same as the previous Pathfinder conditions.

From 30 June 2014, the gateway conditions were amended to allow claims from couples in certain postcodes. Further postcodes were announced throughout 2014 and from November 2014 some postcodes began accepting claims from people with children.

In February 2015, the national expansion phase of UC began with roll-out to more postcodes for single jobseekers without children. This national roll-out into these ‘live service’ areas continued until April 2016 when the live service was available in all Jobcentres across Great Britain.

You can find out more about the roll-out in live service areas in the live service section.

Digital service

In February 2013, the Major Projects Authority expressed concerns about the UC programme. This led to a ‘reset’ of UC and new plans to be formulated. This included a proposal to operate a ‘twin-track’ approach by running a live service system alongside a new digital system.

When UC began in April 2013, it used IT assets developed by private contract suppliers. These areas are known as live service areas and will continue to be rolled out to April 2016 in order to test and learn about processes and policy.

Alongside the live service areas, the DWP have built their own digital service system which started in a small number of areas in November 2014. Between November 2014 and April 2016 DWP introduced further digital test areas. From May 2016, the DWP have started rolling out the digital (full) service to existing live service areas. Claimants already claiming UC in these areas will be transferred across to the digital service system within 3 months of the digital go-live date for that area.

Once that process is complete, from July 2019, DWP will begin migrating all remaining existing benefit claimants to the full UC digital service with a view to completion by March 2022. Separate arrangements will be made for those over state pension credit age. However, until that happens, the two systems will run side by side. To further complicate matters, the UC rules are slightly different for digital claimants than for those who are in live service claimants. We explain more about this in our digital section.

Northern Ireland

The roll-out above applies only to Great Britain. Universal Credit is expected to roll-out in Northern Ireland in 2017.See our NI legislation section for further details.

Tax Credits: Current policy

This section of the website gives information about some of HMRC’s current tax credits policies with links to further information. This material was written by the Low Incomes Tax Reform Group.

Changes to the system – Introduction

A series of fundamental changes to the tax credit system were announced in the June 2010 emergency Budget and the October 2010 Comprehensive Spending Review. Some of these changes were introduced from April 2011, the remainder from April 2012. One final change, the lowering of the disregard for rises in income, is due to start from April 2013 (see further our future changes – tax credits section ).

The original budget and Comprehensive Spending Review documents contain basic information about the changes as well as statistics modelling what impact the changes may have. HMRC also published a summary of the main changes on their website.

Some further changes were announced in the Autumn Statement 2011.

A useful table, summarising the changes and when each began, can be downloaded here.

Changes from April 2011

Lowering of the second income threshold

In 2010-2011 and earlier years, CTC claimants received the full family element (£545) until their income reached ‘the second income threshold’. For most people this was an annual income of £50,000 (although for some it may have been higher).Above that amount the family element was withdrawn at 6.67%, or £1 in each £15 by which income exceeded that figure. Changing the second income threshold to £40,000 in 2011/12 meant that the withdrawal started at lower income levels, and the rate of withdrawal was changed to 41% not 6.67% meaning once it reached the second income threshold it was withdrawn much quicker.

Some families who were receiving the family element of £545 in 2010/11 had their tax credits reduced to Nil from April 2011, whilst other families on higher incomes had a reduction in the amount they received as a result of this change. As explained below, the second income threshold was completely removed from April 2012.

Main taper rate increased from 39% to 41%

From 6 April 2011, the withdrawal (or ‘taper’) rate increased from 39% to 41%.

The first step in a tax credit calculation is to work out the maximum possible entitlement. This maximum (not including the family and baby elements) was then reduced when household income started to go above certain thresholds. In 2010/2011 it meant that if a claim for working tax credit (WTC) or both WTC and CTC was made, entitlement was progressively reduced by 39p for each £1 by which income goes above £6,420 a year. If the claim was CTC only, that income threshold was £16,190 a year.

The change to the withdrawal rate meant that from 2011/2012, claimants will lose 41p instead of 39p for each £1 of income above those thresholds. The 41% taper remains in place for 2012/2013.

Family element withdrawal rate increased

Prior to 6 April 2011, the family element (£545) was protected until income reached at least £50,000 (the second income threshold). Once income reached the second income threshold it was tapered away at a rate of 6.67%.

The 6.67% taper rate gives an income range of approximately £8,170 which is added to the second income threshold (whether it is £50,000 or higher) before the family element disappears completely. Therefore, a family whose second income threshold was £50,000 could continue to get at least some family element until their income reached £58,170.

From 6 April 2011, the taper was increased from 6.67% to 41%. The second income threshold was also lowered so that family element was only protected up to an income of £40,000. With an increase of the taper to 41%, the income range reduced to approximately £1,329. Consequently, in 2011/12, a family with a second income threshold of £40,000 would have had their family element disappear at an income of £41,329.

Families with household income above £40,000 will start to have their family element of £545 a year tapered away from 6 April 2011 at a rate of 41%. The current rate is 6.67%.

Abolition of the baby element

The baby element of child tax credit was payable to families with a child under one in addition to the family element (making a total of £1090). This was abolished for all claimants on 6 April 2011, including those families who had received it for less than 12 months.

WTC for those aged 60 or over

From 6 April 2011, those aged 60 or over can qualify for working tax credit by working at least 16 hours a week. Previously they were required to work at least 30 hours unless they were responsible for a child or children or qualified for the disability or 50+ elements.

Childcare element percentage reduced from 80% to 70%

From 6 April 2011, the childcare element will provide help with only 70% of eligible costs as opposed to the current 80%.

Couples who both work at least 16 hours per week (unless one is incapacitated, in prison or hospital) and lone parents who work at least 16 hours per week can claim the childcare element. From 6 April 2006 until 5 April 2011, this element provides help with the costs of registered or approved childcare of up to 80% of the maximum set amounts which was £175 a week for one child (80% of which is £140) and £300 a week for two or more children (80% of which is £240).

From April 2011, claimants will only receive up to 70% of the maximum amounts which means up to £122.50 for one child and up to £210 for two or more children. The childcare element also paid 70% of costs in the early years of the system before increasing to 80% from 6 April 2006.

Most families who claim the childcare element are affected by the change. For those who received the full 80% of their costs, they had to pay the 10% differences themselves. Even though claimants may not have been paid any childcare element (because their income was high enough to see it tapered away), they may have received more child tax credit than they would have done as a result of including childcare in the calculation. Families who receive less than 80% of their costs would also have seen a reduction in their award.

One important point to note is the interaction with childcare vouchers. The reduction from 80% to 70% means that the calculation used to determine whether someone is better off receiving the childcare element of WTC or taking childcare vouchers has also changed. There will be a group of people who were better off with WTC in 2010/2011 who may find they will be better off taking vouchers in 2011/2012 and future years. Advice should be sought in these cases to ensure a full better off calculation can be done.

Decrease in the income disregard

The tax credit income disregard changed from £25,000 to £10,000 from 6 April 2011. From 6 April 2013, this will decrease again from £10,000 to £5,000.

The disregard is one of most complex parts of the tax credit system. We explain the disregard in detail in our 'understanding the disregards’ section. Tax credits are paid based on current circumstances and household income from the previous tax year.

After the tax year ends, HMRC compare actual income for the year just ended with income for the previous year. Provided the income for the year just ended is no more than £10,000 higher than in the previous year, the award will be unaffected and there will be no overpayment. Hence the term ‘disregard’, because the first £10,000 of any income increase is disregarded when calculating your award.

The £25,000 disregard was very generous. Replacement by a reasonable disregard of £10,000 will not affect most people on lower incomes. It may however impact those moving from benefits into work and reduce the level of credits in the first year of employment. However, once the disregard is lowered to £5,000 in 2013, we may see a return of problems which plagued the earlier years of the system when many people were left with overpayments where they had a rise in income of more than £2,500 (as the disregard was originally).

The lowering of the disregard will make it even more crucial to inform HMRC of changes to income as soon as they happen. As our ‘understanding the disregards’ section explains in detail, even if income changes are reported as they happen, because of the way the system spreads income across a year overpayments can still occur. HMRC will need to ensure that these changes are well communicated to both claimants and advisers.

Up-rating using Consumer Price Index

Each year, the rates of tax credits and other benefits are increased. Normally this is in the form of a percentage, linked to the Retail Price Index. However, the change means that from 6 April 2011, the percentage increases will now be decided using the CPI index.

Freeze on up-rating of basic and 30 hr WTC elements

Each April, the elements of tax credits are increased. As explained above, hitherto this has been done by reference to the retail prices index but from April 2011 will be done by reference to the consumer prices index (which has tended to be less generous). From April 2011, the basic and 30 hour elements of WTC will be frozen and will not be up-rated at all for 3 years.

Increase to the child element of CTC above indexation

The child elements of CTC (not including the family element) were increased by more than indexation which offset some of the losses caused to families with children from the other changes which affect the taper. As a consequence of changes to the taper rate, the income threshold for people claiming CTC only dropped in 2011-12 to £15,860 and so did the income levels at which CTC was progressively withdrawn. This was the first such fall in CTC entitlement since tax credits were introduced in 2003.

Changes from April 2012

Removal of the second income threshold

Prior to April 2012, the family element of CTC (£545) was protected until income reached the second income threshold. For most people in 2011-2012 this was £40,000. It was then reduced at a rate of 41% for every £1 of income above the second income threshold.

We explain in detail how to the second income threshold was calculated in our ‘calculating tax credits’ section. It may still be necessary to calculate this in overpayment cases.
From 6 April 2012, the second income threshold has been removed and so the family element is no longer protected. Instead, the family element will be reduced at a rate of 41% immediately after all other credits have been withdrawn. This means that some people who received the family element in 2011-2012 may receive nothing in 2012-2013.

HMRC wrote to 1.3 million of these claimants advising them that their claim would not be renewed for 2012-2013 unless they contacted HMRC by 31st March 2012. The letter that was sent stated that the income limit for CTC is £26,000 which is incorrect and only applies to couples with one child and no disabilities or childcare costs. For some families the cut-off will be much higher, whilst for some (lone parents working less than 30 hours) the cut-off may be lower. See our blog for further details of the letter.

Example

Derek and Eileen have two children. Derek works 30 hours a week. Eileen works 16 hours a week. Their income is £35,000.

In 2011-2012, the received the family element of CTC worth £545. This is because that element was protected until income reached £40,000 (or higher in certain circumstances). The removal of the second income threshold means that their family element is tapered away immediately after the other elements. Their tax credits are tapered away by the time income reaches £32,264.

50+ element withdrawn

The 50+ element of tax credits ceased from 6 April 2012. Prior to that date, people aged 50 or over who returned to work after a period claiming certain benefits, were eligible to claim tax credits by working at least 16 hours a week. They received the 50+ element for one year from when they return to work. The element was removed from all claims on 6 April 2012, even those where the claimant had not received it for a full 12 months.

Once the element is removed, unless the claimant has responsibility for a child , qualifies for the disability element or is aged 60 or over, they will need to work at least 30 hours a week to claim. Those who do qualify by working at least 30 hours will no longer receive as much WTC as the 50+ element will not be included in their award for the first year. Thus, the additional incentive to move into work provided by the 50+ element is lost.

Backdating reduced to 31 days

Prior to 6 April 2012, initial claims for tax credits could be backdated for up to 93 days if the qualifying conditions were met during that period. You can find out more about backdating in our ‘making a claim section’ . Similarly, changes of circumstances could be backdated up to 3 months, claimants of the disability element were given up to 3 months to inform HMRC of an award of a qualifying benefit and asylum seekers were given 3 months to inform HMRC of a grant of refugee status.

From 6 April 2012, maximum backdating periods have been reduced as follows:

Initial claims – 31 days
Changes of circumstances – 1 month
Reporting qualifying benefit for the disability element – 1 month
Reporting grant of refugee status – 1 month
 

Income disregard for falls in income introduced

HMRC have always had a power to introduce an income disregard for falls in income, but have never used it. Prior to 6 April 2012, if income fell as compared to the previous year, tax credits were adjusted so that the claimant received an amount based on their new (lower) income. Claimants did not need to wait until the end of the tax year to report a fall in income, they could inform HMRC of an estimated income at any point during the year and tax credits would be revised to be based on this new lower income.
From 6 April 2012, the new disregard means that tax credits will not be adjusted until income falls by more than £2500 as compared to previous tax year income. This will be a particular hardship for families on low incomes.
We explain how this disregard works in practice in our ‘understanding the disregards’ section.

Freeze on up-rating second adult element of WTC

As explained above, from April 2011 the basic and 30 hr elements of WTC were frozen for three years. In the 2011 Autumn statement it was announced that from 6 April 2012 the second adult element of tax credits would also be frozen.

The freeze on the second adult element of WTC means that the CTC threshold is also be frozen at £15,860 from April 2012. This is because the CTC threshold is set by calculating the income point at which the basic and second adult elements of WTC are tapered away. 2011-2012 was the first year that the CTC threshold fell since the introduction of tax credits. This was due to the freeze on the basic element of WTC and the increase in taper from 39% to 41%.

Couples with children required to work 24 hours

Prior to 6 April 2012, couples with children needed to work at least 16 hours per week in order to qualify for tax credits. From April 2012, this was increased to a requirement to work at least 24 hours between them with one person working at least 16 hours a week.

For couples who worked above 16 hours, but under 24 hours in 2011-2012 meant that one person needed to increase their hours to at least 24 per week or the other needed to start working so that their combined hours increased to 24 (but with one partner working at least 16).

Couples with children who qualify for WTC in some other way will not be subject to the new hour requirement. This applies to people who qualify for the disability element of WTC or who are aged 60 or over. Both groups will continue to qualify for WTC by working at least 16 hours.

Couples with children where one person is working at least 16 hours and their partner is:

will continue to qualify for WTC by working at least 16 hours (i.e. there is no change from the previous criteria).

HMRC stopped the WTC elements of all couples with children who did not meet the new 24 hour requirement on 6 April 2012. This included claimants who be subject to one of the exceptions as HMRC could not identify these people. Claimants therefore needed to contact HMRC before 6 April to ensure their payments continued. More information about this can be found in an article on our blog.

Childcare element and carers

As explained above, entitlement by one partner in a couple to carer’s allowance exempts them from the new 24 hour rule for couples with children. This exception was announced in the Budget 2012 following a letter sent to Ministers from a coalition of charities led by Low Incomes Tax Reform Group.

The Budget announcement also introduced an exception in the childcare element. Prior to 6 April 2012, couples are required to work at least 16 hours each (combined 32 hours) a week in order to claim help with their childcare costs. The exception to this requirement is where one partner works at least 16 hours a week and the other is incapacitated, in prison or hospital. The Budget announcement means that entitlement to carer’s allowance has been added to the list of exceptions. This means that a couple, where one partner works at least 16 hours a week and the other is entitled to carer’s allowance can claim help with their childcare costs.

Child element of CTC up-rating

It was announced in the June 2010 Budget and the October 2010 Comprehensive Spending Review that the CTC child element would increase by £110 above indexation from 6 April 2012. This planned change was reversed in the Autumn Statement 2011. The CTC element (along with the disability elements of WTC and CTC) increased by CPI of 5.2%.

Changes from April 2013

Income disregard for increases in income reduced

The tax credit income disregard changed from £25,000 to £10,000 from 6 April 2011. From 6 April 2013, this decreased again from £10,000 to £5,000.

The disregard is one of most complex parts of the tax credit system. We explain the disregard in detail in our ‘understanding the disregards’ section.

Autumn Statement 2012

Collection of tax credits debt

Two announcements were made in the Autumn Statement 2012 relating to the collection of tax credits debt. HMRC will be running two pilots in 2013, the first conduting a payment by results pilot on outsourcing tax credits debt to a private debt collection agency and the second working with DWP to look at recovery of overlapping debts (where someone owes money to both HMRC and DWP). You can find out more about these pilots in our pilots being trialled section.

Tax credits error and fraud childcare costs

A pilot will commence during 2013/14 which will require some tax credits claimants who report high childcare costs to provide evidence to HMRC. This is part of the error and fraud programme. You can find out more about calculating childcare costs and particularly the issues that arise in compliance interventions in our understanding childcare section.

Child tax credit payments for 16-19 year olds

The Government will require annual parental certification that child aged over 16 is in full time non-advanced education or approved training. This is part of the error and fraud programme as HMRC believe a high number of overpayments relate to claimants who fail to report that their young person has left FTNAE or training.

