Transition to universal credit: Secondary Legislation: 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

Universal credit: Case law

In this section you will find the main universal credit case law.

Upper Tribunal decisions

Universal credit: Policy changes

Although Universal Credit is not expected to be rolled-out as a full national service 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.

Some of the changes are discussed in a House of Commons Research Briefing paper (January 2016).

April 2016

Benefit cap
Childcare element
Work allowances
Minimum Income floor
Digital service areas – losses and surplus earnings

April 2017

First child premium
Limiting child element to 2 children

April 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 April 2016. (July Budget 2015)

Childcare element

The childcare element, which currently allows parents to claim up to 70% of their eligible childcare costs, will increase to 85% under Universal Credit from April 2016. (March Budget 2014)

Work allowances

For awards from April 2016, the rate of work allowances will change to just 2 levels, the higher rate and the lower rate. This change also removes work allowances altogether for claimants who have no children and do not have limited capability for work. (July Budget 2015)

Minimum Income Floor

The minimum income floor, which applies to claimants who are in gainful self-employment and treats them as having earned at least this amount in the relevant assessment period, will be set against the new national living wage rate, for those aged 25 and over. Claimants aged below 25 will continue to have the MIF pegged to the relevant national minimum wage rate. (Spending Review, November 2015)

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 new surplus earnings rules will come into force in 2016 for those in digital UC areas only. 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.

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 new claims from April 2016 onwards and the standard child element rate will then apply, subject to qualification of the disabled child additions. (July Budget 2015)

Limiting the child element to 2 children

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. (July Budget 2015)

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

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: Statutory instruments

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

Main tax-free childcare regulations

The Childcare Payments Regulations 2015 (SI 522/2015)
HTML | PDF | Explanatory memorandum

The Childcare Payments (Eligibility) Regulations 2015 (SI 448/2015)
HTML | PDF | Explanatory memorandum

Up-rating and amending regulations

The Childcare Payments Act 2014 (Amendment) Regulations 2015 (SI 537/2015)
HTML | PDF | Explanatory memorandum

Tax Credits (Claims and Notifications) (Amendment) Regulations 2015 (SI 669/2015)
HTML | PDF | Explanatory memorandum

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 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

Tax Credits: Upper Tribunal decisions (chronological)

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

LITRG Summary

Tax credit cuts - update

Transition to universal credit: Secondary Legislation: 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 | PDF | Explanatory memorandum

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

HTML | PDF | Explanatory memorandum

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

HTML | PDF | Explanatory memorandum

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

HTML | PDF | Explanatory memorandum

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

HTML | PDF | Explanatory memorandum | Correction

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

HTML | PDF | Explanatory memorandum

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

HTML | PDF

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

HTML | PDF | Explanatory memorandum

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

HTML | PDF | Explanatory memorandum

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

HTML | PDF | 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 | PDF | Explanatory memorandum

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

HTML | PDF

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

HTML | PDF | Explanatory memorandum

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

HTML | PDF | Explanatory memorandum

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

HTML | PDF | Explanatory memorandum

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

HTML | PDF | Explanatory memorandum

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

HTML | PDF

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

HTML | PDF

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

HTML | PDF

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

HTML | PDF | Explanatory memorandum

Transition to universal credit: Secondary Legislation: 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

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 Committee

The Public Administration Committee examines 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 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

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 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 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.

2014-2015

2013-2014

2012-2013

2011-2012

2010-2011

2009-2010

2008-2009

2007-2008

2006-2007

2005-2006

2004-2005

2003-2004

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: 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.

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: 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.

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.

Child Benefit and Guardian's Allowance: Upper Tribunal decisions

In this section you will find decisions relating to child benefit and guardian’s allowance.

Any new cases will be highlighted in our news section.

National Minimum Wage: How much is the National Minimum Wage?

This section provides details of the national minimum wage rates (both current and past) and also provides links to national minimum wage calculators.

NB - In February 2015, the Low Pay Commission recommended a 3 per cent increase in the national minimum wage from October 2015, in addition to increases of 3.3 per cent in the youth development rate; 2.2 per cent in the 16-17 year old rate; and 2.6 per cent in the apprentice rate.

In March 2015, the Government accepted the Low Pay Commission's recommendations for 2015, but with a higher increase to the apprenticeship rate. The new rates take effect from 1 October 2015.

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 current rates from 1 October 2015 are:

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

 

Tax Credits: Statutory instruments - Consolidated

In this section you will find the main tax credit regulations consolidated by LexisNexis. You can use the menu to your left to navigate this section.

This section is split into two parts –

These consolidated versions have kindly been provided by Tolley Tax Intelligence and LexisNexis and essentially contain the tax credits part of Tolley's Yellow Tax Handbook.

They include footnotes indicating amendments to legislation; cross-references; definitions; and additional helpful material including HMRC briefs and cross-references to HMRC’s internal guidance manuals.

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.

 

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 -

 

 

 

LITRG publication about the tax credit changes

Tax Credits: HMRC Research Reports

Below are a series of research reports funded by HMRC into various parts of the tax credits system. Underneath each report is a brief description of the report from the HMRC website.

Working Tax Credit & Child Tax Credit -

This report covers finding from the latest wave of the panel study, focusing on current and future digital services, tax credit customers’ understanding of the tax credit system and tax credit customers’ experiences of the system.

The purpose of this research was to understand why tax credit customers made a ‘progress chasing’ call to the helpline despite having digital acknowledgement of their tax credits claim or renewal and to explore possible improvements.

The objectives of this study were:

Findings from the 2013 tax credits panel study looking at digital services, experience of tax credits systems and the transition to Universal Credit.

Aggregated results from the quarterly survey waves in the 2013 to 2014 financial year for each customer group with, where appropriate, comparisons with previous years.

Survey results for 2013 to 2014 - a survey of customers' experience of using HM Revenue and Customs Contact Centres.

These reports show the findings of HMRC's additional capacity trial, which saw a private sector company carry out error and fraud checks on tax credits case. The trial was intended as a ‘proof of concept’ and as such, these reports suggest that use of the private sector to undertake work in this way is indeed feasible with no clear detrimental effect on accuracy, for example we learn that quality assurance results were the same or better than HMRC but there are some points to address in terms of planning and communications.

HMRC have been testing a small-scale model for suppliers to provide more capacity using 3rd party staff working in existing HMRC call centres. The testing has now finished and this report summarises the findings of the pilot.

This report is based on findings from the Panel Study of Tax Credits and Child Benefit customers. It explores:

This report presents results from the Customer Survey 2012-2013 for each customer group, making comparisons with previous years.

Report of the HMRC Contact Centre Survey results for 2012-2013 - a survey of customers' experience of using HMRC Contact Centres.

This report explores tax credits customers' experiences of and responses to the High Risk Renewals intervention

Annex 2 to report no. 257 Tax credits customers' experiences of and responses to the High Risk Renewals intervention.

Qualitative research to explore customer understanding, opinions and concerns regarding the use of RTI and its communication

This report explores Tax Credit customers' responses to different letter styles in order to create the optimum finalisation letter.

Technical report describing the research methods used in the 2012 wave of the Panel Study of Tax Credits Customers

This report covers findings from the latest wave of the Panel Study, focusing on two areas of strategic priority to HMRC: reducing error and fraud, and the transition to Universal Credit

This piece of research covers Wave 25 of the Tax Credits communications tracking and evaluates the 2012 Renewals activity.

The survey started in October 2010 and covers all lines of business and contact centres. This report covers the results for the April 2011 to March 2012; results from October 2011 to March 2012 have been compared to results from October 2010 to March 2011 where possible.

This reports aims to test key elements of the RBS childcare process using cognitive testing methods, for customer comprehension and effectiveness in capturing all the required information and to explore customers’ views about reporting changes in circumstances, and their ability to accurately provide the required information such as income and childcare charges.

HMRC Customer Survey

HMRC believes that it can target and change customer behaviour by ensuring that all communications are clearer and more direct: this can be achieved by the use of Core Messages. HMRC commissioned this research in order to test a series of draft Core Messages for individuals in a robust qualitative manner. The aim of this research was to identify which Core Messages and message elements work and which do not, and more importantly, why.

Research carried out among deaf and hard of hearing customers to explore experiences of contacting HMRC and other large organisations. The core objectives were to examine deaf and hard of hearing customer views of HMRC

This report explores an enhanced picture of HMRC individual customer segments to ensure alignment and validation of the strategies as applied to individuals.

Linked to report 191, this report investigates customer segmentation, in particular what puts an individual into the segment they’re in. The work is a quantitative follow up of the qualitative segmentation deep-dive

Research into the way individuals in each customer segmentation group are influenced.

This report details the findings of qualitative research around information needs of customers before and during the transition from tax credits to Universal Credit. The report explores current awareness of Universal Credit; information needs of customers, including their preferences around timing and channel and highlights possible implications the change may have on tax credits claim management while customers remain in the tax credit system.

This report presents the findings of the 2011 Panel Study of Tax Credits and Child Benefit Customers. It provides information on a number of topics related to tax credits and assesses the tax credit system from the customers’ perspective, with focus on timeliness and quality: interactive voice recordings; changes to tax credits; responsibilities of tax credit customers and views on error & fraud; financial management and payment process changes and HMRC letters about undeclared changes.  

This report, from HMRC, considers whether HMRC Benefits and Credits (BC) is properly structured and aligned with its key stakeholders to maximise the flow and utilisation of all available intelligence. It also examines whether, in the emerging fight to combat large-scale fraudulent attacks, HMRC BC is being asked to deliver in a specialist area in which it has no real experience, expertise, or therefore competence. The report makes 25 recommendations.

This report presents findings from research with representatives of race, disability and gender groups in order to better understand the needs of these groups. The report provides recommendations for HMRC in relation to its four main business areas: benefits and credits; personal tax; business tax; and, enforcement and compliance.

This report looks at customers’ views about how levels of income should affect eligibility for tax credits and child benefit. The report is based on a telephone survey of tax credit and child benefit customers during the summer of 2010.

This report focuses on the risk factors of introducing errors in the tax credits process. The report is based on findings from the 2009 Panel Study of tax credits and child benefit customers.

This report focuses on people’s experiences with the renewals process of tax credits. It is based on findings from the the 2009 Panel Study of tax credits and child benefit customers, a HMRC survey carried out by the National Centre for Social Research

This report presents research findings on the childcare element of Working Tax Credit. The material is mostly drawn from the 2009 Panel Study of Tax Credits and Child Benefit Customers and covers the use of childcare by recipients of tax credits, the take-up of the childcare element, recipients' experience of managing their childcare element claim and the risk factors of getting an incorrect entitlement to the childcare element.

This report presents findings on tax credits recipients' experience and views of the Tax Credits Helpline. It is based on analysis of survey data collected as part of the Panel Study of Tax Credits and Child Benefit Customers, a HM Revenue & Customs survey carried out by the National Centre for Social Research.

This report is focused on changes in the financial situation of tax credit recipients during the period between the beginning of the economic downturn of 2008 and summer 2009. It explores how tax credits recipients managed financially during this period and whether the economic downturn led to any changes in their behaviour. Findings are presented from the Panel Study of Tax credits and Child Benefit, a HM Revenue & Customs survey carried out by the National Centre for Social Research.

Not all households who are eligible to claim tax credits actually claim them. This report draws on evidence from questions exploring why some eligible households do not claim tax credits asked on two omnibus surveys, and on the 2009 Panel Study of Tax Credits and Child Benefit Customers conducted by the National Centre for Social Research.

This report published by the Department of Education in conjunction with HMRC reports on the childcare affordability pilots that were carried out in 2009. There were 5 pilots in the programme, of which 3 were managed by HMRC and involved changes to the current tax credit system. They were designed to test whether changes to both the amount and way in which tax credits were paid with regards to childcare encouraged take-up of childcare and employment. The appendices are also available.

This research compared customers using a new version of the TC600 claim form notes and folder with customers using older versions to see what impact the new materials would have on error and contact.

The aim of this research was to help HMRC make a decision on whether to industrialise the new guidance to accompany renewals forms. The research looked at whether the new guidance made a difference to error, claimant understanding, and contact with HMRC. The conclusion of the research was that the process should be industrialised as there were no areas of concern.

This research looks at the migration of lone parents from DWP benefits to Child Tax Credit. It seeks to identify problems with the process and make improvements for later phases of migration.

A qualitative study to understand in detail what represents good or poor staff treatment, and what agents understand by a quality HMRC service, process or product.

This report contains the findings from qualitative research among members of the Chinese and Indian population which explored experiences of applying for and claiming tax credits as well as the barriers to take-up.

This report presents brings together the findings from qualitative research and a literature review designed to explore access to benefits, tax and welfare services by Black, Asian and Minority Ethnic (BAME) groups.

The report provides findings from a literature review of available evidence relevant to understanding migrant workers' experiences, expectations, and attitudes to tax credits as well as other benefits. This review was prepared to provide a context for the qualitative HMRC project 'European migrant workers' understanding and experience of the tax credits system'.

This report presents findings from a qualitative research study into the understanding of tax credit rules and responsibilities among European migrant workers and their experiences of the tax credits system.

This report presents the findings from qualitative research designed to explore issues related to the overpayment of tax credits: why some tax credits customers continue to experience overpayments year on year while other customers incur an overpayment once and then not again in subsequent years; why tax credits customers who are subject to direct recovery of an overpayment fail to respond when the Department actively attempts to contact them to recover the overpayment; how customers want HMRC to handle overpayments particularly when customers have asked HMRC to give their case special consideration due to financial reasons; how HMRC can improve the way it handles overpayments and the way it communicates with customers about overpayments; and why overpayments occur.

To support an evaluation of the impact of the Outreach through Children's Centre Initiative which aimed to deliver face-to-face HMRC adviser help and support in Children's Centres, this report details a qualitative study into the customer, adviser and Children's Centre experience of the initiative.

This report presents the findings from HMRC’s baseline survey of Children's Centres visitors to support the evaluation of the Outreach through Children's Centre Initiative to deliver information and advice about tax credits through Children's Centres.

Customers receiving tax credits have to give HMRC up-to-date details of their income, working status and hours. Customers tended to have greater difficulties giving accurate information on income, working status and hours worked when they had complex working arrangements, multiple or temporary employment, English as their second language or they had recently experienced a significant change in household composition.

A qualitative study to explore tax credits customers' awareness of their responsibility to declare a new partner to HMRC, their understanding of how HMRC defines a partnership, and the triggers and barriers associated with reporting a change in household composition.

Report of HMRC’s Customer Survey results 2008-10.

This report summarises the findings of a suite of studies to inform an evaluation of the research and development (R&D) of tax credit schemes introduced since April 2000.

HMRC's annual Customer Service Survey (CSS) 2007 results

HMRC commissioned this research to identify gaps and to explore further ways of reaching disabled customers. The primary objectives of the research were to optimise effectives of help and support services, explore and prioritise all routes of access, understand the barriers faced by disabled customers of HMRC and explore how HMRC can best support disabled customers by making services accessible, useful and desirable to use.

HMRC commissioned independent research to explore claimants' knowledge and understanding of the childcare element (CCE) of Working Tax Credit (WTC) and the role the CCE plays in decisions relating to work and childcare. Qualitative interviews were carried out with recipients of CCE. The research explored the experience of claiming CCE. The impact that CCE had on ability to work, working patterns and choice of formal over informal childcare were also considered.

HMRC commissioned independent research in 2008 to explore the views and experiences of the customers who took part in a pilot designed to help customers claiming tax credits for the first time. In total, six levels of assistance were offered on the pilot. This report outlines findings from research on two of the six levels - Level 2 where customers were invited to call HMRC back once they received the claim form and level 3 where HMRC arranged to call customers back when they had received the claim form.

In 2008, HMRC piloted a process whereby it contacted customers proactively in order to carry out a 'health check' on their award details. This report contains the findings of qualitative research HMRC commissioned as part of the evaluation of the pilot.

In August 2007, HMRC piloted the Reach out Renewals Service Improvement Module to help claimants renew their award on the telephone. HMRC commissioned independent research to find out about claimants' experience of the pilot and about their understanding of the tax credits renewal process in general.

Claimants of tax credits and Child Benefit who have a child aged 16 or over have to report changes in the young person's educational status separately to both the tax credits and Child Benefit helplines. In 2007, HMRC piloted an aligned process designed to offer claimants the opportunity to update the information on their child's education status held on the tax credits and Child Benefit records during one single telephone call. This report presents the findings of the independent qualitative research HMRC commissioned to explore claimants' experiences and views of the aligned process. Claimants' views of the alignment of other Child Benefit and tax credits processes were also explored in the study.

Claimants of tax credits and Child Benefit have to report the birth of a new baby to both the tax credits and Child Benefit helplines. In 2007, HMRC piloted an aligned process which offered claimants the opportunity to report the new birth to both the Child Benefit and tax credits systems in one telephone call. This report presents the findings of independent qualitative research HMRC commissioned to explore the experiences and views of both the aligned and non-aligned processes of reporting the birth of a new baby. The extent to which claimants would like to see an aligned service extended to other changes of circumstances was also explored in the study.

In 2007 HMRC piloted a simplified process for handling the application of tax credits claims from customers who have had household break up. This report details the findings of the qualitative research HMRC commissioned as part of the evaluation of the pilot. The research included two groups of customers, those who experienced the pilot process and those from a 'control' group whose claims were processed using the then existing process.

HMRC commissioned this research to find out more about claimants understanding of the renewals process and what factors contributed to on-time and late renewals.

Appendices are also available @ www.hmrc.gov.uk/research/report52.htm

HMRC commissioned independent research to explore the experiences and attitudes of a wide range of tax credits claimants in order to determine whether it was possible to group claimants by shared experiences and behaviours to tailor services in a more sensitive way.

HMRC commissioned independent research to investigate how willing and able tax credits recipients were to provide an estimate of their household income prior to receiving their P60s at the end of the tax year, and how accurate this estimate was.

HMRC commissioned independent research to examine the experiences and characteristics of people who receive, or are eligible to receive, the disability element of Working Tax Credit (WTC).

Working Families’ Tax Credit

The following research reports were funded by HMRC and relate to the Working Families’ Tax Credit system and the Disabled Person’s Tax Credit that existed prior to April 2003.

Tax Credits: Understanding self-employment

This guide covers some aspects of the tax credits system that are of particular importance for the self-employed.

Self employment and tax credits

To be entitled to tax credits you must be in ‘qualifying remunerative work’. For claims prior to April 2015, there was no restriction on claiming WTC for people who were self-employed, providing the work was done for payment, or in expectation of payment, and they met the remunerative work conditions. You can find out more about the qualifying remunerative work requirement in our entitlement section.

For claims from 6 April 2015 onwards, claimants must be either employed or self-employed. For tax credit purposes, HMRC define self-employed as meaning the self-employed activity is done on a commercial basis with a view to realising a profit and it must be organised and regular.

HMRC will apply this test to new claims from 6 April 2015 and gradually check existing claims to see if those claimants also meet the new test. HMRC will write out to existing claimants about the new test from July/August 2015 before they start to apply these rules to existing claims later in the year.

HMRC have clarified that new claims will be checked against the test if the claimant's previous year income from self-employment is less than the number of working hours (declared by the claimant) x standard rate of national minimum wage.

Notably, this means for example that where a claimant says they normally work say 25 hours a week even if they are only required to work 16 hours a week to qualify for working tax credits, they may be selected for a check if their earnings fall below the threshold based on the hours they declare. (You can find the national minimum wage rates in our national minimum wage section). If they are not earning that amount, then HMRC may ask the claimant to provide evidence that they meet the requirements of the new test. The evidence asked for may include things such as business plans and other business records, including any relevant insurance documents (see HMRC’s Helpcard). It is expected that not everyone whose earnings fall below the threshold will necessarily be asked to prove their self-employment is commercial with a view to realising a profit and is organised and regular. HMRC are developing their guidance on this subject and we will provide more information as it becomes available.

It is not yet clear how this test will be applied in joint claims, where there is a joint hours requirement nor whether there are tax implications where HMRC determine that the self-employment is not commercial for tax credit purposes.

HMRC issued a briefing in March 2015 about how they will apply the new rules.

We will add further information as it becomes available. HMRC’s Tax Credits Technical Manual contains some information about the new test (what is meant by ‘a commercial basis’ and ‘view to the realisation of profits’ for tax credit purposes. It should be noted that even where HMRC determine that a self-employed activity is not undertaken on a commercial basis with a view to realising a profit and is organised and regular, any taxable income from that activity will still be taken into account when assessing the tax credit award amount. This may be relevant where ctc is awarded but wtc refused or claims where the basic remunerative work conditions are met other than by the self-employment activity in question.

HMRC say that the requirement to be either employed or self-employed will not be applied so as to remove entitlement from those whose status is unclear, such as some company directors and some agency workers.

'Company directors who are not otherwise employees are covered as regulation 2(4) extends references to being 'employed' to include being the holder of an office and thus covers company directors as mentioned in your e-mail.

We can also confirm that agency workers are covered in the amended regulations. Although the definition of ‘employed’ in regulation 2 refers to being employed under a contract of service or apprenticeship, the policy intention is that the definition should be read as including agency workers engaged under a contract for services whose earnings are chargeable to income tax as employment income under Chapter 7 of Part 2 Income Tax (Earnings and Pensions) Act 2003 (ITEPA.) This reading of the ‘employed’ definition is supported by the qualification in relation to engagements falling within Chapter 8 of Part 2 (arrangements made by Personal Service Companies) where similarly individuals may not necessarily be engaged under a contract of service. Agency workers, as described in your e-mail, will therefore be considered to meet the entitlement conditions as an employed person for the qualifying remunerative work test for working tax credit.

HMRC will look to clarify this position and if necessary, put it beyond doubt in regulations at the earliest opportunity.'