Welfare Reform Act 2012

Several changes to tax credits legislation were introduced by the Welfare Reform Act 2012. Many of the changes relate to the transition of tax credits claimants to Universal Credit. You can find more detailed information on each of these provisions in our transition to UC section.

One other major change was the introduction of a ‘loss of tax credits’ provision into the Tax Credits Act 2002. You can find out more about this in our Dealing with mistake and fraud section.

A number of provisions were introduced that relate to tax credits fraud and information sharing. You can find out more about those provisions in our Dealing with mistake and fraud section.

COP 26 - 3 month dispute time limit

Section 28(1) Tax Credit Act 2002 sets out the law on recovery:

‘Where the amount of a tax credit paid for a tax year to a person or persons exceeds the amount of the tax credit to which he is entitled, or they are jointly entitled, for the tax year . . . the Board may decide that the excess, or any part of it, is to be repaid to the Board.’ (italics supplied).

Note that unlike the position on social security benefits, HMRC have the discretion to recovery any overpayment no matter how it was caused. To deal with this discretion HMRC have a policy for overpayment recovery which is set out in COP 26.

The COP 26 policy is often referred to as the ‘dispute process’.

From 6 April 2013, HMRC have introduced a 3 month time limit to the dispute process. This is a major change to the process for claimants and advisers. The time limit is complex in practice. More detail about how it works can be found in the dispute process section.

Notional Offsetting

Sometimes, tax credits claimants who form a couple or who become single, either because they separate or because one partner dies, are slow in reporting the change to HMRC. Yet in many cases, if they had acted promptly they would have continued to be entitled to tax credits, albeit in a different capacity.

Prior to 17 May 2007, HMRC had a policy of notional offsetting. This policy was suspended on 17 May 2007 and from then until 18 January 2010, HMRC would recover the whole of any overpayment arising on the old claim, but give no credit for what the claimant would have received had they made a new claim at the right time.

From 18 January 2010, HMRC introduced a new policy that means tax credits recipients who start to live together, or who become single after being part of a couple, but are late reporting the change to HMRC, can reduce the overpayment on their old claim by whatever they would have been entitled to had they made a new claim promptly.

This new policy applies to overpayments arising from 18 January 2010, but also to overpayments that were still outstanding as of that date. So, if an overpayment has been repaid in full prior to 18 January 2010, the new policy will not apply. However, if any part of it remains unpaid, offsetting can be applied to it.

To request notional offsetting, claimants should contact the tax credit helpline to ask for their case to be referred to the ‘notional offsetting (or notional entitlement)’ team in the Tax Credit Office.

Note that the notional entitlement set-off will not cover the three months by which the claimant will be able to backdate their new claim. Normally HMRC will grant the three months backdating automatically, but if that doesn’t happen, they will need to ask for it.

On the whole HMRC policy is to be lenient and not charge a penalty where the failure to report has resulted from a mistake or misunderstanding. If HMRC think the claimant has been negligent in not reporting, and they are left with a net overpayment even after notional entitlement has been applied, they may be charged a penalty against which they can appeal.

If the failure to report is dishonest, the penalty may well be substantial and in extreme cases notional entitlement will not be given.

More information about notional offsetting is available in the HMRC compliance manuals:

These manuals cover notional offsetting from a compliance perspective. It should be noted that notional offsetting applies to non-compliance cases in the same way.

Dual Recovery

This policy is operated by Debt Management and Banking in relation to overpayment recovery.

Some people will be paying back two overpayments, one via ongoing recovery and another via direct recovery. This often happens where there is an overpayment on an old claim, and a new overpayment on a current claim. Since August 2009, HMRC have implemented a new policy which means that any direct recovery action should be suspended until the ongoing recovery ends.

Whilst we welcome this policy, HMRC are not proactive in telling claimants about it. If this applies, you should ask Debt Management and Banking to suspend the direct recovery action. Further details can be found in the HMRC intermediaries guide and in the Debt Management Banking Manual Online.

More information about tax credit debt can be found in our dealing with debt section.

Couples recovery policy

This policy is operated by Debt Management and Banking in relation to overpayment recovery.

The law says that an overpayment debt for a couple can be collected by HMRC in full (but only once!) from either the claimant or their partner. The stated policy of HMRC where this has happened following a household breakdown is to write to both members of the former couple (making every effort to trace any former partner for whom they do not have an up-to-date address).

If the claimant believes that there should be a difference in what they and their former partner should pay, then HMRC will take into account the circumstances of both of them and may ask each of them to pay a different amount, or one of them to pay the full amount. Alternatively, they can agree between them to pay different amounts and inform HMRC of this decision.

Prior to August 2009, HMRC policy was to allow each party to repay 50% of the overpayment. However, when confirming this agreement in writing, HMRC reserved the right to return to the partner who was engaging with them for the other 50% if they could not trace the other partner.

LITRG, along with other representative bodies, expressed concern that HMRC often pursued the engaging partner with vigour whilst the other partner remained ‘untraceable’. This often meant the mother with care of the children had to repay the whole joint overpayment debt where the absent partner was difficult to trace.

Since August 2009, HMRC have implemented a much fairer policy in these situations. As before, provided a person engages with HMRC, they will allow repayment of 50% of the joint debt. Provided that this 50% is paid (either by lump sum or on a payment plan) HMRC will not pursue that person for the remaining 50%. Instead they will pursue the other partner, and if they cannot collect the money will not go back to the engaging partner to collect it.

It is important to note that the law still allows HMRC to pursue either partner for the full amount of the joint debt. Also, this process is not well advertised by HMRC, so you should ensure that you ask Debt Management and Banking if you think it applies.

Changes from October 2014

HMRC announced in the Autumn Statement 2012 that they would be introducing cross award recovery from April 2014. It has now been confirmed that this will begin in October 2014. Currently, where an overpayment debt exists on a claim that has ended, it cannot be recovered against a later tax credits claim even if that claim is made by the same person. Instead the debt is passed to Debt Management and Banking for direct recovery.

The legislation has never prevented cross claim recovery, but the HMRC IT system was unable to do this. Given the growing amount of overpayment debt, and the fact it is likely to increase over the next few years, HMRC will introduce a change to their IT to allow cross claim recovery.

We have added some further information about how cross-year recovery will work in our dealing with debt section.

HMRC announced in Autumn Statement 2013 that they would expand the use of private sector debt collection services in tax credits during 2014 and increase the use of private sector firms in carrying out compliance checks. It was also announced that HMRC would use private firms to help with debt recovery in the earlier stages on a payment by results basis.

Changes from April 2015

HMRC announced in the Autumn Statement 2013 that from April 2015 tax credits payments will be stopped in-year where, due to a change in circumstances, a claimant has already received their full entitlement. This is to prevent a build up of overpayments.

In the Autumn Statement in December 2014, it was announced that the rules for self-employed workers claiming tax credit would be tightened. Initially it was suggested that self-employed claimants whose earnings were below 24 hours a week x national minimum wage would be asked to show that their self-employment was genuine and effective.

In responding to the Autumn Statement, LITRG said that the proposed earnings x hours worked test was likely to discriminate unlawfully against disabled self-employed people who may not be able to work 24 hours a week for health reasons and who qualified under existing legislation on the basis of a 16 hour week.

The actual legislation (SI 605/2015), effective from 6 April 2015, delivers a slightly different rule, whereby a claimant must meet the condition of being either employed or self-employed, as defined. And to be self-employed, their activity needs to be undertaken on a commercial basis with a view to making a profit.

The additional conditions from the 2014 Autumn Statement announcement, that a self-employed claimant must register as self-employed with HMRC for self-assessment and provide their unique taxpayer reference number with their claim, have been postponed for introduction at a later date.

HMRC published a briefing paper about the new rules which offers some information about how the new condition will be applied and it still refers to selecting cases on the basis of a minimum earnings threshold equivalent to qualifying working hours x national minimum wage. But it leaves many unanswered questions at this stage, such as how HMRC will determine whether an activity is undertaken on a commercial basis, whether there will be any practical implications for the difference in tax and tax credits interpretation of status and how claimants and prospective claimants will be helped to ensure they claim on the correct basis to avoid unwittingly incurring overpayment.

Changes from April 2016

Debt recovery

In Budget 2014, the Chancellor announced that from April 2016 the rate of tax credits debt recovery from ongoing awards will increase from 25% to 50% for households with an income of over £20,000 a year.

The Chancellor also announced in Budget 2014 that HMRC would be given powers to allow them to recover tax and tax credit debts directly from claimant’s bank accounts. Only debts of £1,000 or more will be eligible for direct recovery action and HMRC have said they will leave £5,000 across a debtor’s accounts as a minimum. Following concerns raised by a number of bodies, including LITRG, HMRC ran a consultation on the proposals during 2014. The Government’s response was published in November 2014 where a number of safeguards were announced. This measure will be introduced by legislation in late 2015.

Freeze on WTC and CTC elements

Prior to 2011, tax credit elements were increased each year using the Retail Prices Index (RPI). From April 2011, this changed to the Consumer Prices Index (CPI) and at the same time the basic element of WTC and the 30 hour element were frozen for 3 years.

From April 2014, it was announced that most tax credit elements would only increase by 1%, with the exception of the disabled adult and child elements which increased by the higher CPI.

It was announced in the Summer Budget that all elements of WTC and CTC would be frozen for 4 years with the exception of the adult and child disability elements. The disability elements will continue to be increased by CPI. This means that many people will not see an increase in tax credits from April 2016.

Decrease in income disregard to £2,500

See our section on Understanding the disregards.

The Summer Budget 2015 announced that the income increase disregard would reduce again to £2,500 from 6 April 2016.

Example: Bridget has been working in the same job for 2 years and her earnings for 2015/16 were £15,000. After doing well at work, Bridget is promoted to a supervisor role from April 2016 and her salary for 2016/17 will be £19,000. Under the current rules, Bridget’s 2016/17 tax credits award would not be affected by her pay rise because the increase of £4,000 is less than the £5,000 disregard. Bridget would not see a fall in her tax credits until April 2017. However, under the new disregard, Bridget’s 2016/17 tax credits award would be based on income of £16,500 meaning she would see a fall in tax credits from April 2016 rather than April 2017.

Tax Credits: Future policy

In this section you will find information about future tax credits policy changes which have not yet been implemented.

Most of the changes to the system from now on will be to aid the transition of tax credits claimants to Universal Credit. You can find the detail about the stopping of tax credits and transition to UC in our Universal Credit section of the site.

Limiting CTC to two children (April 2017)

The Summer Budget 2015 announcement limits CTC to 2 children from April 2017 and means that anyone who has a third child born on or after 6 April 2017 will not receive the standard rate child element for that child. We understand that the extra amounts for disabled children and severely disabled children above the standard rate will remain payable. It is expected that there will be some exceptions to this rule, although the detail is not yet known.

It was confirmed in a written parliamentary statement on 20 July 2016 that new claims from families with more than two children will continue to be taken in tax credits until November 2018.

Example: Assume Gita and David have 2 children in 2015/16 and have their third child on 6 April 2017.  Their 2015/16 award will be around £6,105. Their 2016/17 award is likely to be similar assuming their circumstances remain the same. In 2017/18, under the current rules they would have seen their award increase to around £8,885, however because of the new rules they will continue to receive around £6,105 in 2017/18 despite having an extra child.

Removal of the family element (April 2017)

Currently, everyone who has responsibility for at least one child has the family element included in their award. From April 2017, the family element (set at £545) will only be included in awards where the person has responsibility for a child or young person born before 6 April 2017.

Example: Christopher and Diana have twins born on 6 April 2017. Under the current rules, their award would have been around £6,105. However, because of the new rules they will receive no more than around £5,560 in 2017/18. The reduction is due to the removal of the family element.

Overall impact

We have explained each of the changes above, however some tax credit claimants may be affected by one, two or all of the changes mentioned above meaning that the actual impact on you will depend on your circumstances and income (for more than one tax year).

It is important when looking at how the changes affect you to look at all changes including the increase in the personal allowance tax threshold, the new living wage premium and reductions or increases to other benefits, such as housing benefit, as well as changes to tax credits.

Universal credit: Policy changes

Although Universal Credit full (digital) service is not expected to be fully rolled-out for some time, a series of policy changes have been announced. In this section we highlight the principles of those changes, although the legislation (and therefore the fine detail) may not yet have been finalised.

Autumn 2016

Benefit cap

In the July 2015 Budget, the Chancellor announced that the Benefit Cap, which applies to those claiming out of work benefits (excluding claimants entitled to in-work support or certain disability benefits) will be reduced to an annual level of £20,000 outside London and £23,000 in London. The change is expected to take effect from Autumn 2016. (July Budget 2015)

April 2017

First child premium

The higher rate of child element payable for the first child, sometimes referred to as the first child premium, will be withdrawn for claims where the first child is born on or after 6 April 2017. Originally (July Budget 2015) it was intended that this policy would apply to all new claims to UC from April 2017, however this was changed in a Parliamentary statement made on 20 July 2016.

Limiting the child element to 2 children

In the July Budget 2015 it was announced that for new claims from April 2017, the child element will only be included for up to 2 children and will not be included for 3rd or subsequent children born on or after 6 April 2017. In a statement on 20 July 2016, DWP confirmed their intention to introduce this policy to its planned April 2017 timetable, however it was confirmed that new claims from families with more than two children would be directed to tax credits until November 2018. Thereafter they will be directed to claim UC. Families already on UC who have a third child after April 2017 will remain on UC and receive only two child elements.

Note: there will be some exceptions to this and we will publish more as the details are known.

April 2018

Digital service areas – losses and surplus earnings

In order to address some of the problems caused by fluctuating earnings and the potential for self-employed (and employed) people to ‘manipulate’ their income to maximise UC entitlement, DWP introduced new legislation in 2014 (The Universal Credit (Surpluses and Self-employed Losses) (Digital Service) Amendment Regulations 2015). These surplus earnings rules were due to come into force in 2016 for those in digital UC areas only, and were subsequently postponed until April 2017, however on 20 July it was announced that these rules would not come into force before April 2018.  We consider these some of the most complicated regulations we have seen and we are concerned how DWP will implement them and most importantly how claimants will understand what is happening.

The basic premise of the legislation is that if someone has a UC award terminated (for example because their income goes up due to a new job) a calculation will be done to work out their ‘surplus earnings’ for that month and the following five months. Surplus earnings are essentially the amount of income they have above the point at which their UC would reduce to nil plus a £300 de minimis. If the person then needs to reclaim UC within that period, say because they lose their job after four months, the surplus earnings for those four months will be applied to their new claim as income. This means they will receive either a reduced UC award or a Nil award and that will continue until the surplus earnings are used up. These surplus earnings will apply to both employed and self-employed claimants.

The Social Security Advisory Committee published a consultation on the regulations before they were laid. In that consultation, DWP provided examples that showed how the policy would work for both employed and self-employed. However, none of the examples compared an employed person and a self-employed person. That would have shown that in some situations, a self-employed person earning exactly the same amount as their employed counterpart over a year could end up with far less UC over that period. This is due to how the surplus earnings policy interacts with the MIF.

For both the employed and self-employed, the policy is likely to be difficult to understand and people will need adequate warning that they will need to ‘save’ any excess wages for the first 6 months they are off UC following either a rise in income or a change in circumstances that results in less UC entitlement.

For the self-employed, DWP have also introduced recognition for losses. This means a loss from the previous 11 months can be carried forward and used in an assessment period. However, the loss can only reduce income down to the level of the minimum income floor and it cannot take account of any pension contributions. This is a small improvement on the existing rules but it does not compensate for the harsh effects of the MIF nor the lack of proper recognition of pension contributions for the self-employed.

Transition to universal credit: Northern Ireland

Welfare Reform Act 2012 coverage
Welfare Reform Bill Northern Ireland
Northern Ireland (Welfare Reform) Act 2015 and secondary legislation
Universal Credit

Welfare Reform Act 2012 coverage

The Welfare Reform Act 2012 broadly applies only to England, Wales and Scotland. There are a couple of exceptions to this set out in Section 149 Welfare Reform Act 2012:

Welfare Reform Bill Northern Ireland

The Welfare Reform Bill was introduced to the Northern Ireland Assembly on 1 October 2012. The Bill has progressed slowly and stalled several times due to disagreement between the various political parties. In December 2014, the Northern Ireland parties agreed a deal on welfare reform (The Stormont House Agreement) in order to get the Bill through the final stages of the Assembly process.

However, on 9 March 2015, Sinn Fein withdrew support for the Bill under the terms of the agreement meaning the Bill stalled once again. On 22 May 2015, a petition of concern was presented by Sinn Fein and SDLP. A petition of concern allows coalition members to block bills which do not have sufficient cross-community support. The Bill therefore stalled once again.

On 17 November 2015, the Northern Ireland Assembly agreed a set of actions on certain matters, which included steps towards the delivery of Welfare Reform. The details of the agreement can be found in the document, A Fresh Start – A Stormont Agreement and Implementation Plan.

In relation to Welfare Reform, the agreement stated that:

The agreement also set up the Welfare Reform Mitigations Working Group to report on a mitigation strategy to Welfare Reform specific to Northern Ireland.

Their report, published on 20 January 2016, highlights mitigation under 3 strands covering disability and carers; advice and sanctions; and mitigation for tax credits and Universal Credit. Strand 3, mitigation for tax credits and Universal Credit recommends aspects of additional discretionary support, for example supplementary payments which recognise the costs incurred by workers with a special weighting for lone parents taking account of childcare costs, discretionary support available for emergency payments in hardship cases as Universal Credit rolls out and an allocation of discretionary support for voluntary sector advice.

The text of the Bill can be found on the NI Assembly website, and links to each stage of the Bill can be found below:

Northern Ireland (Welfare Reform) Act 2015 and secondary legislation

As explained above, under the Fresh Start agreement made in November 2015 it was agreed that the UK Government would legislate for welfare reform in Northern Ireland. The Northern Ireland (Welfare Reform) Act 2015 is an enabling measure providing power to legislate for welfare reform in Northern Ireland and confer powers on the Secretary of State or the Department of Communities (previously DSD) to make further provision by regulations and order.

You can read about the passage of the Act on the UK Parliament website.

The Bill was followed by an Order in Council and a commencement order to start the process of welfare reform in Northern Ireland.

Welfare Reform (Northern Ireland) Order 2015 (SR.No.2006/2015)

This Order makes provision equivalent to the Welfare Reform Act 2012 and will implement the reforms contained in that Act in Northern Ireland, with some limited specific changes, including top up powers and a different sanctions regime, as agreed in the Stormont House Agreement and in previous discussions between the Government and the NI Executive. This order also allows Regulations to be brought forward to implement the various welfare reforms.

Welfare Reform (Northern Ireland) Order 2015 (Commencement No. 1) Order 2016 (SR.No.46/2016)

This Order brings into force provisions of the Welfare Reform (Northern Ireland) Order 2015 relating to: employment and support allowance; benefit cap; recovery of benefits; penalties; information sharing; discretionary payments.

Welfare Reform (Northern Ireland) Order 2015 (Commencement No. 3) Order 2016 (SR.215/2016)

Universal Credit

In May 2016, regulations were published supporting the introduction of UC in Northern Ireland:

It is expected that UC will roll-out during 2017 in Northern Ireland. The DWP are working with NISSA to develop a timetable for the introduction of UC in Northern Ireland. The current JSA and ESA as well as other legacy benefits including tax credits will continue to be available pending the introduction of UC.

In an article published by the Belfast Telegraph in July 2016, the Department for Communities confirmed that roll-out had been delayed until Autumn 2017 but that the roll-out was still planned to complete in 2018.

Universal credit: Digital (full) service

This page explains the digital service and what this means for new tax credit claims as well as for existing tax credit claimants

What is a digital service area?

A digital service area is one where the UC digital service has been rolled out.

In February 2013, the Major Projects Authority expressed concerns about the UC programme. This led to a ‘reset’ of UC and new plans to be formulated. This included a proposal to operate a ‘twin-track’ approach by running a live service system alongside a new digital system.

When UC began in April 2013, it used IT assets developed by private contract suppliers. These areas are known as live service areas and will continue to be rolled out to April 2016 in order to test and learn about processes and policy.

Alongside the live service areas, DWP have built their own digital service system which started in a small number of areas in November 2014. Between November 2014 and April 2016 DWP introduced further digital test areas (see the table below for a list of digital areas). From May 2016, the digital full service will expand so that eventually all live service areas become digital areas. Existing live service claimants will be transferred to the digital service.

Where are the current digital service areas?

The current digital service areas are:

Postcode Go live date District Details

SM5 2

26 November 2014

28 January 2015
No.28 relevant district

The first digital area in Sutton was trialled between 26 November and 19 December 2014. It resumed taking claims under the digital service from 28 January 2015.

SM6 7, SM6 8 18 March 2015 No.50 relevant district  

CR0 4

SM6 9

10 June 2015 No.51 relevant district  

CR0 2

SE1 5

4 November 2015

No.52 relevant district  

SM5 1, SM5 3, SM5 9

SM6 0

2 December 2015

Further digital test roll-out

These postcodes were previously due to launch as part of the live service in April 2016.

TW3 1, TW3 4, TW4 6, TW4 7, TW5 0, TW7 4, TW7 5, TW7 6, TW7 9, TW8 0, TW8 1, TW8 8, TW8 9, TW13 4, TW13 5, TW13 7, TW13 9, TW14 0, TW14 9

SE1 0, SE1 1, SE1 2, SE1 3, SE1 4, SE1 6, SM1, SM2 6, SM4, TW3 2, TW3 3, TW4 5, TW5 9, TW7 7, TW13 6

27 January 2016 Further digital test roll-out The postcodes in bold were previously part of the live service. The other postcodes were due to launch as live service in April 2016.

CRO 1, CR0 3, SM2 5, SM2 7, SM3 8, SM5 4, SM7 3

CR0 0, CR0 5, CR0 6, CR0 7, CR0 8, CR0 9, CR9, SE1 7, SE1 8, SE1 9, SE16 2, SE16 4, SE16 5, SE16 6, SE16 7, SE25 4, SE25 5, TW14 8

EH21, EH31, EH32, EH33, EH34, EH35, EH36, EH39, EH40, EH41, EH42

23 March 2016. Further digital test roll-out

The postcodes in bold were previously due to launch as part of the live service in April 2016 but instead were changed to digital test areas from 23 March 2016.

The postcodes in italics were previously part of the live service in district 37.

 

CR2, CR3 0, CR3 5, CR5, CR6, CR7, CR8, NR13 3, NR29, NR 30 ,NR 31, SE25 6

27 April 2016 Further digital test roll-out These postcodes were originally due to be part of the live service but instead became digital areas on 27 April 2016.

CV21 1, CV21 2, CV21 3, CV21 4, CV21 9, CV22 5, CV22 6, CV22 7

BA1 0, BA1 1, BA1 2, BA1 3, BA1 4, BA1 5, BA1 6, BA1 7, BA2 0, BA2 1, BA2 2, BA2 3, BA2 4, BA2 5, BA2 6, BA2 9, BA3 2, BA3 3, BA3 9, BS31 1, BS31 3, BS31 9,

BS39 4, BS39 5, BS39 7

BA2 7, BA2 8, BA3 4, BS25 9, BS39 6, TA6, TA7 8, TA7 9, TA8, TA9

IP19 1, NR32, NR33, NR34 4

TA5, TA7 0

NE1, NE2, NE3 1, NE3 2, NE3 3, NE3 4, NE5 3, NE5 4, NE13 8, NE13 9

CV23 9

BA1 8, BA1 9, BS31 2, SN14 8

NE3 5, NE13 7, NE18

25 May 2016 Digital (full) service expansion These postcodes were previously part of the live service. Existing live service claimants will be transferred to the new digital full service within 3 months.

W6 0, W6 6, W6 7, W6 8, W6 9

IV1 1, IV1 3, IV1 9, IV2 3, IV2 4, IV2 5, IV2 6, IV2 7, IV3 5, IV3 8, IV4 7, IV5 7, IV8 8, IV9 8, IV10 8, IV11 8, IV12 4, IV12 5, IV12 9, IV13 7, IV21 2, IV22 2, IV26 2, IV54 8, IV63 6, IV63 7, PH19 1, PH20 1, PH21 1, PH22 1, PH23 3, PH24 3, PH25 3, PH26 3, PH26 9, PH32 4

HG1 1, HG1 2, HG1 3, HG1 4, HG1 5, HG1 9, HG2 0, HG2 7, HG2 8, HG2 9, HG3 1, HG3 2, HG3 3, HG3 4, HG4 1, HG4 2, HG4 3, HG4 9, HG5 0, HG5 5, HG5 8, HG5 9 ,LS17 0, Y051 9

HG3 5, HG4 5, Y017, Y018, Y060, Y062

DL9, DL10, DL11 6, HG4 4

DL11 7

29 June 2016 Digital (full) service expansion These postcodes were previously part of the live service. Existing live service claimants will be transferred to the new digital full service within 3 months of the digital go live date.

W14 0, W14 4, W14 8, W14 9

WA7, WA8 0, WA8 2, WA8 3, WA8 6, WA8 7, WA8 8, WA8 9

LA1, LA2 0, LA2 6, LA2 9, LA3, LA4, LA5 8, LA5 9

BA3 5, BA4, BA5, BA6, BA11, BA16, BS27, BS28

27 July 2016 Digital (full) service expansion These postcodes were previously part of the live service. Existing live service claimants will be transferred to the new digital full service within 3 months of the digital go live date

What are the current plans for further digital roll-out?

Eventually, all live service areas will be replaced by digital (full) service and existing live service UC claimants will be transferred to the digital (full service) service. This has already started in some areas (see table above) and the digital service will continue to roll-out across Great Britain from May 2016 with a completion date of June 2018. Once that process is complete, from mid 2018, DWP will begin migrating all remaining existing benefit claimants to the full UC digital service with a view to completion in 2022. A separate process will be designed for those over state pension age who will move from tax credits to pension credit. However, until that happens, the two systems will run side by side. To further complicate matters, the UC rules are slightly different for digital claimants than for those who are in live service claimants.

DWP have released a PDF that lists Jobcentre areas that will become digital between May 2016 and March 2017 covering Phases 1 to 3 of the full digital service roll-out.

What happens to live service claimants who live in areas that become digital?

According to the latest publication from DWP, when a current live service area becomes a digital (full) service area, anyone currently claiming UC through the live service will be migrated onto the full digital service over the first three months.

We will update this page when further information is known about the process that will be used to transfer claimants from live to digital service.

Digital service area legislation and guidance

The conditions for claiming UC in digital areas were introduced by the Welfare Reform Act 2012 (Commencement No.20 and Transitory provisions and commencement No.9 and transitional and transitory provisions) (Amendment) Order 2014. This covered the first phase of digital claims in SM5 2 between 26 November 2014 and 20 December 2014.

The Welfare Reform Act 2012 (Commencement No.21 and Transitional and Transitory Provisions) Order 2015 took effect for claims in SM5 2 from 28 January 2015.

The Welfare Reform Act 2012 (Commencement No.23 and Transitional and Transitory Provisions) Order 2015 extended the number of digital areas starting from 18 March 2015 (See table above).

The Welfare Reform Act 2012 (Commencement No.25 and Transitional and Transitory Provisions) Order 2015 extended the digital areas once again from 2 December 2015 (See table above).

The Welfare Reform Act 2012 (Commencement No.26 and Transitional and Transitory Provisions and Commencement No.22, 23 and 24 and Transitional and Transitory Provisions (Modification)) Order 2016 extended the digital areas once again from 27 January 2016 and 24 February 2016.

The Welfare Reform Act 2012 (Commencement No.27 and Transitional and Transitory Provisions and Commencement No.22, 23 and 24 and Transitional and Transitory Provisions (Modification)) Order 2016 extended the digital areas from 23 March 2016 and 27 April 2016

The Welfare Reform Act 2012 (Commencement No.13,14,16,19,22,23 and 24 and Transitional and Transitory Provisions (Modification)) Order 2016 starts the digital full expansion for 25 May 2016, 29 June and 27 July 2016

Two other key pieces of legislation amended the existing UC rules for digital areas:

DWP guidance – Memo ADM 26/14 sets out the changes made by the Digital Service Amendment Regulations.

See also ADM’s 2/15, 8/15, 22/15 1/16, 10/16 and 14/16 available on GOV.UK.

Who can make a claim for UC in digital service areas?

Any person who resides in a digital service area postcode is eligible to make a claim for UC (however they may not necessarily be entitled to UC). If UC is then awarded they become known as a ‘digital service claimant’.

There is an exception to this where a person has provided incorrect information about their postcode. Broadly this means that if the UC claim has been decided and a payment made, the claimant stays in UC.

Note that on 20 July 2016, DWP announced that in order to help the implementation of the new two child policy for tax credits and universal credit, all direct new claims from families with more than two children would be to tax credits rather than UC until November 2018. No further detail is available, but it is possible that the rules for digital service areas may be amended to accommodate this change. We will update as soon as further information is available.

Between 26 November 2014 and 9 June 2015, there was also a requirement to meet the ‘specified condition’ in digital service areas. The specified condition was that the claimant was a British Citizen who:

Claims for UC based on incorrect information

Where a claimant gives incorrect information about living in a digital postcode and this is not discovered until after a decision has been made about their UC claim and at least one payment is made then they will remain entitled to UC.

If this incorrect information is discovered before the award of UC is made, the claimant will be informed they are not entitled to UC. If they then make a claim for WTC or CTC within one month of being told they are not entitled to UC, their tax credit claim will be treated as made on the date that the claim for UC was made. Similar rules apply where an award of UC is made but no payment is made. In that case the UC claim ceases to have effect immediately.

What UC rules are different in digital service areas?

As well as having different conditions about who is eligible to claim, the main UC rules are also slightly different to those in live service areas.

The differences outlined here apply to anyone who is designated a ‘digital service claimant’. This is defined by DWP as a person who has become entitled to an award of UC

(a) By reference to residence in a digital area postcode (see table above)

(b) By forming a couple with a claimant who was previously awarded UC when they lived in a relevant district

(c) By forming a couple with a claimant who was awarded UC as in paragraph (b) or

(d) By forming a couple with a claimant who was awarded UC as in paragraph (c)

The differences also apply to any Live Service awards of UC made to:

DWP guidance (ADM 26/14) gives the following example of how this works in practice:

Moira lives in relevant district No.28 (a digital area). She is awarded UC as a single claimant when she becomes unemployed. Moira joins her partner Alex, who is also unemployed and entitled to UC, and lives in relevant district No.20 (a live service area). They are awarded UC as joint claimants. Later, Moira leaves the household and is entitled to UC as a single claimant. Alex is joined by a new partner, Laura, and they are entitled to UC as joint claimants. Moira, Alex and Laura are all digital service claimants.

This means that Alex and Laura become digital service claimants even though they live in a live service area. Alex becomes a digital claimant because of his relationship with Moira (under (b) above). Laura becomes a digital claimant because of her relationship with Alex (under (c). This is likely to cause a great deal of confusion.

There are differences in relation to childcare costs, assessment periods, re-claims and calculation of unearned income. ADM 26/14 explains these differences in more detail. From April 2018 (postponed from April 2016), new rules in relation to surplus earnings and self-employed losses will also apply to digital service claimants as outlined above.

For claimants who move from or to a digital service area see our moving area section.

Claims for tax credits in digital service areas

The general rule is that a person may not make a claim for tax credits (whether or not as part of a couple for tax credits purposes) on any date if, had they made a claim for UC on the same date, they would have been eligible to claim UC. This means that people living in a digital area postcode will no longer be able to make a claim for tax credits (unless one of the exceptions below applies).

In this context, a claim for tax credits is made on the date on which the claimant takes action under specified legislation which results in a claim being required. It is irrelevant that under TC legislation the claim is made or treated as made on an earlier date.

This means it is the date that HMRC receive the tax credit claim form that is relevant when considering whether the person would have been entitled to UC on that same date. It takes no account of potential backdating which means the normal one month backdating as well as longer backdating for refugees and those who qualify for the disability element (in some cases).