Calculating working hours

Under the Working Tax Credit (Entitlement and Maximum Rates) Regulations 2002, the number of hours which a self-employed person is in qualifying remunerative work is defined as ‘the number of hours he normally performs for payment or in expectation of payment’.

The HMRC compliance manual states that any hours which will be costed to the client/customer as spent in producing/providing the individual order or service count when working out hours for self-employment. In addition, the following activities also count:

It goes on to say that:

'The amount of time being spent on these activities may also depend upon how established the business is. If a business is in its early days, it is more likely that the claimant will have to invest large amounts of time and effort in building up business contacts for little or no outcome. However, over time the amount of unproductive time spent in this way reduce considerably. If it does not, it may be an indication that the work is not genuinely remunerative.'

The compliance manual also acknowledges that particular trades may present claimants with more difficulty in calculating their working hours and guidance is given for bed and breakfast owners, artists, writers, property renovators and door to door sales people.

Self employment and income

Tax credits generally follow the tax system when it comes to calculating income from self-employment.

HMRC have produced some online guidance which explains how to calculate income from self-employment. This basically involves taking the claimant’s taxable profit and deducting various allowed items such as gift aid and pension contributions. The remaining figure is to be entered into the self-employment income box on the form. If the figure is a loss, 0 should be entered on the form.

Working sheet TC825, provided by HMRC, can be used to calculate income where trading losses, gift aid and pension contributions are involved.

Losses from self-employment

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

A trading loss in a year must be set off against the claimant’s other income for that year. Where the trader is part of a couple and a joint claim is in force, a trading loss in a year must be set off, for tax credits, not only against the trader's current year income but against the joint income of the trader and his or her partner.

Any surplus may be set off against profits of the same trade in future years for tax credits (ie the same as ICTA 1988, s 385 for income tax losses).

There is no carry-back of losses for tax credits.

Unrelieved losses of 2001-02 could be carried forward to 2003-04 and beyond for tax credits; but losses incurred in years prior to 2001-02, or in 2002-03, could not. These were effectively 'non-years' for tax credits, because the income of those years was 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 carried on upon a commercial basis and with a view to realising profits.

For example:

Walid’s trading results and Leila’s employment income for the years 2007/08 to 2010/11 are shown below, alongside their income for tax credits after taking account of Walid’s loss relief.

Year

Walid

Leila

Loss relief

TC income

2010/2011

£3,000

£13,000

(£500)

£15,500

2009/2010

(£12,000)

£11,500

(£11,500)

NIL

2008/2009

(£10,000)

£11,000

(£10,000)

£1,000

2007/2008

£15,000

£10,500

NIL

£25,500

 

Renewals and the self-employed

Tax credits claims last for a maximum of one year. After the end of each tax year, HMRC send renewal packs to claimants. The purpose of these packs is two fold. They finalise the claim for the year just ended and act as a claim for the new tax year.

In order to finalise the claim for the year just ended and ensure any new claim is as accurate as possible, HMRC ask claimants to provide their actual income for the year just ended.

These packs are generally sent out in the summer time. Many self-employed claimants will not have completed their tax returns nor had their final figures from their accountants. For this reason, HMRC allow claimants to complete their declaration forms using an estimated income.

It is important that claimants give an estimated income to HMRC by the deadline (in most cases 31 July) even if they cannot provide an actual income. If they don’t, their payments may stop. The self-employed should give an estimate even if they receive an auto-renewal and their estimated income is within the limits quoted on the renewal form. This will ensure the system knows they have used an estimated income. See the information on missing the deadline in our renewals section.

The claimant then has until the following 31 January to report their actual income. That is also the filing date for income tax self-assessment purposes.

Thus, in order to renew a claim for 2013/14, a self-employed claimant should file income figures for 2012/13 by 31 July 2013, but that may be an estimate. If so, the claimant must file final 2013/13 figures by 31 January 2013.

It is important that they give HMRC their actual income otherwise HMRC will finalise the claim for the previous tax year using the estimated figure which may not be correct. This could potentially lead to penalties and overpayments.

Protective claims

Self-employment has many benefits, but one of the downsides is that income is not necessarily consistent and regular. It may be that a business is doing well and the claimant’s income is too high to qualify for tax credits, but there is a chance that this could change at any time in the future.

Because tax credit entitlement accrues at a daily rate throughout the year, income is worked out by being spread evenly, day by day, over the whole year. This can mean that tax credits already received may have to be recalculated.

This can work to a claimant’s advantage if they start the year on a high income and finish it on a low income, especially if they have made a claim at the start of the year and been given a Nil Award. This is because their award is recomputed for the whole year to give them the tax credit entitlement which is now due. If they had not made a claim, but had delayed claiming until their income fell, they would only have been allowed three months' backdating.

A claim made in these circumstances and followed by a Nil Award is loosely termed a 'protective' claim.

For example:

Edward and Lisa have two children. Edward, on £50,000 a year, is the sole earner. On 1 October 2013 Edward is made redundant and expects to spend the rest of the tax year on contribution based jobseeker’s allowance (JSA).

If Edward and Lisa have made a ‘protective’ claim for the whole of the tax year, their initial award will have been nil. But when Edward is made redundant, and he reports his fall in income to HMRC, he receives a revised award for the whole tax year backdated to April based on an estimate of £25,000 income (£50,000 a year paid for six months) plus his contribution based JSA of £1,846.

Tax credits entitlement £1874.

If they have not made a claim, Edward and Lisa can backdate their claim by only one months from the date of the redundancy. Tax credits entitlement approx £973.

In March 2012, HMRC wrote to claimants who had made protective claims and who were receiving Nil (as well as claimants who they thought would be Nil from April following various system changes). The aim of these letters was to remove people from the system by not renewing their claims for 2012/2013 unless the claimants responded to those letters by 31 March 2012. This exercise will not be repeated for 2013/14 claims. More information can be found in our renewals section.

HMRC Self-employed Helpcard

In response to requests for more information, 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 that this helpcard has not been updated since it was first produced.

LITRG have raised concerns about the way HMRC handle claims from self-employed tax credit claimants and we have sought clarification on several points about the new definition of self-employment and other points published in the Helpcard. We will provide additional guidance around their application once we have HMRC’s response.

 

Transition to universal credit: Secondary Legislation: Main Regulations as enacted

This page shows the main Universal Credit regulations as they were enacted. We have also listed those regulations which amend the main regulations. You can find all amending regulations in our other secondary legislation section.

Universal Credit Regulations 2013 (SI.No.376/2013)

HTML | PDF | Explanatory memorandum

Amended by:

Universal Credit, Personal Independence Payment and Working-age Benefits (Claims and Payments) Regulations 2013 (SI.No.380/2013)

HTML | PDF | Explanatory memorandum

Amended by:

Universal Credit, Personal Independence Payment and Working-age Benefits (Decisions and Appeals) Regulations 2013 (SI.No.381/2013)

HTML | PDF | Explanatory memorandum

Amended by:

Social Security (Payments on Account of Benefit) Regulations 2013 (SI.No.383/2013)

HTML | PDF | Explanatory memorandum

Social Security (Overpayment and Recovery) Regulations 2013 (SI.No.384/2013)

HTML | PDF | Explanatory memorandum

Social Security (Loss of Benefit) Regulations 2013 (SI.No.385/2013)

HTML | PDF | Explanatory memorandum

Universal Credit (Transional Provisions) Regulations 2013 (SI.No.386/2013)

HTML | PDF | Explanatory memorandum

Amended by:

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

HTML | PDF | Explanatory memorandum

Amended by:

Transition to universal credit: Secondary Legislation

This section of the site explains the secondary legislation relating to Universal Credit (UC) and highlights those sections that are relevant to the transition from tax credits to UC. Most of the regulations have been enacted using powers in the Welfare Reform Act 2012, the primary legislation that sets out the framework for Universal Credit.

Main Regulations as enacted

In this section you will find the main Universal Credit regulations covering more detailed entitlement rules, appeals and transitional provision rules.

Miscellaneous and Consequential Amendment Regulations

In this section you will find all other related Universal Credit regulations.

Commencement Orders

In this section you will find all commencement orders relating to the Welfare Reform Act 2012.

Regulations relating to passported benefits

This section contains regulations relating to passported benefits that are given as a consequence of claiming Universal Credit.

Transition to universal credit: Primary Legislation

The main primary legislation relating to Universal Credit is the Welfare Reform Act 2012. This section of the site gives more detail about the provisions contained in the Act. We also highlight other primary legislation that is relevant to Universal Credit.

Legislation
Scope of the Act
Commencement of the Act
Transition from tax credits
Other primary legislation

Legislation

The Welfare Reform Act 2012 (original)

Explanatory Notes

The Welfare Reform Act 2012 was debated during the various Parliamentary stages of the Bill. You can find details of these debates and relevant documents in our resources section. You can find consolidated versions of the Act in our Tax Credits: Statutes - Consolidated section.

Note that the Act (under Section 149) only applies to England, Wales and Scotland with the exception of a small number of sections which also apply to Northern Ireland. The sections that apply to Northern Ireland are Sections 32,33,76,92,126(1) to 126(13), 127(1) to 127(9) and Part 7 (except Schedule 14). You can track the progress of the Welfare Reform Bill in Northern Ireland in our Northern Ireland section. You can find out more about devolution of welfare powers to Scotland in our Scotland section.

Sections 128 and 129 (information sharing powers between the Secretary of State and Director of Public Prosecutions) only apply to England and Wales.

Scope of the Act

As well as introducing Universal Credit, the Welfare Reform Act 2012 also makes amendments to jobseeker’s allowance, employment and support allowance, income support, tax credits, industrial injuries benefit, housing benefit and the social fund. It also provides for the abolition of council tax benefit from April 2013 (to be replaced by local council tax schemes) and sets out the framework for the introduction of the personal independence payment (PIP) to replace disability living allowance for people of working age. Various other social security changes are also implemented by the Act including the benefit cap.

You can find detailed commentary on the changes to tax credits made by the Welfare Reform Act 2012 in our tax credits policy section.

Commencement of the Act

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 come into force through a series of commencement orders.

You can find a full list of commencement orders in the secondary legislation section. The latest commencement order always contains a full list of earlier commencement order dates.

Transition from tax credits

There are several sections in the Welfare Reform Act 2012 that are relevant for the transition of claimants from tax credits to Universal Credit.

Abolition of tax credits

Section 33(1)(f) Welfare Reform Act 2012 confirms that child tax credit and working tax credit are to be abolished. As yet there is no commencement date for this sub-section. You can find out more about the latest timetable for migration in our stopping tax credits section.

Migration to Universal Credit

Section 36 and Schedule 6 Welfare Reform Act 2012 set out some basic detail about the migration from benefits that are abolished under Section 33 (including child and working tax credits). Schedule 6 gives power to create Regulations that ‘make provision for the purpose of, or in connection with, replacing existing benefits with universal credit’. The remainder of the Schedule sets out how this power might be used. Paragraphs 1(1), 2(b), 3(1)(a), 4(1)(a), 5(1), 5(2)(c), 5(2)(d), 5(3)(a) and 6 commenced on 25 February 2013 (under Commencement Order No.8)

The appointed day is defined as the day on which Section 1 of the Act comes into force.