Exceptions to the general rule

There are some exceptions to the general rule:

1. For those who have reached state pension credit age and who live in a digital area, tax credit claims can still be made by:

(a) A person who has reached the qualifying age for state pension credit

(b) A tax credits act couple where both members or one member has reach state pension credit age

(c) Where (a) does not apply, a person who is a member of a State Pension Credit Act couple where the other member of the couple has reached state pension credit age

2. Where a person (or couple) makes a claim for CTC or WTC and on the date that they claim he or she (or they) is or are already entitled to WTC or CTC respectively. This protects existing tax credit claimants, for example a couple who are claiming CTC and want to start work can add WTC to their claim. (See our section on treating people as entitled to tax credits to find out the meaning of the term ‘entitled’ for this purpose.

3. Where a person (or couple) was entitled to tax credits in respect of a tax year and that person (or couple) makes or is treated as making a claim for tax credits for the next tax year. Tax credit claims only last a maximum of one tax year. This exception protects people who renew their claims, which in effect is the same as making a brand new tax credit claim. See our section on treating people as entitled to tax credits to find out the meaning of the term ‘entitled’ for this purpose.

4. From 18 March 2015, the general rule does not apply where the person is prevented from making a claim for Universal Credit. See ADM M3 (M3003). This is where the Secretary of State may determine not to accept any particular claims for UC temporarily in order to safeguard the efficient administration of UC or to ensure the effective testing of systems for the administration of UC. This power was introduced by SI 1626/2014.

The claim process

If a claimant in a digital area makes a claim for tax credits (by sending in a TC600 claim form), HMRC will consider their claim and if they think the person should claim UC instead they will issue a letter TC601U. They will do this where the person lives in a digital area postcode and they (or their partner) have not reached state pension credit age. This letter states that the person does not qualify for tax credits because they live in a postcode where UC must be claimed, however as it is a decision under Section 14 Tax Credits Act 2002, it does carry normal tax credit appeal rights.

Existing tax credit claimants in digital service areas

Existing tax credit claimants are currently unaffected by the roll-out of UC. Their awards of tax credits will continue at present until DWP introduce rules to migrate those people across to UC. DWP current plans are to migrate remaining tax credit claimants to UC from July 2019 to March 2022.

At present, existing tax credit claimants will only be affected if they either choose to move to UC, they have a change that ends their tax credit award or they need to make a claim for another legacy benefit:

Choosing to move to UC

There appears to be nothing stopping an existing tax credits claimant from choosing to claim UC in a digital area. If an existing tax credit claimant makes a claim for UC and DWP believe they meet the basic conditions for UC (except the claimant commitment), their tax credits award will end automatically. It is therefore important that claimants do not make a mistake and try and claim UC – if they do then our understanding is that their tax credits award will be terminated automatically and they will not be able to re-claim tax credits because they live in a digital area. See our tax credits and UC section for more information.

Although the legislation works in such a way as to bring a tax credits award to an end when a UC claim is made, and the process between DWP and HMRC is such that there should be notification to HMRC to end the tax credits claim, we would advise that claimants report the situation to HMRC in case the process breaks down.

Tax credit claimants will need to seek advice from a welfare rights specialist before deciding to make a claim to UC. Some people will be better off under UC than existing legacy benefits, but many people will be worse off financially and UC claimants are subject to conditionality rules that tax credits claimants are not.

As a general rule you cannot be entitled to tax credits and UC at the same time. The only exception to this is during the first assessment period for UC after two people become a couple and the tax credit award of the ‘new claimant partner’ terminates after the first date of entitlement to UC. This is because in such a case UC rules may treat the claim as made at an earlier date than the TC termination date.

In this situation, if a claim for UC is made (or is treated as having been made) and the person (or persons) meet the basic conditions for UC (except for the claimant commitment requirement) then all awards of tax credits for which there is entitlement (on the date of the UC claim) will terminate on:

This will be the case even if under Tax Credits legislation the award would terminate on a later day. See our section on treating people as making a tax credits claim for situations where someone would treated as entitled to tax credits under UC legislation.

Moving to UC due to a change of circumstances ending a tax credit claim

Where a tax credit claim ends because of a change of circumstances – for example a couple separating or a single person forming a couple or a WTC only claimant who loses their job, then in order to continue receiving support, they will need to claim UC unless one of the exceptions above applies.

Where a single tax credit claimant (the new claimant partner for UC purposes) forms a couple with an existing UC claimant, the new claimant partner will have their tax credit award terminated for the current tax year on:

Moving to UC due to claiming another legacy benefit

If an existing tax credit claimant in a digital postcode has a change of circumstances that means they need to make a claim for income-based jobseeker’s allowance, income-related employment and support allowance, income support or housing benefit then they will need to claim UC instead because those benefits are no longer available in digital postcode areas. This means that their tax credits award will come to end automatically once they have submitted a claim UC and DWP are satisfied they meet the basic conditions for UC.

Examples of situations where this may happen include:

Universal credit: Who is currently eligible to make a claim for Universal Credit?

Universal Credit has a number of conditions that must be met in order to establish entitlement. We explain these in our entitlement to UC section.

However, before even considering the entitlement conditions of the benefit, it must be determined whether the person is eligible to make a claim. Even if a person is eligible to submit a claim, it does not mean they will be entitled to UC.

The first step in establishing eligibility to claim is to find out the claimant’s postcode.

Postcodes accepting UC claims

Once you have established the claimant’s postcode, you will need to find out which of the following categories it falls into:

To help you do this we have created a postcode checker: universalcreditinfo.net

Enter a postcode and the checker will tell you the status of UC in that postcode area and the current situation for tax credits and other legacy benefits.
 

 

For those requiring historical roll-out data, we also have a PDF roll-out document that shows the roll-out for all postcodes since 2013.

DWP have a general power to stop accepting UC claims in specific areas at any time under Regulation 4 Transitional Provision Regulations 2014. Please check our blog for the latest information.

Universal credit: When will tax credits stop?

Existing tax credit claimants are currently unaffected by the roll-out of UC. Their awards of tax credits will continue at present until DWP introduce rules to migrate those people across to UC. DWP current plans are to migrate remaining tax credit claimants to UC from July 2019 to March 2022.

At present, existing tax credit claimants will only be affected if they choose to move to UC, they have a change that ends their tax credits award or they need to make a claim for another legacy benefit (one of the other benefits that UC is replacing). The general rule is that you cannot claim tax credits and UC at the same time.

Claiming Universal Credit
Changes of circumstances
Claiming a legacy benefit
What happens next?

Claiming Universal Credit

Existing tax credit claimants who live in areas where UC has rolled out may be able to choose to claim UC and leave tax credits.

If a claim for UC is made (or is treated as having been made) and the person (or persons) meet the basic conditions for UC (except for the claimant commitment requirement) then all awards of tax credits for which there is entitlement (on the date of the UC claim) will terminate on:

This will be the case even if under Tax Credits legislation the award would terminate on a later day.

It is important that claimants seek advice from a welfare rights specialist before leaving tax credits as there are many issues to consider aside from which one is better financially as the UC rules are very different to tax credits. It is also important that the decision is the right one, as if the claimant lives in a digital service area they will not be able to re-claim tax credits. Those in live service areas may be able to withdraw the UC claim and re-claim tax credits at the present time, although this is subject to exceptions.

Although the legislation works in such a way as to bring a tax credits award to an end when a UC claim is made, and the process between DWP and HMRC is such that there should be notification to HMRC to end the tax credits claim, we would advise that claimants report the situation to HMRC in case the process breaks down.

Changes of circumstances

Where a tax credit claimant has a change of circumstances that ends their award, they may have to claim Universal Credit. This would be the case if they live in a digital service area as they would no longer be able to claim tax credits unless they are over state pension credit age. If they live in a live service area then they may be able to claim UC if they meet certain conditions. In such cases, HMRC will normally terminate the tax credit claim because the claimant has reported a change – for example the loss of a job by a WTC only claimant. However it would also be terminated if the person has claimed UC and not told HMRC about their change as HMRC would receive information from DWP about the UC claim once DWP had confirmed the person meets the basic conditions for UC.

If an existing tax credit claimant forms a couple with an existing UC claimant, then they will be treated as claiming UC as a couple. HMRC will see that this claimshould be informed by DWP that this claim has been made (once DWP are satisfied the basic UC conditions are met) and terminate the tax credit award. The tax credit claimant’s tax credit award will be terminated from the date that they became a couple (note that this may be different to the UC start date as UC rules may treat the couple claim for UC as made at an earlier date than the tax credit termination date).

DWP do not actually send a notification to HMRC each time someone claims UC. In brief, what actually happens is that DWP set a marker on their system that there is a UC interest and HMRC trawl the system to look for National Insurance Number matches with tax credit claimants. This should only happen where DWP have confirmed that the person (or persons in a joint claim) have satisfied the basic conditions for UC. Where there is a match the tax credit claim will be terminated.

However, it is important to remember that tax credit claimants have an obligation to notify HMRC of changes. A change of status from single to part of a couple is something that must be reported for tax credit purposes anyway and we recommend that claimants continue to notify changes and not rely on DWP to transfer information otherwise there is a risk of a tax credits overpayment if the process fails.

Claiming a legacy benefit

If an existing tax credit claimant in a digital postcode has a change of circumstances that means they need to make a claim for income-based jobseeker’s allowance, income-related employment and support allowance, income support or housing benefit then they will need to claim UC instead because those benefits are no longer available in digital postcode areas. This means that their tax credits award will come to end when they claim UC

Examples of situations where this may happen include:

What happens next?

Once tax credits have been terminated due to a claim for UC, HMRC will begin the in-year finalisation (IYF) process. This may begin immediately or if the claim for UC happens between April and July the IYF process may be delayed. See our finalising tax credit claims section for more detailed information.

Universal credit: What is income for UC?

Income for Universal Credit purposes will be treated as earned income or unearned income. If it is not specifically included as either of these then it will be disregarded.

The importance of determining whether income is earned or unearned can be seen in the calculation of UC entitlement. Earned income is subject to a 65% taper whereas unearned income reduces UC maximum entitlement pound for pound.

Alert: There are variations to the income rules which apply to universal credit claims in ‘digital service’ areas.

Earned income (see digital service areas)

Earned income for UC is defined as:

1.  The remuneration or profits derived from

a.  Employment under a contract of service or in an office (including elective office)
b.  A trade, profession or vocation (self-employed earnings)
c.  Any other paid work

2.  Any income treated as earned income for the purposes of UC

Employed earnings

The general rule is that earned income for an assessment period should be based on the actual amount received in that period. There are some exceptions to this general rules that are explained in ADM Chapter H3.

This is the case even if there is some dispute about the amount of money paid by an employer. For example, if someone is paid £400 in their assessment period and believes that they have been overpaid because they worked fewer shifts that normal that month, that is irrelevant for UC. £400 will be used as earned income as that is the amount received during the assessment period.

For many employees, DWP will receive these employed earnings figures directly from the HMRC RTI (Real Time Information) system. We have a dedicated RTI section which explains how RTI data feeds into UC and how it is used by DWP.

Employed earnings are defined as any amounts that HMRC treat as ‘general earnings’  (as defined in Section 7(3) ITEPA 2003) leaving out any amounts treated as earnings under the benefits code (Chapters 2 to 11, Part 3 ITEPA 2003) and amounts exempt from income tax  under Part 4 ITEPA 2003 (such as approved mileage allowance reliefs, work-related training, no-cash vouchers etc….).

General earnings includes wages, salary and fees. It also includes payments of statutory sick pay, statutory maternity pay, ordinary statutory paternity pay, additional statutory paternity pay and statutory adoption pay. Some other payments are also included as employed earnings, a full list of these can be found in Paragraph H3072 (ADM Chapter H3).

As noted above, certain amounts are also excluded from being employed earnings. In the early stages of UC, benefits in kind (which HMRC would normally treat as earnings) will NOT be treated as income for UC purposes. A full list of benefits in kind not yet treated as earnings can be found in Paragraph H3081 (ADM Chapter H3).

Deductible expenses under Chapter 2, Part 5 of ITEPA 2003 are disregarded in calculating employed earnings. This ensures any allowable expenses reimbursed by an employer are not taken into account as income.

One point that should be noted is that the Regulations do not seem to contain any provision that allows expenses incurred by an employee which are not reimbursed by an employer to be deducted from earned income. The current benefits and tax credits systems do allow such deductions to be made.

Deductions from employed earnings

UC is generally based on net income and therefore from the claimant’s employed earnings can be deducted:

Full details of employed earnings can be found in ADM Chapter H3.

Self-employed earnings

Self-employed earnings are those which derive from a trade, profession or vocation. The claimant does not need to be classed as ‘gainfully self-employed’ for such earnings to be taken into account. We explain self-employed earnings in more detail in the self-employment section.

Unearned income

Unearned income broadly includes the following types of income:

Further detail about what counts under each heading can be found in ADM Chapter H5. Student income detail can be found in ADM Chapter H6.

Reporting income

Employed earnings

Generally employed earnings will be reported to DWP by HMRC under the Real Time Information (RTI) system.

Where:

The UC regulations make it clear that where these two requirements are met the amount reported by the employer to HMRC via the RTI system is the amount that the UC claimant is to be treated as receiving in that assessment period.

This has a number of consequences for UC claimants. In brief these are:

The Regulations do make some provisions for reporting income other than by RTI. Where an employer is not required to report through RTI or fails to report (note this is a total failure to report rather than incorrectly reporting) the earnings to HMRC then DWP will ask the claimant to self-report their figures. This will be done through a self-reporting earnings tool online. The claimant may also be asked to produce verification of those earnings (for example by providing a payslip).

Once earnings have been self-reported, they should not be taken into account again if the employer then reports those earnings through RTI. 

Self-employed earnings

Self-employed claimants will be required to submit details about their earnings each month using an online system. More information about this can be found in our self-employed section.

Digital service areas

Surplus earnings and losses

In digital service areas, it is expected that the UC rules will introduce a surplus earnings and loss policy in respect of income (The Universal Credit (Surpluses and Self-employed Losses) (Digital Service) Amendment Regulations 2015). These surplus earnings rules were due to come into force in 2016 for those claiming in digital UC areas but were then postponed until April 2017 (see the Universal Credit (Surpluses and Self-employed Losses) (Change of coming into force) Regulations 2016). However it was announced on 20 July 2016 that these changes would be delayed further and would now be implemented from April 2018.

You can find out more about what counts as a digital area in our timetable section.

The basic principle is that if someone has a UC award terminated (for example because their income goes up due to a new job) a calculation will be done to work out their ‘surplus earnings’ for that month and the following five months. Surplus earnings are essentially the amount of income they have above the point at which their UC would reduce to nil plus a £300 de minimis. If the person then needs to reclaim UC within that period, say because they lose their job after four months, the surplus earnings for those four months will be applied to their new claim as income. This means they will receive either a reduced UC award or a Nil award and that will continue until the surplus earnings are used up. These surplus earnings will apply to both employed and self-employed claimants.

For self-employed claimants, some recognition for losses will also be introduced. The rules mean that a loss from the previous 11 months can be carried forward and used in an assessment period. However, the loss can only reduce income down to the level of the minimum income floor and it cannot take account of any pension contributions.

Self-employment: Calculating income from self-employment

General rules
Actual receipts
Permitted expenses
HMRC cash basis
Digital service areas

Calculating income from self-employment for UC is very different to tax credits where claimants simply take the figure used for their tax return and enter it on to the tax credits forms.

Income from self-employment will be taken into account regardless of whether the person is found to be in gainful self-employment or not.

Alert: There are variations to the income rules which apply to universal credit claims in ‘digital service’ areas

General rules

Earnings that are not employed earnings and are derived from a trade, profession or vocation are self-employed earnings.

Self-employed earnings must be calculated for the claimant’s monthly assessment period.

The basic calculation is:

GROSS PROFITS minus INCOME TAX, NATIONAL INSURANCE AND PENSION CONTRIBUTIONS

Whilst this seems a straightforward calculation, there are some important points to bear in mind:

Actual receipts

Any payment actually received during the assessment period is included as an actual receipt, regardless of when is it earned. -

Actual receipts include

The ADM Chapter H4160 onwards provides further details about each of these payments, together with some examples.

Permitted expenses

Permitted expenses are amounts paid in the assessment period in respect of expenses wholly and exclusively incurred for the purposes of the trade, etc, or an identifiable business proportion of any expenses incurred for more than one purpose. In principle, DWP will deduct from the actual receipts any business expense that

The ADM Chapter H4197 lists allowable expenses and provides more details about these conditions..

Flat-rate deductions are allowed as follows:

For a car or van

for the first 833 miles

45p per mile

 

thereafter

25p per mile

For a motor cycle

 

24p per mile

Note that for a car, the only deduction allowed for the cost of acquiring or running the vehicle is the flat rate deduction. In the case of a motor cycle or van, the claimant may choose between the flat rate deduction (above)or the actual cost of acquiring and running the vehicle under the permitted expenses rules.

At least 25 hours but no more than 50 hours

£10

More than 50 hours but no more than 100 hours

£18

More than 100 hours

£26

Expenses not allowed include:

HMRC cash basis

Claimants will be asked to provide evidence of their self-employed earnings. As accounts are generally prepared using accounting principles, they will often show different information to that required for UC purposes and claimants may therefore be asked to provide additional supporting evidence, such as bank statements, purchase receipts or indeed expenses from a different assessment period, to support their claim.

Providing self-employed income calculated on a cash basis for UC purposes present complications for claimants as there are key differences between the accounting mechanisms for income tax purposes and those for UC purposes, outlined below:-

 

Accounting under Universal Credit

Accounting under HMRC’s cash basis

Reporting time frame

Monthly reporting.

Annually by January 31 after the end of the tax year

Mandatory or optional use of accounting basis

There is no choice on how the monthly accounts are prepared for DWP – they must conform to the Universal Credit regulations.

The cash basis is optional and businesses can elect to use it on an annual basis. Alternatively businesses can use the ‘accruals basis’ (generally accepted accountancy practice).

Thresholds

There are no thresholds – all self-employed Universal Credit claimants must use the same accounting basis.

Universal Credit claimants must leave the cash basis if their annual turnover is greater than £154,000 (twice the VAT registration limit)

Transitional rules

There are no transitional rules; when completing their self-assessment tax returns Universal Credit claimants must adjust their annual accounts to ensure that income and expenses are only declared once.

On switching to the cash basis (and from it to the accruals basis), transitional rules ensure that income and receipts are accounted for only once.

Carry forward of losses

There is currently no facility to carry forward losses from one assessment period to another.

Business losses may be carried forward to set against the profits of future years but not carried back or set off ‘sideways’ against other sources of income

Digital Service Areas

Surplus earnings and losses: In digital service areas, it is expected that the UC rules will introduce a surplus earnings and loss policy in respect of income (The Universal Credit (Surpluses and Self-employed Losses) (Digital Service) Amendment Regulations 2015). These surplus earnings and self-employed losses rules were due to come into force from April 2016 for those claiming in digital UC areas but DWP delayed the changes until April 2017 (The Universal Credit (Surpluses and Self-employed Losses) (Change of coming into force) Regulations 2016). On 20 July 2016, a further delay was announced and the changes will now not be implemented until April 2018.

The basic principle is that if someone has a UC award terminated (for example because their income goes up due to a new job) a calculation will be done to work out their ‘surplus earnings’ for that month and the following five months. Surplus earnings are essentially the amount of income they have above the point at which their UC would reduce to nil plus a £300 de minimis. If the person then needs to reclaim UC within that period, say because they lose their job after four months, the surplus earnings for those four months will be applied to their new claim as income. This means they will receive either a reduced UC award or a Nil award and that will continue until the surplus earnings are used up. These surplus earnings will apply to both employed and self-employed claimants.

For self-employed claimants, some recognition for losses will also be introduced. The rules mean that a loss from the previous 11 months can be carried forward and used in an assessment period. However, the loss can only reduce income down to the level of the minimum income floor and it cannot take account of any pension contributions.

Universal credit: Elements

In order calculate a claimant’s Universal Credit entitlement, the first step is to calculate their maximum amount before taking account of any income or capital. The maximum award is made up of a standard allowance and various elements. The circumstances of the claimant will determine which elements they qualify for.

You can find out more about how to calculate an award of UC in our calculating UC section.

Legislation
Standard Allowance
Child element
Housing costs element
Capability for work elements
Carer element
Childcare element

Legislation

The Welfare Reform Act 2012 outlines the elements to be included in an award of UC. The detailed requirements for each element are set out in the Universal Credit Regulations 2013. The DWP ADM guidance also contains detailed information about each element. We have noted references to each ADM chapter after each element.

Standard allowance

This is included in all claims but the amount depends on age and whether the claimant is single or claiming as part of a couple. See our rates page for the current rates.

Child Element

A child element will be included in a Universal Credit award where a claimant is responsible for a child or qualifying young person who normally lives with them. Where a child lives in 2 separate households, claimants will be expected to agree who has main responsibility and claim accordingly. If no agreement can be reached, DWP will make their own decision.

There are 2 separate rates for the child element; one rate for the first/only child and then a reduced rate for second and subsequent children. NOTE: Changes have been announced to the child element from April 2017. You can read more about these changes in our Policy section.

The child element is increased by a disabled child addition if the criteria is met. There are 2 rates of disabled child addition, only one is included in the award for each child:

More detailed information on the child element can be found in ADM Chapter F1.

Housing costs element

A housing element can be included in the maximum amount of Universal Credit which helps towards qualifying housing costs. Housing costs can either be owner occupier costs (mortgage interest) or rent. This element replaces housing benefit.

Three basic conditions must be met to get the housing element: payment; liability; and occupation conditions. This means that a claimant must be liable for payments in respect of accommodation they occupy as their home, they must pay the costs and they must occupy the home.

Eligibility criteria for the housing costs element is complex. One important point to note is that for owner occupiers, no housing costs element can be included in any assessment period where there is any earned income. It doesn’t matter how much the earnings are or whether the work is temporary or permanent.

If a housing element is included to help with rent, the claimant will receive a lower work allowance (meaning more of their income is taken into account that would have been the case).

More detailed information on the housing element can be found in the following ADM Chapters:

F2: Housing costs element

F3: Housing costs element – support for renters

F4: Housing costs element – support for owner occupiers

Capability for work elements

There are two elements under this heading – limited capability for work element (LCW) and the limited capability for work and work related activity element (LCWWRA). It is important to note that a claimant cannot get both elements – they only get one or the other.

Limited capability for work element (LCW)

The LCW element is included in the maximum amount if the claimant has a limited capability for work. In a joint claim only one element is included even if both claimants satisfy the criteria. In addition, a claimant cannot get the LCW element and the carer element if they are the one who satisfy the criteria for both.

The element may not be payable immediately and can be subject to a three month determination period during which the DWP decides whether the claimant does have limited capability for work or whether they should get the LCWWRA instead. Some people are exempt from the requirement to wait three months.

Limited capability for work and work related activity element (LCWWRA)

The LCWWRA element is included in the maximum amount if the claimant has a limited capability for work and work related activity. The rules are similar to those for ESA. As with the LCA element, only one element can be included in a joint claim even if both claimants meet the criteria and the claimant cannot get the LCWWRA element and the carer element if they are the one who satisfy the criteria for both. The three month determination period also applies to the LCWWRA.

More detailed information about the LCW and LCWWRA elements can be found in ADM Chapter F5. The ADM also contains more guidance about the work capability assessment and what constitutes limited capability for work and LCWWRA.

G1: Work capability assessment

G2: Limited capability for work

G3: Limited capability for work and work related activity

Carer element

This element will be added to the maximum amount of Universal Credit where the claimant has regular and substantial caring responsibilities. This means that the person meets the entitlement conditions for carer’s allowance including caring for at least 35 hours a week. It also includes a person who would be entitled to carer’s allowance but their earnings are too high. There is no requirement to actually claim carer’s allowance.

Only 1 carer element is allowed per claimant and in joint claims two carer elements can be included providing both claimants are not caring for the same disabled person. If both claimants care for the same person, then they can decide who gets the carer element.

More detailed information about the carer element can be found in ADM Chapter F6.

Childcare costs element

Claimants with childcare costs may be able to get this element if they meet the two qualifying conditions which are:

Not all childcare can be covered by the childcare costs element. Only ‘relevant childcare’ is covered which generally includes childcare which is registered or approved.

The amount of the element is the lesser of 85% of the amount paid for relevant childcare OR the maximum amount (see our rates page for the maximum amounts). Childcare costs cannot be included if DWP deem them excessive or if the cost is met or reimbursed by an employer, some other person or other relevant support (such as other Government funding for childcare). NOTE: From April 2016, the value of childcare costs which can be covered by the childcare element increased from 70% to 85% of the amount paid, subject to maximum amounts. (See our Policy section for more about these changes).

More detailed information about the childcare costs element can be found in ADM Chapter F7.

Check out our new universal credit web tool

Tax Credit Renewals - deadline 31 July

Tax-free childcare: Statutory instruments

In this section you will find statutory instruments relating to tax-free childcare in their original form.  

Main tax-free childcare regulations

Childcare Payments Regulations 2015 (SI.No.522/2015) | Explanatory memorandum

Childcare Payments (Eligibility) Regulations 2015 (SI.No.448/2015) | Explanatory memorandum

Up-rating and amending regulations

Childcare Payments (Amendment) Regulations 2016 (SI.No.796/2016) | Explanatory memorandum

Childcare Payments (Eligibility) (Amendment) Regulations 2016 (SI.No.793/2016)

Childcare Payments Act 2014 (Commencement No. 1) Regulations 2016 (SI.No.763/2016)

Tax Credits (Claims and Notifications) (Amendment) Regulations 2015 (SI.No.669/2015) | Explanatory memorandum

Childcare Payments Act 2014 (Amendment) Regulations 2015 (SI.No.537/2015) | Explanatory memorandum

Tax Credits: Starting an appeal

This section provides information about appealing a tax credits decision. Not all decisions are appealable. You can find a full list of appealable decisions here.

The appeals process changed significantly for decisions made on or after 6 April 2014. The new process is explained below as well as what to do for appeals against decisions made before 6 April 2014.

The appeals process

A tax credit appeal is a formal process that allows a claimant to challenge an incorrect entitlement decision. The appeals process is set out in Section 38 Tax Credits Act 2002. For decisions made on or after 6 April 2014, an appeal cannot be brought under Section 38 unless a review of the decision has been carried out (called mandatory reconsideration) and a mandatory reconsideration (MR) notice issued showing the outcome.

Following the mandatory reconsideration process, onward appeals are dealt with by an independent tribunal which is completely separate from HMRC. This is the Social Entitlement Chamber of the First-tier Tribunal to which most welfare benefit appeals go in the first instance.It is administered by HM Courts and Tribunals Service which is an agency of the Ministry of Justice. In Northern Ireland, appeals are dealt with by The Appeals Service (TAS). These agencies are independent of HMRC and there is a specific set of rules governing the First-Tier Tribunal’s procedures.

If the claimant is dissatisfied with the decision of the First-tier Tribunal, they can appeal further, but only on a point of law and with permission, to the Administrative Appeals Chamber of the Upper Tribunal which replaced the former Social Security and Child Support Commissioners on 11 November 2008. On matters of fact, as opposed to law, the decision of the First-tier Tribunal is nearly always final.

From the Upper Tribunal, a right of further appeal lies, again with permission and on a point of law, to the Court of Appeal, Court of Session in Scotland, or Court of Appeal in Northern Ireland.

Appeals vs. Dispute

The distinction between MR/appeals and disputes is one even HMRC staff find hard to understand. The appeal route is used where there the claimant thinks that HMRC have calculated their entitlement incorrectly, it can therefore be used to challenge an overpayment if the underlying calculation that led to the overpayment is wrong. A dispute is used where there claimant has been overpaid (they have in fact received more than their entitlement for the year) but they don’t think it should be paid back. Generally this is because they believe HMRC have made a mistake and that they met their responsibilities as set out in COP 26. More information can be found in our disputes section.

There are some important differences between the two processes:

Changes from 6 April 2014

The main change is that claimants must ask for a review of the decision before they can appeal. This review is called ‘mandatory reconsideration. Some other differences between the old system and the new are:

These changes were brought in by new regulations – the Tax Credits, Child Benefit and Guardian’s Allowance Reviews and Appeals Order 2014 - which amended the Tax Credits Act 2002 and inserted some new sections covering mandatory reconsideration.

Decisions made on or after 6 April 2014

How to request a mandatory reconsideration (MR)

MR requests need to be made in writing or using form WTC/AP . There is no requirement for the request to be signed, as long as HMRC are satisfied that the claimant has sent in the request they can continue. Intermediaries and agents can ask for a MR if they have written authority to act.

The request should be made within 30 days of the date on the decision notice. See ‘late requests’ below if the claimant has missed this 30 day time limit. Recovery of any overpayment will be suspended upon receipt of the MR.

The case will then be sent to the relevant part of HMRC. If the decision was made in the course of a compliance investigation then the case will be sent to compliance to consider the MR request.

According to HMRC guidance, upon receipt of a MR request HMRC staff will decide whether the decision carries MR rights or not. If it is decided that the decision does not carry MR rights then staff are instructed to contact the claimant by phone and explain why this is the case and make a note on the claimant’s records. Only if they are not contactable by phone will a letter be sent. Historically, HMRC have been known to refuse appeals where they believe there is no appeal right and this is either incorrect or can potentially be challenged at Tribunal. With the introduction of MR, it appears that challenges over the validity of a MR request are being dealt with by HMRC and there is no recourse to a Tribunal on an issue of validity. This would leave Judicial Review as the only potential option.  We are confirming this position and will provide an update once more information is obtained.

HMRC have published guidance in their manual outlining the mandatory reconsideration process which covers what attempts HMRC will make to get further information and what notices will be issued to claimants.

Late requests

You should always try to ensure that you, or the claimant, lodge the appeal within the 30 day time limit for appealing. However if this time limit has passed, it is not necessarily fatal as MR requests can be accepted providing the following conditions are met:

  1. The claimant has applied for an extension of time
  2. The claimant explains why the extension is sought and the request for late MR is made within 13 months of the notification of the original decision.
  3. HMRC are satisfied that due to special circumstances it was not practicable that the application for MR be made within the 30 day time limit
  4. HMRC are satisfied that it is reasonable in all of the circumstances to grant the extension. In determining whether it is reasonable to grant an extension, HMRC must have regard to the principle that the greater the amount of time that has elapsed between the end of the 30 day time limit and the date of application, the more compelling the special circumstances should be.

An application to extend the time limit which has been refused may not be renewed.

One important point is that under the old appeals system, if HMRC refused a late appeal request then it was ultimately up to the Tribunal to decide whether to allow the appeal or not. Under the MR process, HMRC are effectively judge and jury on late requests and other than possibly using Judicial Review  there appears to be no process to challenge HMRC’s refusal to accept the late MR.

HMRC give some guidance on late requests in the tax credit manual.

The mandatory reconsideration decision

Upon receipt of a MR request, HMRC will first decide whether the decision has a right to request MR attached to it (see above) and then decide whether any further information is required to make their decision.

If HMRC need more information they will make 3 attempts to contact the claimant by telephone to obtain the additional information. If contact cannot be made, a ‘mandatory reconsideration triage letter’ will be sent asking for further information.

HMRC guidance appears to state that if no further information is required, HMRC staff should still telephone the claimant to either tell them the original decision is correct or to tell them the original decision was wrong. There is guidance on what staff should do if, during this telephone call, the claimant then agrees the original decision was correct. Outbound calls from HMRC are normally not recorded and so staff are directed to make a note of this on TC648. Advisers may need to request a copy of this if the claimant then seeks advice and you find the decision is wrong and an appeal needs to be lodged with the Tribunal.

Once HMRC make their decision they should send the claimant two copies of the mandatory reconsideration notice. According to HMRC guidance this notice should in most cases contain the following information:

WTC/AP form confirms that ‘we will put any recovery action on hold while we carry out the reconsideration or while your appeal is being considered’. However the staff guidance states that at the point of issuing the MR notice, the suspension of recovery is to be lifted. It is not clear at what point this gets suspended again if the claimant continues their appeal and we are seeking clarification from HMRC on this point.

Appealing the mandatory reconsideration decision

Under the old appeal system, if HMRC did not agree that the original decision was wrong, the case was automatically sent to the Tribunal service. The claimant did not need to take any action. Under the new process, claimants must appeal directly to the Tribunal service if they are not happy with HMRC’s mandatory reconsideration decision. This is called ‘direct lodgement’.

This appeal must be made within one calendar month from the date of the mandatory reconsideration notice if you are in England, Wales or Scotland and within 30 days of the mandatory reconsideration notice in Northern Ireland.