The Schedule allows:

In relation to working tax credit and child tax credit (as well as other benefits to be abolished) provisions exist to terminate awards of tax credits, to make an award of UC without a claim to a person whose tax credits have been terminated, and to award transitional protection where the amount of UC will be less than the amount of the existing benefit.

Finally, Schedule 6 grants powers to amend the Tax Credits Act 2002 and any provision made under it as necessary. This is a wide ranging power and means that DWP and HMRC can make changes to the TCA 2002 (primary legislation) through regulations. According to the explanatory notes it ‘may be used to align certain tax credit rules more closely with universal credit in advance to facilitate the transition process’. In addition Schedule 6 allows new provisions to be made for the purposes of recovering overpaid tax credits and specifically states that overpayments of tax credits can be treated as overpayments of UC.

In summary, the Act gives DWP and HMRC a great deal of scope for dealing with the transition from tax credits (as well as other means-tested benefits) to UC both in terms of ending tax credits awards and awarding UC but also in respect of dealing with existing tax credits debt.

Transfer of functions from HMRC to DWP

Section 126 Welfare Reform Act 2012 allows any tax credit function of the Treasury or Commissioners of HMRC to be transferred to the Secretary of State by an Order in Council. This provision was included in order to remove a previous provision under the Commissioners for Revenue and Customs Act 2005 which stated that certain functions, including in relation to tax credits, could not be transferred by Order in Council.

According to the explanatory notes:

'An Order under this section may also make provision in connection with such a transfer or direction, and other provision including provision relating to the use or supply of information, combining any aspect of the payment and management of tax credits with any aspect of the administration of social security and applying social security legislation in relation to tax credits. Subsection (5)(a) allows new functions to be conferred on, or functions to be removed from, the Secretary of State, the Treasury, the HMRC Commissioners, a Northern Ireland Department or any other person. Under subsection (5)(b), the Order may authorise the Secretary of State and the HMRC Commissioners to arrange for the HMRC Commissioners to provide services to the Secretary of State in connection with tax credits.'

The section also allows:

As with the other provisions relating to tax credits, Section 126 gives DWP a wide range of powers in relation to the tax credits system.

Information sharing between HMRC and DWP

Section 127 Welfare Reform Act 2012 allows information held by HMRC (and those who provide services to HMRC) to be supplied to the Secretary of State (or to a person providing services to them) or to a Northern Ireland department (or to a person providing services to him/her) for the purposes of departmental functions. Similarly information held by the Secretary of State (and those who provide services to him/her) can be shared with HMRC for the purposes of HMRC functions.

The Section prohibits either DWP or HMRC receiving information and sharing it with any other person or body unless certain conditions are met.

Other primary legislation

Following the Summer Budget 2015, the Welfare Reform and Work Bill was introduced into Parliament. You can track progress of the Bill on the Parliament UK website.

The Bill introduces several provisions including:

You can read the bill, explanatory notes and briefing papers by following the links below:

Main Bill as introduced

Explanatory notes

Second reading briefing paper
 

Transition to universal credit: Scotland

This page sets out legislation that is relevant to welfare reform and universal credit specifically relating to Scotland. You can read more about Universal Credit and Scotland in our policy section.

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 Bill 2015 is the main piece of legislation. It is currently making its way through the Parliamentary process. The Bill sets out the powers that are being transferred to the Scottish Parliament or Scottish Ministers. Part 3 of the Bill relates to Welfare Benefits and in particular Clauses 24, 25 and 28 relate specifically to Universal Credit.

First reading (House of Commons) (28 May 2015)

Second reading (8 June 2015)

Committee stage (15 June – 6 July 2015)

1st Sitting
2nd Sitting
3rd Sitting
4th Sitting

Report stage (To be announced)

You can find the Bill, amendments and explanatory notes on the Parliament UK website.
 

Transition to universal credit: Northern Ireland

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 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 22May 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 has therefore stalled once again and Northern Ireland continue to face fines by the Treasury for the delay in passing the Bill.

You can monitor progress of the Bill on the NI Assembly website.

Link to each stage of the Bill can be found below:

Transition to universal credit: Legislation and case law

In this section of the website you will find all primary and secondary legislation relating to the transition of tax credits claimants to Universal Credit. You can use the navigation on the left or the links below to find the relevant statute, statutory instrument or explanatory notes.

Primary legislation

This section contains links to the Welfare Reform Act and the accompanying explanatory notes.

Secondary Legislation

This section contains secondary legislation including the main Universal Credit Regulations, consequential and miscellaneous amendments and commencement orders. You will also find legislation related to passported benefits and Universal Credit.

Northern Ireland

In this section you will find information about the progress of the Welfare Reform Bill through the Northern Ireland Assembly.

Scotland

In this section you will legislation relating to devolution of welfare powers to Scotland.

Case law

In this section you will find the main universal credit case law.

Tax Credits: Future policy

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

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.

Changes from April 2016

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.

In Budget 2015, the Chancellor re-announced additional changes to tighten the rules for self-employed workers claiming working tax credit, whereby they must register with HMRC for self-assessment and provide their unique taxpayer reference number with their working tax credit claim, This change was initially set for introduction in April 2015, however following Budget 2015 it has been delayed and will now be introduced in April 2016.

In the Summer Budget, 8 July 2015, the Chancellor announced sweeping cuts to the tax credits system. Some of the changes will be introduced from April 2016 with the remainder following from April 2017.

Increase in taper rate to 48% and decrease in the income threshold to £3,850 (April 2016)

These two changes together will affect many existing claimants and mean that they are likely see a fall in tax credits.

When calculating tax credits, there are two ‘thresholds’ that are important. Above these thresholds, WTC and CTC amounts are reduced as income rises.

From April 2016, the taper rate will increase to 48% and the threshold for WTC only and WTC/CTC cases will reduce to £3,850. Although not directly announced, these two changes, combined with the freeze on some elements of tax credits, mean that the CTC only threshold will also reduce as a consequence down to £12,125.

Broadly, this means that people with incomes above the new thresholds will see their tax credits reduced lower down the income scale and at a much faster rate.

Krysten is a lone parent with two children. She works 30 hours a week and claims tax credits including some help with childcare costs of £150 a week. Her salary is £18,000. Her 2015/16 tax credits award is around £11,600. Krysten will see that reduced by £2,050 in 2016/17.

This is because under the current system, Krysten’s tax credits do not start to reduce until her income goes above £6,420 and when it does she loses 41p of tax credits (from her maximum possible amount) for each £1 of income she has above £6,420. However from April 2016, Krysten will see her tax credits start to reduce when her income goes above £3,850 and when it does she loses 48p of tax credits for each £1 of income she has above £3,850 which is much faster than the current rates.

Some people will not be affected by these two changes. Anyone who has income below the new thresholds or who is in receipt of income support, income based-jobseeker’s allowance, income-related employment and support allowance or pension credit will continue to receive maximum tax credits based on their circumstances (although they will be affected by the freeze to some elements explained above).

Jason is a lone parent who is looking for work. He has 1 child and receives income-based jobseeker’s allowance. His tax credits for 2015/16 are £3,325. His tax credits in 2016/17 will remain as £3,325 if he continues to receive IBJSA.

Freeze on WTC and CTC elements (April 2016)

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 (April 2016) 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.

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.

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)

The family element (set at £545) will not be available to those starting a family from April 2017, although there appear to be some proposed exceptions and we will provide updates once more details are known.

Example

Christopher and Diana have 2 children 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.

Other effects

Tax credits can act as a passport to other benefits such as free school meals, help with health costs. Many of these passported benefits have thresholds that have been set close to the CTC only threshold. It is not yet clear whether there will be any changes to those thresholds.

If a tax credit claimant has an overpayment from a previous year, it can be recovered from their ongoing award at a rate of 10% or 25%. The 10% rate is available for those who are in receipt of ‘maximum tax credits’. As a direct consequence of the Summer Budget announcement, some people who were on the 10% recovery rate will find not only that their award has reduced because of the changes to the taper rate and thresholds, but also that they move into the 25% recovery band as they are no long receiving maximum tax credits.

The Summer Budget 2015 also announced a ‘living wage’ premium for those aged 25 and over which would see the current National Minimum Wage topped up to £7.20 an hour from April 2016. For tax credit claimants, any rise in their gross salary will see a reduction to tax credits of 48p for each £1 of salary. However, because of the income disregard in tax credits, claimants may not see a reduction in tax credits until the following tax year. Any loss of tax credits may be slightly offset by the extra take home pay and increases to the tax personal allowance.

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.

Tax credits are due to be phased out over the next few years and replaced by the new Universal Credit. Although the Government promised that no-one would be worse off at the point they are moved to Universal Credit, this only applies to making sure they are not worse off compared to whatever tax credits they are receiving at the time. The cuts to tax credits announced in the Summer Budget mean that people are likely to be on lower levels of tax credits at the point they move across to Universal Credit.

Summer Budget 2015

Tax credit on-line renewals - HMRC makes the process easier

Tax-Free Childcare scheme delayed until early 2017

HMRC sending SMS text messages to contact tax credit claimants

National Minimum Wage: Government reports

Each year the Government submits evidence on the national minimum wage to the Low Pay Commission.

The evidence is available in two parts - economic and non-economic evidence.

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003 

Child Trust Fund: Statutory instruments

In this section you will find the original versions of child trust fund (CTF) regulations in date order -

Tax Credits: Renewals

Each tax credit claim lasts for a maximum of one tax year. A new claim must be made each year, however it is not necessary to fill in a new TC600 claim form each year.

HMRC will normally send a set of papers (normally between April and June each year), and so long as the information requested is given within the time limits requested, the legislation treats the claim as having being made for the new tax year in most cases. The information below about the renewals process has been provided by the Low Incomes Tax Reform Group. Use the links below to navigate this section.

An outline of the process
The renewals process
The renewal packs
Auto-renewals - current
Auto-renewals - historic
Reply required
Online renewals
Provisional payments
Missing the deadline
Withdrawing from the system
Penalties
Renewals and Universal Credit

Outline of the process

For the majority of claimants the process aims to do two things: to reconcile entitlement for the year just gone (the current year) with what has been paid; and to renew the tax credit claim for the coming year.

Although the process is often referred to as the ‘renewals process’, not everyone will want or need to renew their claim. Some people, for example where a joint claim ended in the tax year just ended, will need to finalise the old claim but will not be making a new claim. In this case they are not renewing merely finalising the old claim.

HMRC have information about the process on GOV.UK aimed at claimants.

The renewals process

The claim for the year just ended (current year) was based initially on the claimant’s circumstances for that year, and income for the year before (the previous year). One of the functions of the renewal process is to establish their income for the current year, and to review any changes of personal circumstances during it, so that their final entitlement for that year can be ascertained.

Having established their income for the current year, it is used, together with their latest set of personal circumstances, to set the initial award for the coming year.