For people who live in Great Britain (England, Scotland and Wales), form SSCS5 should be used to appeal against the mandatory reconsideration decision. HM Courts and Tribunals Service also publish a booklet on how to complete the form. You must include a copy of the mandatory reconsideration notice with the appeal. You must include a copy of the mandatory reconsideration notice with the appeal.

For claimants in Northern Ireland, appeals should be made on form NOA1 (HMRC).

Claimants must include one copy of the mandatory reconsideration notice with their appeal. The form and notice should be sent to:

If an appeal is received by HMRC against a MR decision, they will write to the claimant and tell them to lodge it directly with the Tribunal service. If an appeal is sent to HMCTS or TAS they will check whether a MR has been carried out and if not, it will be forwarded to HMRC and treated as a MR request.

Late appeals following mandatory reconsideration

Both HMCTS and TAS will consider late appeals up to 13 months from the date of mandatory reconsideration. The claimant will need to state reasons as to why the appeal is late.

Decisions made before 6 April 2014

If the decision was made before 6 April 2014, then the old appeals process explained below should be followed.

How to appeal
(Decision made before April 2014)

An appeal must be made in writing within 30 days of the date of the decision that is being challenged. This will normally be the date on the tax credits award notice. Although the appeal will eventually be heard by an independent tribunal, the notice of appeal must be sent to the Tax Credit Office (TCO).

The appeal must state what the customer thinks is wrong and must also state which decision they are appealing against.

The appeal does not have to be on a special form. You can use form WTC/AP but a letter will also be sufficient. You must give the name and contact details of the claimant, confirm the decision that you are appealing against and sign the letter. If you have authority to act for the claimant, the appeal can be signed by the adviser, otherwise the claimant should sign it. It is generally useful to include a copy of the authority form.

Appeals should be sent to:

Appeals Team
Tax Credits Office
Preston
PR1 4AT

Additionally, the letter should explain the grounds for appeal. It will generally not be sufficient simply to state that you are appealing because you, or the claimant, think the decision is wrong.

Late appeals

 

(Decision made before April 2014)

 

You should always try to ensure that you, or the claimant, lodge the appeal within the 30 day time limit for appealing. However if this time limit has passed, it is not necessarily fatal. Both HMRC and the First-tier Tribunal have discretion to accept a late appeal provided it is made within 13 months of the date of the original decision.

If the appeal is late, it should explain why.

A late appeal can be accepted provided: --

  1. there are reasonable prospects that the appeal will be successful; and
  2. one of the following circumstances applies:-

Ignorance of the law is not in itself a good reason for appealing late and generally the later the appeal is, the stronger the reasons should be.

It may be that HMRC will simply accept and process the late appeal. If they do not do so, the question of the late appeal will be referred to the tribunal for immediate consideration. This will be considered by a tribunal judge but without a hearing. It is advisable to ensure that the request is as detailed as possible.

Settling an appeal with HMRC

 

(Decison made before April 2014)

 

More information about settlements can be found in the HMRC tax credits manual.

The Settlement procedure originates in tax law and allows HMRC to settle an appeal by agreement with the claimant before Tribunal, which means the appeal is treated as withdrawn. If a compromise is reached, a notice is sent to the claimant who then has 30 days to reject the terms of the settlement in writing. This power remains following the introduction of mandatory reconsideration although it is not clear how widely HMRC use this process now.

More information

Disputes

This section outlines the dispute process which is one of the ways in which a claimant can challenge an overpayment.

To find out more about how to understand whether the claimant has an overpayment and how to identify the cause of an overpayment see our overpayment and underpayments section.

The dispute process

Most challenges against overpayments will be done using the dispute process. This process is used where there is in fact an overpayment but the claimant believes that they should not pay it back because of an error by HMRC.

The dispute process is not governed by statute. Under statute, HMRC may recover all overpayments howsoever caused. HMRC set out their policy on how they exercise this discretion in Code of Practice 26. The process in COP26 is referred to as the ‘dispute process’.

The dispute process is internal to HMRC. Disputes are decided by the Customer Service and Support Group (CSSG), part of the Tax Credit Office in Preston.

In September 2009, a specialist team was set up within CSSG to deal with disputes and complaints from certain intermediaries (primarily only for those who provide free help to claimants). As well as creating a dedicated team, a new process was implemented which means advisers should receive an acknowledgement letter with the contact details of the named caseworker dealing with the dispute or complaint. In February 2012, HMRC stopped issuing acknowledgement letters to advisers following a successful trial as they were dealing with disputes quickly. Disputes should be addressed to:

IDCT
CSSG
Tax Credit Office
Preston
PR1 4AT

We are currently trying to confirm with HMRC that these arrangements are still operating for disputes from intermediaries from April 2016.

Disputes can be lodged using form TC846 or by letter (generally preferred by advisers as it allows a full argument to be put forward).

Suspension of recovery during a dispute

For disputes received by HMRC prior to 15 July 2013, as soon as a claimant disputed an overpayment, whether on form TC846 or in some other written format, HMRC suspended recovery of the overpayment whilst they investigated the matter. Recovery did not recommence unless and until the dispute was resolved against the claimant and in HMRC’s favour. Thereafter, HMRC’s policy was that suspension could only be reactivated if the claimant submitted a new dispute with new evidence to HMRC which required further investigation.

HMRC changed their policy in relation to recovery suspension for disputes received from 15 July 2013. This represents a major change in policy. For disputes received after that date, there will no longer be any suspension of recovery when a dispute is lodged.

If the overpayment is being recovered from an ongoing tax credits award, that will continue whilst the dispute is considered. If the overpayment is being recovered directly via debt management and banking (DMB), they will continue recovery action whilst TCO consider the dispute.

We are not aware of any changes to the policy that if a dispute is successful, any payments made will be refunded to the claimant.

The new policy means it is crucial that claimants and their advisers engage with DMB if the debt is in direct recovery so that further action (ultimately distraint or county court) is avoided. Information about time to pay arrangements can be found in the dealing with debt section.

It is still worth speaking to DMB for direct recovery debts to request a suspension of recovery by DMB (rather than TCO). It is a good idea to try requesting this where the claimant the claimant is in financial hardship or in receipt of certain means tested benefits. Even if the claimant doesn’t fit this criteria it is still worth asking DMB for suspension if a dispute has been filed as even though it is not official DMB policy some officers are prepared to suspend when cases are in dispute or go to the Adjudicator. It should be noted that HMRC’s helpful guidance for advisers in the guide ‘How HMRC handle tax credit overpayments’ has now been withdrawn and there is no published information about when HMRC will consider a suspension as there was previously.

Appeals vs. disputes

The distinction between appeals and disputes is one that even HMRC staff have difficulty with. There are some important differences between the two processes:

Examples of when an appeal and dispute may be appropriate -

Example of when an “appeal” is the right thing to do:

Daisha claims tax credits for her three children. Her eldest child finishes her GCSEs but decides to stay on at school to do her A levels. Daisha tells HMRC and continues to receive tax credits for three children. When HMRC work out Daisha’s final tax credits for the year, they only include two children. Because Daisha received money for three children, HMRC think that they have overpaid her. Daisha can appeal the decision and ask HMRC to change her award as she should have received tax credits for three children. If this is successful, the overpayment will disappear.

Example of when a “dispute” is the right thing to do:

Eric and his wife were paid tax credits for three children when they only have two. When Eric received his award notice, he phoned HMRC to tell them they had the number of children wrong. HMRC did not correct the mistake and kept on paying Eric too much tax credit. After the end of the year, Eric had received more tax credit than he should have and so has an overpayment. Eric can use the dispute process because he accepts that he has been paid too much, but doesn’t think he should have to pay it back because he told HMRC of the mistake as soon as he saw his award notice.

If a claimant sends an ‘appeal’ to HMRC that should be a dispute, it will generally be re-directed. Unfortunately when the opposite happens, a claimant sends a ‘dispute’ when in fact they want to appeal, the letter tends to be treated as a dispute. In such cases we recommend that advisers argue that HMRC should treat the original letter as an appeal. There is no requirement that appeals must state that they are an ‘appeal’ so long as they meet the other appeal requirements.

The previous ‘reasonableness’ test

Prior to 31 January 2008, claimants faced the much criticised ‘reasonableness test’. This test had long been criticised by representative bodies, and following a succession of reports in 2007 by the Adjudicator, The Parliamentary Ombudsman and Citizens Advice, HMRC decided to revise the test.

The following paragraphs contain information about the operation of the reasonableness test. Whilst the test is not applicable to new cases, HMRC have stated that the test will still be used where a claimant asks HMRC to review a previous dispute decision that was made under the old test. In practice, our experience is that all current disputes are being dealt with under the new test which is generally more generous to claimants. Officially, any disputes outstanding as of 31st January 2008 should have been dealt with under the new test.

COP26 (April 2007 version) stated:

‘For us to write off an overpayment you must be able to show that the overpayment happened because:

- we made a mistake, and

- it was reasonable for you to think your payments were right.’

Both tests had to be satisfied before HMRC would write off an overpayment.

Of the two tests described above – that HMRC must have made a mistake, and that it must be reasonable for the claimant to have thought their award was right – it was the second of the two, commonly known as ‘the reasonableness test’, that provoked the most controversy.

The responsibilities test

The old versions of COP26 were most noticeably silent on what claimants could expect from HMRC. Whilst HMRC internal guidance gave some indication of what claimants could expect, the reasonableness test centred around the claimant and put the emphasis on them to check HMRC’s work. There seemed little responsibility for HMRC and this led to large overpayments being recovered in situations where the claimant did not spot an error which HMRC had made.

In designing the new test, HMRC attempted to move away from the one-sided list of responsibilities, replacing a test which imposed all of the responsibility on the claimant to one which set out responsibilities for both parties.

The responsibilities for both the claimant and HMRC can be found in HMRC's Code of Practice leaflet COP 26.

There are four possible outcomes to a dispute:

In this situation the overpayment will not be written off since, if both sides have met their responsibilities, the overpayment is likely to be a naturally occurring overpayment which is built into the system, or is caused because HMRC have 30 days to action a change.

In this situation the overpayment will not be written off because of the failure of the claimant to meet their responsibilities. This may be overridden if there are exceptional circumstances.

In this situation the overpayment will be written off because HMRC failed to meet their responsibilities.

In this situation the part of the overpayment attributable to HMRC’s failure will be written off, but the part attributable to claimant error will remain recoverable unless exceptional circumstances are present.

There is some useful guidance on how HMRC staff approach overpayment write-off in this situation in the tax credits manual.

One other way of having an overpayment written off is to examine whether ‘notional offsetting’ applies if the case involves separating couples, couples coming together or one member of a couple dying or going abroad for longer than 8 or 12 weeks (depending on the circumstances). More information can be found in our Understanding Couples section.

Time limit for disputes

Background

Since the tax credits system began, most challenges of overpayments have been made through the dispute process. Prior to 6 April 2013, there was no time limit for disputing an overpayment.

Due to the design of the award notices, it isn’t always easy to tell whether there is an overpayment and, even if there is an overpayment, to tell how much is owed. This is especially true for overpayments that occurred in the early years of the system and are still being recovered. It often isn’t until the claimant’s award ends and they receive a demand from DMB (debt management and banking - part of HMRC) that they realise that they have an overpayment, or appreciate its true extent.

Because historically there has been no limit on the time allowed to dispute an overpayment, people could still dispute an overpayment even after their award had ended, and could still be successful in getting it written off if the relevant evidence was available.

However, in order to manage the number of disputes, and get tax credits system ready for the move to Universal Credit, HMRC decided to introduce a three month time limit for disputes from 6 April 2013.

Although this is a fairly simple change in theory, the operation of the time limit is very complex. As a result, although the time limit appeared on award notices from April 2013, it was fully implemented from October 2013.

When does the time limit run from?

As set out in COP 26, the three month time limit for disputing an overpayment runs from the date of the final award notice relating to the tax year in which the overpayment arose (but see below for overpayments from earlier years).

For people whose claims are auto-renewed the time limit runs from the date the renewal notice states a final decision will be made. For most people this will be 31 July following the end of the tax year to which the claim relates. Note that it is not the date of the renewal notice itself, but the date that it says a decision will be made.

Example 1: Dean and Sharon receive a Section 17 auto-renewal notice which is dated 14 May 2016 as they were in receipt of income based Jobseeker’s allowance for the entire 2015-2016 tax year. The notice states that if HMRC do not hear from the couple, they will confirm the amount due for 2015/16 (ie the entitlement decision) and make a decision on how much to award for 2016/17 on 31 July 2016. Dean and Sharon have 3 months from 31 July 2016 to dispute any overpayment listed for 2015/16.

Following representations by LITRG, where an appeal is unsuccessful (or only partially successful) and any remaining overpayment then needs to be disputed, the three month time limit for the dispute will run from the date of letter telling the claimant the outcome of their appeal.

Finally, in some cases, such as where a claim is investigated by HMRC under their compliance powers, a new final award notice may be issued at the end of the investigation. If that happens, the three month time limit is activated again from the new final award notice.

Overpayments from earlier years

The time limit was introduced from 6 April 2013 and therefore affected finalised notices for the 2012-13 tax year. As explained above, the time limit runs from the date of the final notice relating to the tax year in which the overpayment arose.

For 2012-13 final award notices only, the time limit applied to overpayments relating to the 2012-13 tax year and historic overpayments for earlier years.

In other words, claimants were able to dispute within three months of the 2012-13 final notice in order to challenge any 2012-13 overpayments and any overpayments from earlier years that had not already been disputed. If they did not, the chance to dispute was lost unless they can show exceptional circumstances as to why they missed the deadline.

Final award notices for 2013-14 and subsequent years only carry dispute rights against any overpayment that occurred in the year being finalised. For example, the final notice for 2015-16 will give three months to dispute any overpayment that occurred during 2015-16 but not any overpayment from 2014-15 or earlier years. The time limit for disputing those overpayments will have passed.

Example 4: Ronnie has been overpaid during 2015-16 as HMRC did not initially process a change of circumstances that she reported. The overpayment of £2500 is shown on the final award notice dated 17 August 2016. Ronnie will have until 17 November 2016 to dispute that overpayment. Ronnie also has overpayments for 2014-15 and 2011-12. She cannot dispute those overpayments as the time limit has expired.

Claimants with old overpayment debts

Many tax credits claimants do not realise that they have an overpayment until their claim has ended and they receive a demand from Debt Management and Banking. The volume of overpayment debt has meant that HMRC have been slow to chase claimants for old debt. In some cases, claimants have heard nothing from HMRC for a number of years. It is worth checking whether the Limitation Act 1980 might apply in particularly old cases.

Up until October 2013, where claimants received a new demand from HMRC after years of no contact, if they chose to do so they could have sent in a dispute against the overpayment.

From October 2013, HMRC have made it clear that claimants can no longer dispute old overpayments where they have not disputed within 3 months of their final award notice. In practice, this means that those with debts being recovered directly for 2014/15 and earlier years are unlikely to have the right to dispute.

What if a claimant misses the deadline?

If a claimant is outside of the three month time limit, HMRC guidance is that they will accept the dispute if there is a good reason why the claimant missed it. For example due to serious illness. This should be explained in the dispute letter sent to HMRC.

What if HMRC refuse to admit a dispute?

We envisage that there may be situations where claimants have contacted the helpline to dispute an overpayment but have received incorrect advice. Or the issue may have been referred to a back office team and no dispute form been given to the claimant. In such cases, advisers should write to HMRC stating that the dispute should be admitted.

If HMRC still refuse to accept the dispute, then advisers should lodge a formal complaint (remembering that there is generally no suspension of recovery during the complaints process unless agreement can be obtained on a case by case basis from DMB).

Alternative ways to challenge the overpayment

The introduction of the three month time limit for disputes means that the statutory official error provisions become more important.

Under these provisions, an HMRC decision can be revised in favour of the claimant if it is incorrect by reason of official error – defined as an error by HMRC or DWP to which the claimant or adviser did not materially contribute. In most cases these provisions provide an avenue where the appeal time limit has passed, although in certain circumstances they can apply as an alternative to disputes.

Although these official error provisions have always existed, they are rarely used by claimants and advisers. Instead the issues often get dealt with as ‘disputes’ particularly where the time limit for an appeal has expired. For the claimant, the result of a successful challenge under the official error provisions is that the overpayment does not have to be repaid. The two routes are different because a successful official error argument means that the award is amended so the overpayment disappears, whereas with a dispute the overpayment remains but is simply written off so the claimant does not have to repay it.

As there has been no time limit for disputes up to 5 April 2013, there was no need for claimants to specify which heading they were challenging the overpayment under.

However, now the dispute time limit has been implemented, it is important to consider whether the statutory official error provisions apply because the time limit for official error is much longer (five years) than the three months allowed for disputes and the time limit allowed for appeals. The rules relating to official error are explained in a separate section.

If HMRC refuse to admit a dispute because it is outside of the time limit and the appeal time limit has passed, but the case is one that fits the official error provisions, advisers should make a request under the Official Error Regulations and highlight the time limit. See our Official error section for more information.

Exceptional circumstances

As part of the dispute process, HMRC staff should consider whether exceptional circumstances prevented a claimant from meeting their responsibilities. (See steps 6-9 of the dispute process in the tax credit manual)

According to the guidance exceptional circumstances do not need to be rare, and the words can simply mean ‘strong reasons’. Examples given of exceptional circumstances are the death of a close relative, serious illness, and flooding of the claimant’s home.

If exceptional circumstances are found then the overpayment that resulted from the claimants’ failure to meet their responsibilities due to exceptional circumstances should be written off.

It is not possible to list circumstances which HMRC will accept as ‘exceptional’. HMRC take a different approach in each and every case depending on the circumstances. It should be noted that the exceptional circumstances with which HMRC are concerned in this part of the test are those existing at the time when the claimant was expected to meet their responsibilities. Exceptional circumstances may also exist which mean it is more difficult for the claimant to repay an overpayment or they may exist at the time when a dispute should have been filed within 3 months of the date of decision.

Evidence

One of the biggest difficulties with disputes is evidence. HMRC will often refuse to accept that a claimant has met their responsibilities if they cannot locate correspondence or telephone calls in support.

It is for this reason that we recommend that claimants keep a file with copies of all tax credit correspondence. Claimants should keep copies of all letters sent to HMRC as well as detailed notes about any telephone calls including date, time, operator name and a brief description of the conversation.

Sometimes called data protection requests, Subject Access Requests are a useful way to obtain copies of data from HMRC including print outs of household notes (the notes that helpline operators make during telephone calls), other award information and telephone calls. You can find details of how to submit a SAR request in the Obtaining information about your client section of the website.

Records of telephone calls

As noted above, a SAR request can help you obtain copies of phone call recordings. In our experience HMRC do not always listen to calls and it is therefore advisable to make it clear in any dispute that HMRC should listen to all relevant recordings.

Unfortunately, despite HMRC repeatedly saying that all telephone calls are recorded, this is not always correct particularly in relation to the early tax credit system. In a number of cases in 2003 and 2004, calls to the helpline that were diverted to a private supplier were not always recorded. The scale of the problem was revealed in the answer to a Parliamentary question by David Laws MP on 20 February 2007 (see col 612W in Hansard for that date). The response from Benefits and Credits was:

‘The private sector advisers dealt mainly with generic, non-claimant specific enquiries. They received the same training as the HMRC staff to enable them to do this.’

However, it would have been very difficult to filter accurately the generic from the claimant-specific, particularly where the same call contained elements of both.

Following a campaign by LITRG and others, tax credit officials have agreed that where an issue arises as to whether a claimant telephoned the helpline at that time to report a change in circumstances or a mistake in their payments, in the absence of any tape recording of the call the claimant will usually be given the benefit of the doubt, with any ensuing overpayment being written off.

As far as we are aware, all phone calls are now recorded to the main helpline although this may not be the case with compliance phone calls or outbound calls by HMRC. It is advisable that claimants always make a note of the date, time, adviser name and a brief note of the call.

Second disputes and next steps

If the claimant has further evidence in support of the overpayment, a further (second) dispute can be sent to HMRC. It is advisable that this second dispute makes it absolutely clear what the further evidence is and why it changes the previous dispute decision. HMRC will continue to recover the overpayment during this second request.

According to COP 26, this second request must be done within 30 days of receiving your dispute decision letter. In exceptional situations, such as when the claimant is in hospital, HMRC will accept a second dispute outside of the 30 day time limit.

Next steps

While there are rights of appeal against awards and other decisions on tax credit entitlement, there is no statutory right of appeal against the exercise by HMRC of their discretion in relation to an overpayment recovery. That is not to say there is no legal or other remedy. If HMRC refuse a request to write off an overpayment resulting from their error, the following steps may be taken.

Tax Credits: Challenging overpayments

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 that must be considered when challenging an overpayment. The options are not mutually exclusive, therefore it may be appropriate to pursue one, two, three or all of them, depending on the circumstances of each case.

The options are:

  1. Appeal
  2. Dispute
  3. Official Error
  4. Complaint
  5. Repayment/hardship
  6. Judicial Review

Tax Credits: Appeals

This section of the website sets out information about tax credits appeals. You can find a list of appealable decisions and how to start an appeal. We also briefly explain official error as an alternative or addition to an appeal.

Tax Credits: Appealable decisions

Not all tax credit decisions carry a right to mandatory reconsideration or appeal. If a decision isn’t appealable you may want to consider the dispute process, official error or a complaint.

This section sets out the tax credits decisions that can be reviewed under the mandatory reconsideration process and then appealed. You can find out how to start an appeal in the appeals section of the site.

Rights of appeal are granted by statute against (TCA 2002, s 38(1)):

There is no right of appeal against an administrative decision in relation to the recovery of an overpayment, nor against the issue of a notice under s 14(2), 15(2) or 16(3).

Note also procedure for settling an appeal under Taxes Management Act 1970 s 54 applies to tax credit appeals.

One noticeable absence from the list above is a right of appeal against a decision by HMRC to recover an overpayment. Using the appeal rights above, a claimant can challenge a decision by HMRC that led to an overpayment and, if successful, that decision can be reversed establishing that there is in fact no overpayment (or it is less than the original amount).

However, if there is in fact an overpayment (the claimant has received more than their entitlement), there is no right of appeal against HMRC’s decision to recover this overpayment.

An appeal can only be brought against any of the above decisions after it has been reviewed by HMRC under the mandatory reconsideration process.

Tax Credits: Judgments of the higher courts

In this section you will find all tax credits judgments of the higher courts -

Commission v United Kingdom EUECJ C-308/14 (14 June 2016) - Judgment from the Court of Justice of the European Union that finds that indirect discrimination is justified in the UK right to reside test for child benefit and child tax credit

Humphreys v Revenue and Customs [2012] UKSC 18 (16 May 2012) - Supreme Court judgment that considers whether refusal of child tax credit to substantial minority carer is discriminatory under the European Convention on Human Rights.

Humphreys v Revenue and Customs [2010] EWCA Civ 56 (11 February 2010) - Court of Appeal considers whether refusal of child tax credit to substantial minority carer is discriminatory under the Human Rights Convention.

Regina v Rajeshree Parmer [2006] EWCA Crim 979 (24 March 2006) - Court of Appeal considers whether potential working tax credit offset relevant when sentencing a claimant convicted of benefit fraud.

Taylor v Commissioners of the Inland Revenue (2004) EWCA Civ 174 (20 February 2004) - Court of Appeal judgment in relation to disregarding bank holidays in calculating average hours worked.

Child Benefit: Judgments of the higher courts

In this section you will find all child benefit judgments of the higher courts -

Commission v United Kingdom EUECJ C-308/14 (14 June 2016) - Judgment from the Court of Justice of the European Union that finds that indirect discrimination is justified in the UK right to reside test for child benefit and child tax credit

Revenue And Customs v Aiga Spiridonova [2014] NICA 63 (09 September 2014) - Judgment from the Court of Appeal in Northern Ireland that holds that the right to reside test for child benefit is lawful.

Child Benefit: Statutory instruments - Uprating and amending

In this section you will find all original child benefit up-rating and amending legislation.

If you would like to see the main (substantive) regulations in their original form you can find them in the statutory instruments section of legislation and caselaw.

Child Benefit & Guardians Allowance

Child Benefit only 

Guardians allowance only

Northern Ireland – Child Benefit and Guardians Allowance

Tax Credits: Statutes - Consolidated

With thanks to LexisNexis and Tolley Tax Intelligence for sharing their consolidated tax credit legislation with us.

Tax Credits Act 2002 -

Welfare Reform Act 2012 -

Tax Credits: Statutory instruments – Consolidated – Alphabetical

Below are the main (substantive) tax credits regulations consolidated by LexisNexis

The consolidated legislation includes footnotes indicating amendments to legislation; cross-references; definitions; and additional helpful material including HMRC briefs and cross-references to HMRC’s internal guidance manuals.

They are displayed here alphabetically, but you can also view them chronologically.

Tax Credits: Statutory instruments – Consolidated – Chronological

Below are the main (substantive) tax credits regulations consolidated by LexisNexis

The consolidated legislation includes footnotes indicating amendments to legislation; cross-references; definitions; and additional helpful material including HMRC briefs and cross-references to HMRC’s internal guidance manuals.

They are displayed here in chronological order, but you can also view the regulations alphabetically.

Transition to universal credit: Commencement Orders

Commencement Orders

The provisions in the Welfare Reform Act 2012 are being gradually introduced. Some sections of the Act came into force on the day the Act was passed (8 March 2012). The remaining provisions will come into force through a series of commencement orders. Links to each commencement order are below.

The latest commencement order (shown last on the list below) contains a table at the end summarising all prior commencement orders.

See also the following regulations which provide for amendments to certain of the above Commencement Orders

Alert - universal credit

National Living Wage

National Minimum Wage: Statutory instruments - Amending

In this section you will find all original amending national minimum wage legislation.

National Minimum Wage amending legislation:

Amendments to acts

Amendments to regulations

Tax Credits: Statutory instruments - Up-rating and amending legislation

Below are all original up-rating and amending tax credit legislation.

They are displayed here in chronological order.

Uprating Regulations -

Miscellaneous Amendment Regulations -

Amendments to the Working Tax Credit (Entitlement & Maximum Rate) Regulations 2002 -

Amendments to the Child Tax Credit Regulations 2002 -

Amendments to the Tax Credits (Claims and Notification) Regulations 2002 -

Amendments to the Tax Credits (Definition and Calculations of Income) Regulations 2002 -

Amendments to the Tax Credits (Appeals) Regulations 2002 -

Amendments to the Tax Credits (Residence) Regulations 2003 -

Amendments to Working Tax Credits (Payment by Employers) Regulations -

Amendments to the Income Thresholds and Determination of Rates Regulations 2002 -

Commencement Orders -

Amendments to the First-tier Tribunal and Upper Tribunal rules and procedures -

Other Amendment Regulations -

Universal credit: Adviser guidance

This section of the site contains links to Universal Credit guidance for advisers published by both DWP and HMRC.

DWP Advice for Decision Making (ADM)
HMRC guidance
DWP toolkit for advisers

Universal credit: Entitlement to Universal credit

This section of the website gives an overview of the entitlement conditions of Universal Credit. The primary focus of this website is to provide a comprehensive resource that focuses on the transition of tax credits claimants to UC. This section of the site is not intended to provide detailed information about UC but is aimed at guiding advisers through the main areas whilst providing links to further information.

During the roll-out of UC, only people who are eligible to claim can actually submit a claim. Eligibility to submit a claim is not the same as having entitlement and even if a person is eligible to submit a claim it is possible they may not be entitled to UC. You can find out about the current eligibility to claim rules in our Who can claim UC? section.

Claim conditions
How to claim
Claimant commitment
Work conditions
Rates
Calculating universal credit
Elements
What is income for UC?
Changes of circumstances
Capital rules
Self-employment
Passported benefits 
Benefit cap
Transitional protection
RTI and Universal Credit
Payments

Universal credit: Who can claim Universal credit

Universal Credit is being rolled out gradually. Two systems are currently running side by side – a live service system and a digital (full) service system. This part of the website explains in detail who can currently claim UC, the impact of the changes on claims for tax credits and the rules that apply in each area.

Roll-out timetable
This page explains how UC is rolling out and includes links to a PDF document that contains all roll-out postcodes and dates.

Current eligibility to claim
This page explains who is currently eligible to claim UC and how to work out if someone is in a live service or digital service area.

Digital (full) service
This page explains in detail what the digital service is, gives links to the relevant legislation, explains the impact on tax credit claims of digital service and outlines the main rule differences between digital and live service areas.

Live service
This page explains live service in detail and explains the impact on tax credit claims in live service areas.

Moving areas 
This page explains what happens to claimants who move areas (including between digital areas and live service areas).

Tax credits and UC
This section brings together information about the impact of UC roll-out on claims for tax credits. It explains when people may have a choice between the two and also looks at the possibility of moving back to tax credits from UC.

Universal credit: Stopping tax credits

This section of the site covers the process involved in ending a tax credits claim when someone has made a claim for Universal Credit. HMRC are using the term ‘stopping tax credits’ (STC) to describe this process.

In this section we explain:

When will tax credits stop?
Finalising tax credit claims
Tax credit debt

Universal credit: Guidance

In October 2010, the Government announced that as part of its Welfare Reform agenda, Universal Credit would replace most current working age benefits. You can find out more about the background to UC in the resources section of the website.

Universal Credit is a means-tested benefit for working age people on low incomes who are in and out of work. It replaces the following benefits

Claimants do not need to have paid national insurance contributions to qualify. In Great Britain, (i.e. England, Wales, Scotland) Universal Credit is dealt with by Department for Work and Pensions (DWP). In Northern Ireland, Universal Credit is being introduced along a different schedule and will be dealt with by the Department for Communities (previously the Department for Social Development)..

Universal Credit was introduced in April 2013 by way of a small pathfinder in one part of the UK. By April 2016, some form of UC was available in all Jobcentres in Great Britain. From October 2013, UC started to roll out across the UK. We explain more about the roll-out on the roll-out timetable page

Both working tax credit and child tax credit will be subsumed into the new credit, along with income-based Job-seekers allowance; income-related Employment and Support Allowance; Income support and Housing Benefit. Where Universal Credit is available via the ‘digital service’, most claimants will no longer be able to claim these legacy benefits.


Tax Credits - Concentrix telephone number for intermediaries UPDATE

Universal credit: Tax credit debt

This section of the website explains what happens to outstanding tax credits debt when a claimant moves from tax credits to universal credit. Full details of the process are not yet known and more information will be published as it is released by HMRC.

The general principle is that tax credit debt will be passed to DWP for collection from the claimant’s UC award.

Universal credit: Moving areas

Once a person becomes entitled to UC, they stay on it even if their circumstances change or they move to a non-UC area (where it has not yet been introduced). This applies within Great Britain. Sometimes this is referred to as the ‘lobster pot’ principle. In live service areas, once entitled to UC, the gateway conditions are not relevant so if a person has a change of circumstances that means they no longer meet one of the gateway conditions it will not necessarily affect their entitlement to UC (unless it is a change that also affects entitlement to UC).

Unfortunately the position on moving areas is not that clear and we are seeking further information from DWP.

Moving from a digital area to a live service area

Our understanding is that if you claim UC in a digital area and move to a live service area, you will remain classified as a ‘digital service claimant’ meaning that the digital rules would continue to apply.

However, it does appear that a claimant in this situation could withdraw their UC claim and reclaim tax credits (see above for more information on the factors to consider if contemplating this).

Moving from a live service area to a digital area

It is not clear what happens to someone who claims UC in a live service area and then moves to a digital area and whether they would become a ‘digital service claimant’ and be subject to slightly different rules. We are seeking clarification on this point.

However what is clear is that once a claimant moves from a live service area to a digital area, they cannot withdraw their UC claim and claim tax credits because HMRC would reject the claim as they are living in a digital postcode.

Universal credit: Live service areas

This page explains the live service and what it means for new tax credit claims as well as for existing tax credit claimants.

What is a live service area?
Who can claim in live service areas?
Current gateway conditions
Claims for UC based on incorrect information
Claims for tax credits in live service areas
Existing tax credit claimants in live service areas
Transferring from live service to digital service

What is a live service area?

When UC started in April 2013, the IT system used was developed by private contractors. Following a programme ‘reset’, DWP decided to build their own digital IT system that would run alongside the existing system. Areas using the original system are known as ‘live service areas’.

All UC areas will be live service areas unless they are a designated digital area. Live service areas continued to roll-out until April 2016 in order to test and learn processes and policy. From May 2016, live service areas will gradually become digital (full) service areas and all existing live service claimants will be transferred to the digital IT system. 