So we have a three-year rolling programme. The initial claim for 2014/15 was based on circumstances current in 2014/15 and income for 2013/14. The renewal process for 2014/15 compares the actual income of 2014/15 with that for 2013/14 to fix the final entitlement for 2014/15, and uses the income figure for 2014/15 to fix the initial award for 2015/16.

The comparison works like this for finalising 2014/2015 claims (concentrating only on income and leaving aside changes in entitlement which are due to changes in circumstances):

So an initial tax credits award is made in the year of payment, then revised at the end of the year to produce in many cases an underpayment or overpayment.

It should be noted that in 2006/2007 and earlier years, the disregard for rises in income was only £2,500 instead of £25,000. See our ‘understanding the disregards’ section for a fuller analysis of the consequences of this change from £2,500 to £25,000. From 6 April 2011 the disregard decreased to £10,000 and further decreased to £5,000 from 6 April 2013.

The decrease from £10,000 to £5,000 did not impact on the renewals cycle which finalised 2012/13 claims, but it did have an impact when HMRC calculated initial claims for 2013/14 and the £5,000 disregard will apply when HMRC finalise claims from 2013/14 and later.

The renewal packs

Claimants will either receive:

  1. A TC603R auto-renewal form; or
  2. A TC603RR plus TC603D (reply required)

plus guidance notes (TC603R or TC603RD).

Auto-renewals - Current

Previously if the claimant was in receipt of the full CTC family element only, or if they had a nil award because their income was too high to receive any payments, HMRC sent them a TC603R only. If their personal circumstances had not changed and their income was within a prescribed range so that their award would remain the same, nothing further needed to be done. HMRC would automatically finalise the claim for the year just ended and set up a new claim for the current year. These are what HMRC describe as auto-renewal cases.

Due to changes to the system, particularly the removal of the second income threshold, the number of people getting an auto-renewal fell. However, since 2013/14 many more people are being moved from the reply required group to the auto-renewal group as a result of HMRC having access to Real Time Information data from employers and occupational pension providers.

The following people should receive auto-renewal notices for 2014/15 renewals cycle:

All other claimants should be reply-required cases.

Even though some auto-renewal forms will show income figures provided by an employer or occupational pension provider, it is important that claimants still check to see whether they have other income or can make any deductions from the figure provided by their employer as income for tax credits purposes is not the same as income for tax purposes. See our RTI and tax credits section for more detailed information on what should be checked.

Auto-renewals - historic

In December 2010, in an effort to reduce costs, HMRC introduced legislation which enables them not to automatically renew people on nil awards (or who will be on nil awards from the following 6 April) unless the claimant tells HMRC that they wish to renew their claim.

At the start of the 2011-2012 tax year, HMRC sent letters (TC1015) to anyone on a nil award at the time.

These letters were a ‘relevant notification’ that HMRC would no longer automatically renew their claim unless, within 30 days, the claimant makes a ‘relevant request’. If the claimant did not make a relevant request (ie write to or phone HMRC to say they wished to renew their claims for 2011/2012), their claim lapsed at the end of the 2010/2011 tax year.

HMRC considered the exercise a success and decided to run a similar exercise for people who were Nil award in 2011/2012 or who HMRC thought would be a Nil award from April 2012 due to the various budget changes. HMRC once again sent letters to claimants in February 2012 stating that if they did not contact HMRC by 31 March 2012, their claim for 2012-2013 would not be renewed. There were a number of issues with this letter.

We do occasionally speak to claimants who want to withdraw from the tax credit system (see further the section below on withdrawing from the system) and from that point of view these initiatives may have seemed welcome. However, it is very important that people are fully aware of the consequences of leaving the system and what they could lose by doing so as once the 30 day ‘relevant request’ window passes HMRC cannot renew the claim. Instead a fresh claim would need to be made.

In particular there are two groups of people who may lose out by not renewing:

Failure to respond to the letter by 31 March 2012 meant that HMRC, under the legislation, did not (and cannot after the 30 day period has expired) renew the claim automatically and a fresh claim will need to be submitted in the future. We understand that HMRC allowed some claimants slightly longer than 30 days to respond depending on when their letter was sent.

The other issue with the letter that HMRC sent out in March 2012 was the income limits stated in the letter were misleading. The letter stated that the income limit for CTC was £26,000 for 2012-2013, however this only applied if the claimant was part of a couple with one child. The limit for people with more than one child, qualification for any of the disability elements or who claim help with childcare costs was significantly higher. 

Concerns were raised by various organisations, including Low Incomes Tax Reform Group, that claimants would allow their claim to lapse based on incorrect information and that they would not ask HMRC to renew their claim even though they may have known their circumstances would change during 2012-2013 (e.g due to the birth of a second child) or they thought it might change. This is because they believed their income to be over the £26,000 limit. More information can be found on our blog.

If advisers come across claimants during 2015/16 who allowed their claim to lapse as a result of the letter and whose circumstances changed meaning they would have received payment for 2012-2013 and 2013-2104, they should submit a fresh claim as soon as possible and request the maximum 31 days backdating. A complaint letter should also be sent to HMRC with a request for compensation equal to any tax credits and passported benefits that have been lost as a result of HMRC’s misleading information.

HMRC did not run this exercise for the 2013/14 or 2014/15 tax years. 

Reply required

If the claimant is not an auto-renewal case, they must reply to the TC603RR and complete and return the TC603D declaration form with details of their income for the 'current year' (the tax year just ended). This can be done by;

Since April 2014, HMRC have had access to real time information income data from employers and occupational pension providers. They will replay this information on the TC603RR form. It is important that claimants still check to see whether they have other income or can make any deductions from the figure provided by their employer as income for tax credits purposes is not the same as income for tax purposes. See our RTI and tax credits section for more detailed information on what should be checked.

If they have made more than one claim during the current year, eg because they started the year as a single claimant then became a joint claimant with a new partner, they must complete a set of forms for each claim, even if they each show the same information.

Prior to 6 April 2010, if a couple separated during the renewals period, and one member of the couple did not complete their forms an overpayment would occur of payments between 6 April and the date they separated. This was the case even if one partner completed their renewal forms.

But legislation, effective from 6 April 2010, allows one member of a couple to finalise the previous year’s claim and renew the claim for the period following 6 April – separation. If only one member responds, the award will be based on the information provided which may not be accurate. HMRC have advised that, where possible, it is still recommended that both members send back their forms, although failure to do so will no longer result in an overpayment providing one partner has done so.

It is vital to complete and return renewal papers when required to do so. Dissatisfaction with the system has led some people to deliberately refrain from renewing, with the result that payments made to them from the start of the new tax year are treated as overpayments. It is important that the claimant checks the personal circumstances listed and inform HMRC if any of them have changed.

Online renewals

In April 2014, HMRC introduced the facility to renew tax credit claims online via the GOV.UK website. This online system was initially limited to those who received an annual declaration (reply-required cases) and had no changes to report. HMRC extended the service in July 2014 to also include renewals from claimants who had changes or corrections to report.

For 2014/2015 renewals, HMRC are planning to extend their online renewal option to cover more claimants, both with and without changes to report.

The expectation is that most tax credit claimants who want to use this option will need to confirm their on-line identify via the new GOV.UK Verify security system. The Verify system is still being developed, tested and changed. It uses third party companies (such as Experian) to confirm a person’s identity by using various types of data such as address details, financial information, passport details, driving licence details. Users will be asked questions based on the data. They will also be asked to enter a code received on their mobile phone. appears that claimants who do not have a mobile phone will not be able to complete the verify process.

Once identity is confirmed, the company notify HMRC and you set up your on-line account (including security passwords ) and you can access the Government systems which are then linked to Verify.

A person’s identity is verified by the third party company each time they want to use a service. The person can choose which third party company they want to use. As of April 2014, there are three companies – Experian, Digidentity and the Post Office. More will be added over time. There is no account with Government.

You can read more about the Verify service on the GOV.UK website

There are a number of concerns about the verify process, especially for some tax credit claimants who may not have the documents needed to verify themselves (a passport or driving licence) or who do not have a mobile phone. HMRC have an alternative process in place for people who wish to renew online during 2015 renewals but who cannot use the verify system. The alternative process was initially offered directly with HMRC but, from June 2015, is run as a secondary level identity assurance programme through the Government Digital Service. It offers a Basic Identity Account which can be used to access tax credits services but unlike the full Verified Identity Account (through Verify) cannot be used to access other Government services on-line. Claimants who wish to use this alternative secondary option will need to follow the first few steps of the on-line renewal instructions on GOV.UK taking them through the initial GOV.UK Verify information pages

At any point they fail to complete the Verify service, they should be automatically provided with an option to select Basic Identity Account to continue with their on-line identification and renewal.

To renew online, claimants will need to confirm their identity through GOV.UK Verify by completing the steps for either the full Verified Identity Account or the Basic Identity Account and have their:

HMRC also plan to repeat the option to renew by telephone using the automated option, where claimants have no changes to report. The option is available as part of the automated messaging service which is played to callers using the tax credits helpline.

Provisional payments

So long as renewal papers are returned by the deadlines shown below, claims are treated as made for the new tax year and are backdated to 6 April.

While the renewal process is going on, HMRC will continue pay on the basis of the last known income and circumstances for the tax year just ended. These run-on payments are known technically as provisional payments.

So provisional payments for 2015/16 reflect the income and circumstances last reported in 2014/15. It is important to complete the renewal forms quickly so as to re-establish the award for 2015/16 on the basis of the latest information and to get the rates and thresholds for that year.

When the renewal process is complete, provisional payments are replaced by payments under an initial award for the new tax year. See the information in the claims starting section.

The deadline for return of renewal papers for 2014/15 is the date specified on the renewal papers (in most cases this will be 31 July 2015). This is referred to by HMRC as the ‘first specified date’.

In 2004/05 the deadline was 30 September following the end of the year; in 2005/06 it was brought forward to 31 August 2006; it was then brought forward a further month in 2006/07 to 31 July. The bringing forward of the renewal deadline was part of a series of measures intended to reduce the volume of overpayment in the system.

If the claimant cannot supply firm details of their 2014/15 income by the deadline stated on the renewal papers (in most cases 31 July 2015), for example if they are self-employed and are still waiting for their accounts to be finalised, an estimate is acceptable.

The important thing is to return an estimate by that date. If an estimate is given, it must be confirmed, or actual figures supplied, by 31 January 2016 (which is also the online filing deadline for self-assessment).

Missing the deadline

If the claimant does not renew (either by sending the papers to HMRC or renewing via the telephone or on-line) by 31 July 2015 (or the date on their renewal papers if different) then the award may be terminated.

Failure to renew means that no new claim is made for 2015/16, consequently any provisional payments received from April 2015 will become overpaid and HMRC will seek to recover them via direct recovery.

In addition any other overpayments that were being recovered from their ongoing award will switch to direct recovery when their award is terminated for non-renewal.

If HMRC terminate the award for failing to renew (and consequently stop all payments) regulations allow the claim to be restored providing the claimant renews within 30 days from the date on the notice telling them that their payments are to be stopped (technically called the Statement of Account). Note that for the renewals cycle relating to 2009/10, 2010/11, 2011/12, 2012/13 and 2013/14, HMRC extended the 30 days to 60 days due to problems that claimants had using the tax credits helpline to renew. HMRC have not yet confirmed the position for 2014/15.

Outside of this 30 day period, the claim can only be restored if there was 'good cause' for failing to renew, so long as the renewal papers are returned by the later deadline of 31 January 2016.

In both cases, restoration means that HMRC treat the claim as being made from 6 April 2015.

If the claim cannot be restored (because there was no good cause or if good cause was present the renewal was not done before the 31st January), all provisional payments paid from 6 April 2015 will be treated as overpaid, and the claimant will have to make a fresh claim which can only be backdated a maximum of 31 days.

As mentioned above, it is vital to return renewal papers when required to do so. Claimants should particularly beware of using non-renewal as a tool to pull out of the tax credits system. The consequence of doing so is that their entitlement will cease as from the start of the tax year 2015/16, and therefore any payments received in that year to the date of termination will become overpaid. In addition you will no longer be able to repay any overpayment by reduction of your ongoing award, as there will be no ongoing award to reduce. Instead recovery will be commenced directly.

To summarise:

Withdrawing from the system

As noted above, dissatisfaction with the system has led some claimants to refrain from completing their renewal papers. This has also happened where people have had a change in circumstances and thought they were no longer entitled to tax credits. The consequence of not returning the forms is set out above, and generally means that all payments between April and the date HMRC terminate the claim (for failure to complete the renewals process) become overpaid.

In April 2010, HMRC introduced rules to allow claimants to withdraw from the system by only finalising their previous year claim and not renewing their claim for the current tax year. But be aware that these rules need to be followed carefully as the timing of the notification to withdraw will determine whether there is a consequential overpayment.

NB - please not however that the above link has been archived by HMRC and has no therefore been updated since May 2014.

Penalties

In addition to the claw back of all provisional payments made to date, there may be financial penalties for not responding to a renewal notice, or for giving the wrong information in response to it. More information about penalties can be found in our 'penalties and interest' section.

Renewals and Universal Credit

Universal Credit, when fully implemented, will replace working tax credit and child tax credit. Claimants will be transitioned from tax credits to UC over the next few years. The finalisation process for claimants who are moving to UC is different to the process for people remaining in tax credits. You can find out more information about this in our dedicated transition to UC section.

Tax credits on-line renewals UPDATE

HMRC tax credits on line renewal service

Child Benefit and Guardian’s Allowance: Rates and tables

Child benefit

Child benefit rates are usually updated yearly in April. The rates are weekly amounts.

From 6 April 2011, the rates will stay the same for three years (2011/2012, 2012/2013 and 2013/2014).

 

Only / eldest child or
qualifying young person

Any subsequent child
or qualifying young person

2015/2016

£20.70

£13.70

2014/2015

£20.50

£13.55

2013/2014

£20.30

£13.40

2012/2013

£20.30

£13.40

2011/2012

£20.30

£13.40

2010/2011

£20.30

£13.40

2009/2010

£20.00

£13.20

2008/2009

£18.80/£20.00*

£12.55/£13.20*

2007/2008

£18.10

£12.10

2006/2007

£17.45

£11.70

2005/2006

£17.00

£11.40

2004/2005

£16.50

£11.05

* - from 5 January 2009.

Guardian's allowance

The weekly rate of guardian's allowance is per child and in addition to child benefit.

 

 Weekly rate

2015/2016

£16.55

2014/2015

£16.35

2013/2014

£15.90

2012/2013

£15.55*

2011/2012

£14.75*

2010/2011

£14.30

2009/2010

£14.10

2008/2009

£13.45

2007/2008

£12.95

2006/2007

£12.50

2005/2006

£12.20

2004/2005

£11.85

*- the increase in the 2011/12 and 2012/2013 rate of guardian's allowance does not apply to payments being made to a person living abroad. See SI.No.1039/2011 and SI.No.845/2012 for details.
 

 

Child Benefit and Guardian’s Allowance: Forms, notices and checklists

Below you will find copies of current HMRC forms, notices and checklists relating to child benefit.

This is an on-line version of the child benefit claim form. It can be completed on screen and printed out. It will still need to be posted to the child benefit office, at the address printed on the form. You must have Adobe Reader version 8.0 or later installed on your computer before you can view and print the child benefit claim form. You can find further information on what to do before you start and what else to send with the child benefit claim form on the GOV.Uk website.

If your client’s preferred language is welsh, they can print out and then complete the welsh version of the claim form - CH2 (Welsh) (April 2015)

This form is used as an extension to the child benefit claim form because the paper version has only enough space for two children/young persons. Use this form if your client wants to claim for three or more children/young persons. You do not need this form if your client is completing the online claim form, as that allows an unlimited number of children/young persons to be included. This form can not be used in isolation to add additional children/young persons to an existing child benefit award, in those circumstances a fresh claim for the additional child/young person should be made.

The latest version of the CH2 notes. The notes show each page of the claim form and include information about how to complete it. It is advisable to keep a copy of the notes that were issued with any claim form which is submitted. If your client’s preferred language is welsh, they view the welsh version of the claim form notes - CH2 Notes (Welsh) (April 2015)

This form is used to apply for an extension of child benefit, for up to 20 weeks, for young people who have left full-time non advanced education or approved training

This appeal form can be used to submit an appeal. Normally, an appeal has to be made within one month of the decision. See our section on submitting an appeal for more information.

This form is usually sent to the claimant by the child benefit office. It is used to withdraw or continue with an appeal following an explanation of the decision from the child benefit office

This is the authority form that must be used by intermediaries who wish to act on behalf of child benefit claimants. It is generally used by intermediaries such as Citizens Advice, Local Authority welfare rights and other voluntary advice agencies. You can find out more about the different ways of representing child benefit claimants in the acting on behalf of someone else section.

This form is used if a child/young person is to be looked after by a local authority or Health and Social Services Board or Trust for 8 consecutive weeks or more. This form is to provide information so that entitlement to child benefit can be properly decided. The form is completed jointly by the child benefit claimant and also the social worker, locum, duty social worker or clerk.

See also -

Child Benefit and Guardian’s allowance: Current leaflets

This section gives details of all leaflets produced by HMRC in relation to child benefit and guardian’s allowance.

The leaflets listed below are all current versions, archived versions of the leaflets will be coming soon.

Child Benefit

These notes provide information about getting child benefit for young people aged 16 or over who are in full time non advanced education or approved training. You can find further information in our qualifying for child benefit section.

These notes provide details about the child benefit rules if your client is coming to the UK from abroad or leaving the UK either permanently or temporarily.

This leaflet provides information on how and when to complain to the child benefit office. You can further information in our making a complaint section.

This leaflet provides information for child benefit claimants whose children/young persons are being looked after by the local authority or Health and Social Services Board or Trust. It includes information on when child benefit stops and when it can be paid including any periods that the child/young person spends at home.

These notes provide social workers with details of the special rules about child benefit for children who are looked after by a local authority or Health and Social Services Board or Trust.

Guardian’s Allowance

HMRC do not produce any separate leaflets about guardian’s allowance as where relevant, the information is included in leaflets on child benefit.

 

Child Benefit and Guardian’s Allowance: Qualifying for child benefit and guardian’s allowance

This part of the website provides information about qualifying for child benefit and guardian’s allowance.

There is a range of information about qualifying for both benefits on the GOV.UK website. We have provided links to the relevant information based on the claimant’s circumstances

Child Benefit
Guardian’s Allowance

Child Benefit

Basic eligibility criteria for child benefit
Children over 16
Fostering a child
Adopting and child benefit
Children living with someone else
Children in care
Children in hospital or residential care
Living or working abroad
Newly arrived in the UK

If you need more detailed information, the following sections of the child benefit and guardian’s allowance manual may be useful.

Responsibility for a child or qualifying young person

Entitlement to child benefit requires the claimant to be ‘responsible’ for a child or young person. This part of the manual explains what ‘responsible’ means in the context of entitlement along with an explanation of related concepts such as ‘living with’, ‘prescribed residential accommodation’ and how contributions to the cost of a child are relevant to entitlement.

Prescribed conditions for a child or qualifying young person

In order to claim child benefit, the claimant must be responsible for a child or young person. This part of the manual explains what counts as a child and ‘qualifying young person’.

Exclusions from entitlement and priority between persons

In some situations, child benefit cannot be claimed. This part of the manual explains those exclusions. Sometimes more than one person claims child benefit for the same child or young person. This part of the manual explains who takes priority in such situations.

Entitlement after the death of a child

This part of the manual explains what happens to child benefit if a child or young person dies.

Residence and Immigration

Child benefit legislation includes certain requirements relating to residency and immigration status. This part of the manual explains those requirements.

Guardian’s Allowance

Qualifying for guardian’s allowance

If you need further information about who is entitled to guardian’s allowance, the following sections of the HMRC manuals will be useful.

General conditions of entitlement
Adopted children and qualifying young persons
Illegitimate children and qualifying young persons
Surviving parent in prison
Residence and entitlement
Whereabouts of the surviving parent

 

Child Benefit and Guardian’s Allowance: Payment information

Frequency

Child benefit payments are usually paid every four weeks on a Monday or Tuesday. In some cases child benefit may be paid weekly.

If your client is already getting child benefit, every four weeks, you can check the date of their next payment by using HMRC’s on-line tool. You will need to know your clients child benefit reference number.

Guardian's Allowance is paid with child benefit payments, and is usually paid every four weeks directly into any bank, building society or National Savings and Investment (NS&I) account that accepts Direct Payment. HMRC have information on their website about the types of account that they will pay child benefit into.

Bank Holidays

If your client’s payment is due to be paid on a bank holiday the payment will be made early, usually the last working day before the bank holiday. The GOV.UK website provides a table so you can check if your client’s payments will be affected by specific bank holiday dates and, if appropriate, the earlier date when they should receive the payment.

Child Benefit and Guardian's Allowance: Making a complaint

As HMRC administer child benefit and guardian’s allowance, complaints follow their normal complaints process which is outlined briefly on the GOV.UK website and in their complaints leaflet C/FS1

A complaint is generally about the way your client has been treated, unlike an appeal which is against a decision which has been made on a child benefit claim. A complaint may take the form of an unreasonable delay, a mistake which could have been avoided, poor or misleading advice, the use of discretion, inappropriate staff behavior or more generally how your client has been treated. Your client may be able to claim back reasonable costs caused by the child benefit office's mistakes such as postage, phone calls and professional fees. They may also be entitled to a redress payment for things such as worry or distress. Full details can be found in HMRC’s Redress Guidance.

In the first instance, complaints should be made to the child benefit office. Your client can do this in a number of ways:

Child Benefit Office
PO Box 1
Newcastle Upon Tyne
NE88 1AA

The Guardian's Allowance Unit
Child Benefit Office
PO Box 1
Newcastle upon Tyne
NE88 1AA

If the reply received from HMRC is still not satisfactory, your client can ask them to look at the complaint again. This is often called a ‘Tier 2’ complaint and is usually dealt with by the child benefit office Director's Complaints Team. You contact them in the same way as above but make sure that you address the complaint to the Director of child benefit or the Director’s Complaint Team.