It is important to understand whether an area is a live service area or digital service area because the main UC rules are different between the two. In addition, some areas that are currently live service will be changed to digital service at some point in the future and advisers will need to understand the process for transferring between the two systems.

Who can claim in live service areas?

Only claimants who meet the ‘gateway conditions’ in place for that area are eligible to make a claim for UC. If the person meets the gateway conditions and lives in a postcode that is accepting UC claims, then they are able to submit a claim. However the gateway conditions should not be confused with the entitlement conditions of UC. Even if a person meets the gateway conditions, it does not mean they will necessarily be entitled to UC. We explain the main entitlement conditions for UC in our Universal Credit section.

Gateway conditions were introduced from 16 June 2014 (prior to that date pathfinder conditions applied). However, they have changed a number of times since that date. To add further complexity, the gateway conditions vary from postcode to postcode.

In the majority of live service areas, claims can only be made by single, childless jobseekers who meet other strict conditions. However in some live service areas, claims can be made by couples and families with children who meet other strict conditions.

We have produced a PDF roll-out document that explains which gateway conditions apply to each postcode.

As with the digital service area, there is a general power that states the Secretary of State may determine not to accept any particular claims for UC temporarily in order to safeguard the efficient administration of UC or ensure the effective testing of systems for the administration of UC.

Current gateway conditions

If a claimant lives in relevant districts No.1 to No.28, then the gateway conditions in this document will apply at the date of claim. These districts accept claims from couples and families with children (subject to some exceptions).

If the claimant lives in any other relevant district (except those designated as digital areas) then the gateway conditions in this document will apply at the date of claim.

The date of claim for UC is normally the date it is received or if later, the first day for which the claim is made. Where a couple is treated as having made a claim for UC, the date on which the claim is treated as having been made is the date they form the couple. More information can be found in DWP ADM Chapter A2.

You can read more detail about the gateway conditions in ADM Chapter M3.

Claims for UC based on incorrect information

Where a claimant gives incorrect information about living in one of the relevant districts or meeting the gateway conditions and this is not discovered until after a decision has be made and at least one payment is made then they will remain entitled to UC.

If this incorrect information is discovered before the award of UC is made, the claimant will be informed they are not entitled to UC. If they then make a claim for WTC or CTC within one month of being told they are not entitled to UC, their tax credit claim will be treated as made on the date that the claim for UC was made. Similar rules apply where an award of UC is made but no payment is made. In that case the UC claim ceases to have effect immediately.

Claims for tax credits in live service areas

If a person meets the gateway conditions in a live service area that is accepting UC claims, then they can claim UC.

Our understanding of the current rules is that there is an element of choice, so that if someone meets the gateway conditions but would rather claim tax credits then they can do so. There is nothing stopping HMRC from accepting a tax credit claim from someone living in a live service area who meets the gateway conditions. That same choice does not exist with all legacy benefits – for example where the gateway conditions are satisfied a claim for UC or Jobseekers Allowance or Employment and Support allowance results in the abolition of income-based JSA and income-related ESA for that claimant so they can’t be claimed instead of UC.

The general rule is that a claimant is not entitled to tax credits for any period where they are entitled to UC. The only exception to this is during the first assessment period for UC after two people become a couple and the tax credit award of the ‘new claimant partner’ terminates after the first date of entitlement to UC. This is because in such a case UC rules may treat the claim as made at an earlier date than the TC termination date.

Existing tax credit claimants in live service areas

Existing tax credit claimants are currently unaffected by the roll-out of UC. Their awards of tax credits will continue at present until DWP introduce rules to migrate those people across to UC. Existing claimants will only be affected if they either choose to move to UC or they have a change that ends their tax credit award:

Choosing to move to UC

There is nothing stopping a tax credits claimant from choosing to claim UC providing they meet the relevant gateway conditions. Entitlement to WTC or CTC is not listed as one of the restrictions in the gateway conditions.

Tax credit claimants will need to seek advice from a welfare rights specialist before deciding to make a claim to UC. Some people will be better off under UC than existing legacy benefits, but many people will be worse off financially and UC claimants are subject to conditionality rules that tax credits claimants are not. 

However, as a general rule you cannot be entitled to tax credits and UC at the same time. The only exception to this is during the first assessment period for UC after two people become a couple and the tax credit award of the ‘new claimant partner’ terminates after the first date of entitlement to UC. This is because in such a case UC rules may treat the claim as made at an earlier date than the TC termination date.

In this situation, if a claim for UC is made (or is treated as having been made) and the person (or persons) meet the basic conditions for UC (except for the claimant commitment requirement) then the all awards of tax credits for which there is entitlement (on the date of the UC claim) will terminate on:

This will be the case even if under Tax Credits legislation the award would terminate on a later day.

Although the legislation works in such a way as to bring a tax credits award to an end when a UC claim is made, and the process between DWP and HMRC is such that there should be notification to HMRC to end the tax credits claim, we would advise that claimants report the situation to HMRC in case the process breaks down.

Moving due to a change of circumstances

Where a tax credit claim ends because of a change of circumstances - for example a couple separating or a single person forming a couple, or a WTC only claimant who loses their job - then if the gateway conditions are met the person can claim UC.

Where a single tax credit claimant (the new claimant partner for UC purposes) forms a couple with an existing UC claimant, the new claimant partner will have their tax credit award terminated for the current tax year on:

Transferring from live service to digital service

According to a publication from DWP, when a current live service area becomes a digital (full) service area, anyone currently claiming UC through the live service will be migrated onto the full digital service over the first three months.

A few live service areas became digital areas between January and April 2016 in order to test the transfer process. From May 2016 to mid 2018 the remaining live service areas will become digital areas.

We will update this page when further information is known about the process that will be used to transfer claimants from live to digital service. 

Tax credit overpayments - changes to ongoing recovery

Check your tax credits - new on line service

Universal credit: Case law

In this section you will find the main universal credit case law.

Upper Tribunal decisions

Universal Credit Rates table Dec 15

Universal credit: Payments

How is Universal Credit paid?
How often are the payments?
Budgeting support

How is Universal Credit paid?

Universal credit, including any part of the award which is an amount included for housing, is paid directly to the claimant. In a joint claim, both claimants nominate which claimant is to receive the payment (in some cases DWP can split the payment or decide which of the joint claimants will receive the payment). Claimants are responsible for ensuring they pay their rent to their landlord, although in exceptional cases, DWP will consider paying the housing amount of the award separately and directly to the landlord.

Payments are made by automatic transfer to the claimant’s bank account. Bank account details are completed as part of the claim process and any subsequent changes to those details should be notified to DWP. DWP have arrangements to make payment by a separate service for those unable to make use of mainstream bank, building society or credit union account and this method of payment should be discussed with the claimants work coach.

How often are the payments?

Universal credit payments are paid monthly, in arrears. Each monthly payment should be credited to the claimant within 7 days of the end of the assessment period that it covers. DWP expects claimants to be responsible for budgeting their finances accordingly, although they do have some flexibility to alter payments in exceptional circumstances and claimant should discuss this with their work-coach.

For new claims, payments can take up to 5-6 weeks while the claim is processed and payment issued. DWP can award an advance payment of Universal Credit for new claimants who expect to struggle meeting essential expenditure whilst waiting for their first payment and claimants in this situation should be encouraged to discuss their request for an advance payment at their Universal Credit claim interview. Advance payments will only be granted where DWP consider the Universal Credit claim looks likely to result in an award. The advance payment is a loan from DWP and must be repaid, usually by deducting the agreed repayment amount from subsequent payments of Universal Credit.

There is little information published about UC advances by DWP, however CPAG have written an excellent guide explaining advances and linking to the latest DWP guidance: CPAG guide.

Budgeting support

DWP can arrange to pay Universal Credit payments fortnightly, pay the housing part of the award direct to the claimant’s landlord and also split the Universal Credit payment between joint claimants. These are known as alternative payment arrangements and are designed to offer some flexibility in budgeting support for claimants who either need their payments to be paid in any of these ways permanently or just temporarily.

DWP have published a guide explaining personal budgeting support and alternative payment arrangements including when they are available and how to ask for them.

Claimants can ask for alternative payment arrangements either at their Universal Credit claim interview or by calling the Universal Credit helpline (0345 600 0723; textphone: 0345 600 0743, Monday to Friday, 8am to 6pm).

Various organisations offer information and advice for Universal Credit claimants about budgeting. DWP work closely with Local Authorities to provide suitable budgeting support arrangements.

Other information

DWP Advice for Decision Making – staff guide B1

DWP publications

Help with budgeting your Universal Credit

Budgeting your Universal Credit quick guide

Guide to managing Universal Credit payments

Tax-free childcare: Legislation

In this section you will find legislation and case law relating to tax-free childcare.

You can use the menu to your left or use the links below to find the right section. At present there is no case law relating to tax-free childcare as it is a new scheme. As decisions are published, they will be added to this section.

Tax-free childcare: Statutes

In this section you will find statutes relating to tax-free childcare in their original form.

Childcare Payments Act 2014

HTML  | PDF  | Explanatory Notes

Tax credits - Concentrix telephone number for intermediaries

Charities launch survey about use of digital technologies

Autumn Statement 25 November 2015

Tax credit cuts - update

Transition to universal credit: Passported benefits

This page shows regulations that are related to passported benefits and Universal Credit. You can find out more about other passported benefits in our guidance section.

Free School Lunches and Milk (Universal Credit) (England) Order 2013 (SI.No.650/2013)

HTML | PDF | Explanatory memorandum

Free School Lunches and Milk (Universal Credit) (Wales) Order 2013 (SI.No.2021/2013)

HTML | PDF

National Health Service (Exemptions from Charges, Payments and Remission of Charges) (Amendment and Transitional Provision) Regulations 2015 (SI.No.1776/2015)

HTML | PDF

Child Benefit and Guardian's Allowance: Upper Tribunal decisions

In this section you will find decisions relating to child benefit and guardian’s allowance.

Tax Credits: Codes of practice

This section gives details of HMRC Codes of Practice (COP) that are relevant for tax credits.

These are important documents issued by HMRC to say what their practice is in certain situations. They are not legally binding and can be overturned by the courts, although this has happened very rarely in practice. Below we have given details of all current codes as well as links to archived versions that are useful for dealing with older disputes and appeals.

Current Codes of Practice
Archived Codes of Practice

Current Codes of Practice

At present there is only one COP in use for tax credits, however it is extremely important as it sets out how HMRC deal with overpayments of tax credits.

You can find more information about challenging overpayments in our ‘how to deal with HMRC’ section.  

Archived Codes of Practice

The codes that appear below are no longer in use and are presented here for information purposes only. Earlier versions of COP 26 are useful when dealing with old disputes and appeals.

Previous versions of Cop 26 -

Previous versions of COP 23 are no longer available:

Cop 23 dealt with examinations, either before tax credits were paid or during the year whilst tax credits were being paid on a provisional basis. This code of practice was replaced with leaflet WTC/FS2 in April 2005 (WTC/FS2 is available from our tax credit leaflets section).

Previous versions of COP 27 are no longer available:

This covered compliance enquiries and was replaced by WTC/FS1 in April 2005. (WTC/FS1 is available from our tax credit leaflets section).

Tax Credits: Parliamentary Committees

There is a Commons Select Committee for each government department, examining three aspects: spending, policies and administration.

These departmental committees have a minimum of 11 members, who decide upon the line of inquiry and then gather written and oral evidence. These members are elected by other MPs. Findings are reported to the Commons, printed, and published on the Parliament website. The government then usually has 60 days to reply to the committee’s recommendations.

Some Select Committees have a role that crosses departmental boundaries such as the Public Accounts Committee.

Treasury Committee

The Treasury Committee, amongst other things, examines the expenditure, administration and policy of HM Treasury and HMRC. Therefore, the tax credits system gets a regular review by this Committee.

Current members of this Committee are:

Reports from the current session of Parliament can be found here. 

Reports for prior sessions can be found here.

Public Accounts Committee

The Public Accounts Committee is one of the most powerful parliamentary committees as it looks across government and is mainly concerned with value-for-money of government spending judged by economy, effectiveness and efficiency. It gets involved with tax credits primarily when the National Audit Office reviews how HMRC are running the system.

Current members of this Committee are:

Reports from the current session of Parliament can be found here.

Reports for prior sessions can be found here.

Work and Pensions Committee

The Work and Pensions Committee, amongst other things, examines the expenditure, administration and policy of the Department of Work and Pensions. Although having no standing in relation to tax credits the Committee must understand the relationship between tax credits and the welfare benefits administered by the DWP.

Current members of this Committee are:

Reports from the current session of Parliament can be found here.

Reports for prior sessions can be found here.

Public Administration and Constitutional Affairs Committee

The Public Administration and Constitutional Affairs Committee examines constitutional issues and the quality and standards of administration within the Civil Service and scrutinises the reports of the Parliamentary and Health Service Ombudsman. The Committee can therefore be involved in 'benefits' issues such as tax credits.

Current members of this Committee are:

Reports from the current session of Parliament can be found here.

Reports for prior sessions can be found here.

Committees established by Statute

From time to time various statutes provide that Committees should be established to perform specific roles, generally to protect the interests of users of government services.

Tax Credits: Archived forms, notices and checklists

Below you will find historical versions of tax credits forms, notices and checklists. These can be useful for disputes, complaints and appeals that relate to earlier years. We will continue to add materials as they become available.

SE Helpcard

TC600 claim form notes

These are the notes that accompany the TC600 claim form.

TC956 disability help sheet

The disability help sheet lists the 3 conditions for the disability element of tax credits.

TC602SN – checklist

This checklist is sent with award notices to help claimants check that the notice is correct.

TC603R renewal pack notes for annual review

TC603RD renewal pack notes for annual review and declaration

TC689

TC825 income worksheet

This form is provided by HMRC to help claimants work out their income for tax credits.

TC846 dispute tax credits overpayment

WTC/AP (TC23) – Appeal form

Tax Credits: Current Forms, notices and checklists

Below you will find copies of current HMRC forms, notices and checklists relating to tax credits.

If you would like to see previous versions of these products or forms that are no longer produced you can find them in our archived forms, notices and checklists section. You can also find a full list of forms and letters used by HMRC in the tax credits manual on the HMRC website.

HMRC have produced a Self-employed Helpcard for tax credit claimants. The Helpcard gives additional information to that contained in the claim form notes and also provides an insight into the way HMRC look at whether an activity can be classed as self-employment, what types of activity can be included as remunerative work and what kinds of records they expect claimants to keep in case they ask to see them. (Note this Helpcard has not been updated recently.)

NB - You can request printed versions of the following forms by calling the tax credits helpline on 0345 3003900 -

Tax Credits: How to deal with HMRC

This section provides guidance on a range of standard tax credits processes.

Acting on behalf of someone else: This section explains the different ways of acting on behalf of someone else including how becoming an appointee, intermediary or agent.

Navigating HMRC: This section explains what the different parts of HMRC do in relation to tax credits.

Contacting HMRC about tax credits: This section explains the different ways to contact HMRC about tax credits.

Obtaining information held by HMRC: Information held by HMRC can often be useful when writing a dispute or appeal. This section explains how to obtain that information and what to do if HMRC do not provide it within the set timescales.

Challenging Overpayments: This section outlines the various ways of challenging tax credit overpayments.

Appeals: This section explains the appeals process in tax credits.

Disputes: The most common way of challenging overpayments. This section explains how the dispute process works and what to do if a dispute fails. Challenging overpayments: There are several ways of challenging an overpayment depending on the cause of it. This section explains more about each route and the steps needed.

Dealing with mistake and fraud: This section explains more about HMRC’s powers to investigate claims including examinations and enquiries as well as the less well known discovery power.

Dealing with overpayment debt: This section explains how Debt Management and Banking recover tax credit overpayments debt.

Expected HMRC standards: HMRC have a set of standards set out in Your Charter that should be followed by tax credits staff as well as all other parts of HMRC. This section also explains help available to those with disabilities.

Making a complaint: This section explains what to do when things go wrong and includes information about escalating cases to the Adjudicator and Parliamentary Ombudsman.

Benefits and Credits Consultation Group: The BCCG group is a forum comprising of HMRC Benefits and Credits staff and representatives from organisations outside of HMRC where strategic and operational issues are discussed. This section contains the minutes from those meetings.