If the response from the Tier 2 complaint is still not satisfactory, a further complaint can be made to the Adjudicator’s Office and onwards to the Parliamentary Ombudsman via your client's MP. More information about the escalation routes can be found in the equivalent tax credits sections.

Child Benefit and Guardian’s Allowance: Making a claim

This section of the website explains how to make a claim for child benefit and guardian’s allowance.

Child Benefit

Claims for both child benefit and guardian’s allowance

Guardian’s Allowance

Child Benefit

Claiming child benefit

Form CH2 is the child benefit claim form. There are 3 main ways to obtain a claim form:

The form is also available in Welsh.

The completed claim form should be sent to:

Child Benefit Office (Washington)
Freepost NEA 10463
PO Box 133
Washington
NE38 7BR

HMRC has produced guidance to help claimants fill in the claim form. The guidance goes through the claim form page by page.

More detailed information for advisers about making a claim is available in the HMRC child benefit and guardian’s allowance manual.

When to claim

Child Benefit should be claimed within three months of becoming entitled to it. Late claims can only be backdated up to three months.

HMRC recommend that a claim should be made as soon as:

Backdating

Claims can normally only be backdated up to 3 months, and there is no need to show why the claim was late.

There are special rules for backdating for refugees. Providing the claim is made within three months of being awarded refugee status, the claim can be backdated to the date the person first claimed asylum. The HMRC child benefit and guardian’s allowance manual explains these rules in full.

Documentation and evidence

HMRC generally require an original birth or adoption certification along with a completed claim form. HMRC advise claimants to send the form anyway, even if they don’t have the form.

One exception to this requirement is if someone has claimed child benefit for the same child previously.

HMRC have produced guidance for claimants about birth and adoption certificates.

Claims for both child benefit and guardian’s allowance

Under child benefit and guardian’s allowance legislation, where a person who claims child benefit also appears to have entitlement to guardian’s allowance for the same child or qualifying young person, the child benefit claim may be treated alternatively or additionally as a claim for guardian’s allowance.

Where a person who claims guardian’s allowance also appears to have entitlement to child benefit for the same child or qualifying young person, the guardian’s allowance claim may be treated alternatively or additionally as a claim for child benefit.

Guardian’s Allowance

Claiming guardian’s allowance

Claims for guardian’s allowance are to be made on form BG1. This form can be downloaded from the HMRC website or a paper copy can be obtained from the guardian’s allowance unit (0845 302 1464).

A set of notes accompany the claim form which help claimants complete the form.

The form should be sent to:

The Guardian's Allowance Unit
Child Benefit Office
PO Box 1
Newcastle upon Tyne
NE88 1AA

More detailed technical information for advisers about claiming guardian’s allowance is available in the HMRC child benefit and guardian’s allowance manual.

When to claim

The HMRC website offers the following advice on when to claim:

‘It is best to make your claim straight away to avoid losing money. You should claim Guardian's Allowance as soon as the child involved comes to live with you.

Try to claim both Guardian's Allowance and Child Benefit at the same time so that the Guardian's Allowance Unit can deal with them both together. If you can't apply for Guardian's Allowance straight away, make sure you apply for Child Benefit.’

Backdating

Guardian’s allowance claims can generally only be backdated three months. As with child benefit above, special rules apply for refugees. In some cases, it can be backdated further if a claim for child benefit has also been made.

Documentation and evidence

HMRC ask for original copies of the child’s birth certificate and the original death certificate of the parent (or parents).

Child Benefit and Guardian's Allowance: Intermediaries

This section of the site outlines how to become an intermediary in respect of child benefit and guardian’s allowance and the processes HMRC have in place that can help intermediaries.

The processes for child benefit are the same as for tax credit’s intermediaries, using joint forms and a shared support team – the Tax Credit Office External Relations Team.

What is an intermediary?

The HMRC tax credits website defines an intermediary as one of the following:

It also includes other organisations such as welfare rights workers within Local Authorities.

What can an intermediary do?

According to HMRC, how to act for your child benefit client, an intermediary can:

They cannot receive the payment on behalf of a child benefit claimant (unless they are also an appointee) and they cannot get any award notices or other decision notices (unless they are also an appointee or an agent).

How to become an intermediary

HMRC authorise intermediaries using form TC689.

If it is a joint claim, both claimants should sign the form. For joint claims that have ended, it is sufficient for only your client to sign the form (without the other partner). In such cases HMRC should give all information about the previous joint claim and should not require a signature from the second partner.

To avoid delay in setting up the authority, you must ensure that all questions are completed and that signature(s) have been obtained. HMRC will not process incomplete TC689’s.

Once logged on the system, the TC689 lasts for 12 months unless a different end date is specified.

If you deal with tax credits on a regular basis you may wish to become a registered intermediary which will allow you to submit the TC689 electronically. See below for details of how to do this.

Registering as an intermediary organisation

HMRC have a process in place to allow organisations who deal with child benefit on a regular basis to become an intermediary organisation.

To do this your organisation will need to register with the Intermediaries, Agents and Appointees Team by completing form TC1136 and posting it to:

HMRC Benefits and Credits
Intermediaries, Agents and Appointees Team
PRESTON
PR1 4AT

Once authorised, you will be given a reference number for your organisation which can be used on the TC689 form. In addition, in cases where a TC689 is needed quickly, authorisations for child benefit can be submitted electronically using the on-line KANA version of TC689 (KANA). Please note that the on-line TC689 form doesn’t have the customer(s) signature so you must keep an additional copy signed by the customer(s) as HMRC may request to see the original at any time as part of their assurance checks. HMRC will only accept a TC689 electronically from registered organisations.

Intermediaries helpline

There is an Intermediaries helpline which is separate from the main helpline and generally answered by knowledgeable HMRC staff. In many instances they will arrange for you to get a call-back from the processing team dealing with the claim (usually the same day).

The phone number is 0300 200 3102 and lines are open 9am to 5pm, Monday to Friday.

Child Benefit and Guardian's Allowance: Help with disabilities

There are many ways of contacting HMRC which are outlined in the ‘contacting HMRC’ section of the website. For those who have disabilities, effectively communicating with HMRC can be difficult. At present, no central computer system records special needs that a claimant might have, therefore reference should be made in all communications of any specific needs that HMRC should be aware of.

HMRC do provide special services for those with particular needs. A full list of all services is published on the GOV.UK website.

Following the closure of HMRC’s enquiry centres, claimants who need face to face help should contact the child benefit helpline (0300 200 3100 or textphone 0300 200 3103) or guardian’s allowance unit (0300 200 3101 or textphone 0300 200 3103) to arrange an appointment. If it is an emergency, then claimants should request that they are seen immediately.

More information is available on the GOV.UK website.

Child Benefit and Guardian’s Allowance: Overpayments

Background

Overpayments usually happen when there is a change of circumstances but the Child Benefit (or Guardian’s Allowance) payments haven't been adjusted to match.

Where there is an overpayment, the Child Benefit Office will send out a letter explaining that Child Benefit (or GA) has been overpaid, by how much, why and whether the claimant has to pay back the overpayment. There should also be a separate letter which explains how to pay the money back.

Anyone who thinks they have been overpaid Child Benefit or GA but hasn’t received a letter should contact the Child Benefit Office to check.

If someone is overpaid Child Benefit (ChB) or Guardian’s Allowance (GA) and it is as a result of either misrepresentation or the failure to disclose information by the claimant, whether fraudulently or not, HMRC can recover the overpayment.

How to pay back overpayments

Usually, claimants are asked to pay back the money in a one-off lump sum, with large debts, there is the option to ask for a ‘Time to pay’ arrangement spread over a period of time.

However, since June 2012, there was a correction to the policy and the Child Benefit Office can now also let claimants repay overpayments directly from ongoing awards. When ChB and GA were transferred to HMRC, the provision to recover an overpayment of Child Benefit or Guardian’s Allowance from an ongoing award of one of these benefits was inadvertently lost. The provision in section 107 of the Welfare Reform Act 2012 re-enables overpayments of Child Benefit and/or Guardian’s Allowance to be recovered from future payments of these benefits.

Process for recovery of Child Benefit and Guardian’s Allowance overpayments from an ongoing award

Any letters sent will have a contact number for the claimant to ring to discuss the repayment options, including whether they will be put into financial hardship because of the amount they are being asked to repay by deductions.

More information about overpayments of Child Benefit and Guardian’s Allowance can be found on the GOV.UK website.

Information about how to appeal can be found in our appeals section.

Child Benefit and Guardian’s Allowance: Government websites

In general terms, Government websites are the most reliable in providing information on child benefit and guardian’s allowance, but sometimes the information is not always correct.

Child Benefit
Guardian's Allowance

Child Benefit

https://www.gov.uk/browse/benefits/child

The GOV.UK website provides coverage for most basic issues concerned with child benefit. There is also a section of the site dedicated to those who help others @ http://www.hmrc.gov.uk/childbenefit/people-advise-others/how-to-act.htm

http://data.gov.uk/

Here you can search for various child benefit datasets.

http://www.legislation.gov.uk/

Here you can search for legislation relating to child benefit. You can also find legislation in PDF format in our legislation and case law section.

http://webarchive.nationalarchives.gov.uk/*/http:/www.hmrc.gov.uk/

Here you can enter past versions of HMRC’s website (from 2006 onwards). It allows you to access HMRC’s website at various snapshots in time to see what the website contained at that moment. The contents and links are still live so you are able to navigate through the site and see the guidance, forms and leaflets as they were at that time.

Guardian’s Allowance

https://www.gov.uk/guardians-allowance

The GOV.UK website provides coverage for the basic issues concerned with guardian’s allowance.

http://www.legislation.gov.uk/

Here you can search for legislation relating to guardian’s allowance. You can also find legislation in PDF format in our legislation and case law section.

http://webarchive.nationalarchives.gov.uk/*/http:/www.hmrc.gov.uk/

Here you can enter past versions of HMRC’s website (from 2006 onwards). It allows you to access HMRC’s website at various snapshots in time to see what their website contained at that time. The contents and links are still live so you are able to navigate through the site and see the guidance, forms and leaflets as they were at that time.

Child Benefit and Guardian’s allowance: External commentary

This section of the site contains links to information about child benefit and guardian’s allowance written by other, non-governmental organisations.

If your organisation produces child benefit material please let us know and we will include it below.

Citizens Advice

Citizens Advice publish an advice guide online which includes information about child benefit and guardian’s allowance

Turn 2 Us

Turn2us is a charitable service which helps people access the money available to them through welfare benefits, grants and other help.

The charity also has a benefits calculator and produces information on a range of topics including child benefit and guardian’s allowance.

Child Benefit and Guardian’s Allowance: Changes of circumstances

This section of the website gives an overview of changes of circumstances that need reporting for child benefit and guardian’s allowance.

Child benefit
Guardian’s allowance

Child benefit

The HMRC sets out the changes that claimants need to report for child benefit purposes.

They also explain how these changes will impact on the child benefit claim.

The HMRC child benefit and guardian’s allowance manual has detailed information for advisers about misrepresentation and failure to disclose for child benefit.

How to report changes

There are three ways to report changes:

Child Benefit Office
PO Box 1
Newcastle Upon Tyne
NE88 1AA

Given the potential consequences if changes are reported late, it is crucial that records are kept when changes are reported.

For calls to the helpline, it is recommended that claimants record the date, time, operator name and brief details of the call.

For letters sent to the Child Benefit Office it is recommended that a copy of each letter is kept and that it is sent recorded delivery (requiring a signature) as a minimum. At the very least a proof of posting should be obtained.

Guardian’s allowance

Guardian’s allowance changes are similar to those above for child benefit. To report changes relating to guardian’s allowance, claimants can use the online child benefit form or contact the guardian’s allowance unit:

(Textphone: 0300 200 3103)

The Guardian's Allowance Unit
Child Benefit Office
PO Box 1
Newcastle upon Tyne
NE88 1AA

As above, it is recommended that the claimant keep good records of any changes that are reported.

Child Benefit and Guardian's Allowance: Benefits and Credits Consultation Group

BCCG is a forum hosted by HMRC to discuss tax credits, child benefit, guardian’s allowance and tax-free childcare with representatives.

The format and objectives of the group were reviewed during 2014 and members consulted on proposals to streamline the arrangements. Before then, the Group provided:

The group used to meet bi-monthly and the minutes were published after each meeting on the HMRC website. You can find further information and links to the minutes of each meeting within the tax credits - BCCG section of this website.

During 2014, BCCG agreed to reduce the number and frequency of their meetings such that they now meet in various specific sub-committee arrangements to discuss items of current and specific interest, such as the in-year finalisation of tax credits.

Tax Credits: Starting an appeal

This section provides information about appealing a tax credits decision. Not all decisions are appealable. 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. You can find a full list of appealable decisions here. The information below was written by the Low Incomes Tax Reform Group.

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. This agency is legally independent of HMRC and there is a specific set of rules governing the First-Tier Tribunal’s procedures. The Tribunals service was previously a separate agency of the Ministry of Justice but merged with HM Courts Service from 1st April 2011.

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

On 3 July 2012, HMRC published a consultation document called ‘Tax Credits: mandatory revision before appeal’. HMRC sought views on the impacts of changing the tax credits appeals process to mirror the Department for Work and Pensions planned changes to their appeals process which was announced in the Welfare Reform Act 2012 and subject to a consultation between February and May 2012.

The aim of the consultation was to look at simplifying the tax credits appeals process by introducing a mandatory consideration of revision before appeal. HMRC anticipated that this would significantly reduce the number of appeals to be heard by the Courts and Tribunal Service and ensure continued alignment and consistency of treatment with the revised DWP appeals legislation and processes which DWP will be introducing.

The consultation closed in October 2012. HMRC confirmed at the November 2012 Benefits and Credits Consultation Group meeting that although the proposals in the consultation document would go ahead to mirror DWP changes, given the current delays in the tax credits appeals system they would not be implemented from April 2013 as originally planned. Instead they have been introduced 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.

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’. The process is currently different in Northern Ireland although it is expected that direct lodgement will comment there in late 2014.

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 sent to the Tax Credits Office, Preston, PR1OSB and if you cannot reach agreement with HMRC or do not agree with their decision, it will be forwarded to the Tribunal Service by HMRC.

Claimants have 30 days from the date of the mandatory reconsideration notice to lodge their appeal. 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 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.

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
(Decison 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.

Prior to July 2013, the TCO should acknowledge receipt of the appeal in around 5 working days from when they logged it on their system. This provided useful evidence that an appeal had been sent. However from 15 July 2013, HMRC have stopped these acknowledgement letters as they are now undertaking to deal with all appeals within 6 weeks. We advise that all appeals are sent recorded delivery or with some proof of posting.

There have been reports of the TCO declining to accept an appeal even though it is validly made. This is sometimes due to confusion within the TCO as to what constitutes a valid appeal in respect of an overpayment – it is sometimes not understood that there is a right of appeal against a decision on an award that results in an overpayment, even though there is no statutory right of appeal against the collection of the overpayment.

It is worth remembering that HMRC do not have power to decline to entertain a valid appeal, and jurisdiction over what is a valid appeal lies with the appeal tribunal, not with HMRC.

If you, or the claimant, do not receive any acknowledgement from HMRC within a reasonable time, you should contact the Tribunals Service and ask them if they can list the appeal directly.

HMRC do not have power to refuse to accept a valid appeal or to strike out an appeal. If there is any uncertainty or dispute in this regard it is for the independent tribunal to decide, not HMRC.

Although it is possible in some circumstances make a late appeal, you should wherever possible ensure that the appeal is sent to HMRC within the 30 day time limit and that you make allowance for any postal delays. If you are still awaiting information relevant to the appeal, it is advisable to include a request for that information with the appeal and make it clear that you will be sending further representations at a later date.

Late appeals
(Decison 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.

Late appeals can arise where an appeal against an award concerns detail relating to the calculation of the claimant’s entitlement. Tax credit claimants are not given calculations with their award notices and will have to ask for them separately. This information could be outside the 30 days allowed for appealing against the award. It is our understanding in such cases that HMRC will generally not decline to accept a late appeal. Alternatively it could perhaps be argued that the 30 day time limit runs from the date on which the claimant receives the additional information. But the only safe course is to ensure that appeals are lodged within the 30 day time limit.

If HMRC do not consider a late appeal to be in the interests of justice, they are not entitled to refuse to admit it on those grounds without first consulting the First-tier Tribunal.

Settling an appeal with HMRC
(Decison made before April 2014)

Once the appeal has been processed, someone at the TCO will contact you (if there is an authority in place, otherwise they will contact the claimant), usually by phone, to discuss the appeal. HMRC may agree a settlement of an appeal with you or the claimant, and that is what they generally aim to do in the first instance. Although the proposals should be considered, you do not have to settle and can choose to have the case listed with the First-tier Tribunal.

If agreement is reached, the TCO will confirm it in writing, and amend the award there and then. It is advisable to ask for the direct dial number of the appeal officer should there be any further queries and ensure that they agree to send confirmation of the outcome in writing in addition to a new award notice (on occasion TCO have been known to send only the new award notice).

If settlement is not reached, a date will be set for a hearing before the First-tier Tribunal. The claimant has the right to back out of any agreement made with the TCO under this procedure, provided TCO are told within 30 days.

More information about settlements can be found in the HMRC tax credits manual.

Appeal delays

Due to the rapid rise in the number of compliance interventions being carried out by HMRC in trying to tackle error and fraud in the system, the number of appeals has also risen dramatically. This has caused a concerning backlog of appeals in the Tax Credit Office. It is not uncommon for compliance appeals to take several months before any contact is made with the claimant and even longer for the case to progress to the Tribunal.

HMRC do try and triage cases to ensure that people who are completely out of payment (such as those subject to undisclosed partner decisions) have their appeals dealt with quickly (within three months is the timescale). However, evidence suggests this doesn’t always happen.

For decisons made before April 2014, in theory it is possible to ask the First-tier Tribunal directly to list the case where HMRC are acting unreasonably and delaying the appeal and there is hardship. Child Poverty Action Group have written some guidance on dealing with delays that covers writing to the Tribunal directly. They note that such applications are unlikely to be entertained unless there are special reasons why the case should be dealt with urgently, or there has been a significant delay.

From 15 July 2013, HMRC have undertaken to deal with all appeal cases within 6 weeks.

More information

 

Tax Credits: How to claim

To be entitled to tax credits you must claim them. There is no entitlement without a claim.

In the early years of the tax credits system, it was possible to claim online. This facility was withdrawn due to fraudulent attacks. The majority of claimants will now need to obtain a paper claim form from HMRC, although there are some other methods of claiming that are available to certain groups of claimants which are explained below.

Obtaining a paper claim form

The paper claim form is called the TC600. You can find a sample of the current form in our forms, notices and checklists section. The primary way of obtaining a claim form is from the tax credits helpline (0345 300 3900 or textphone 0345 300 3909). Some advice organisations also carry stocks of forms, although HMRC are reducing the organisations who can do so.

It is standard procedure for the Tax Credits helpline to ask for the claimant’s name, address and National Insurance number when they request a claim form. The helpline may also ask the claimant some questions to estimate what their entitlement might be. In some cases, the helpline may refuse to issue a claim form as they believe that the claimant does not meet the criteria, or the claimant does not have a national insurance number or the entitlement check shows entitlement as NIL. This should not happen and if it does full details of the date, time and operator name should be taken and used to prepare a complaint. It is not the function of the helpline to make a decision on entitlement to tax credits, especially not on the basis of a single phone call.

The paper claim form can also be requested by submitting an on-line request via GOV.UK. Anyone using this service is advised to run through either HMRC’s ‘Do I qualify ’questionnaire or HMRC’s tax credits calculator first, the on-line claim form request automatically becomes available at the end of either of those services. Even if the online calculator suggests you may not be able to claim, if you are unsure or your circumstances are complicated you may want to request a form anyway. (It is unclear whether HMRC have introduced this service temporarily to improve their customer service during the annual renewal period when it can be more difficult to get through on their tax credit helpline or whether this is a more permanent on-line option and we will update this information once the position is confirmed).

Security procedures -

In 2010, HMRC introduced a new security procedure whereby they require people to answer questions based on their Experian credit data. Initially it appeared that if the claimant could not answer these questions, HMRC were refusing to issue a claim form unless the claimant attended an interview at an enquiry centre. If the claimant did not have a national insurance number, they would not be able to go through the security procedure. However, HMRC staff had an alternative set of questions for such situations. Following an impact assessment consultation about the new security procedures, HMRC agreed to pilot issuing claim forms without requiring the claimant to answer security questions. This pilot remains ongoing.

Full details of the IDAS security procedure can be found in our dealing with HMRC section. Information for obtaining a national insurance number can be found on the DWP website.

One point to note about the new security arrangements was that advisers could no longer request forms on behalf of claimants as the new process required the claimant to pass the security checks. Since the pilot commenced allowing forms to be issued without going through the additional security checks, it is unclear of the position for advisers who want to request a form without the claimant being present. Members of the Benefits and Credits Consultation Group (BCCG) have raised this and other related problems with HMRC.

In and out of work process (IOW)

The IOW process is aimed at those claiming income-based jobseeker’s allowance and income support to enable their benefit claims to be quicker and easier when moving in and out of work.

The new process was originally tested in six pilot areas from September 2007. More information about the pilots and their evaluation can be found in the DWP evaluation report. From December 2008 to March 2010, the process was rolled out nationally.

The basis of the process is that when a claimant moves from benefits into work, they will be able to end their out-of-work benefits and claim their in-work benefits in one phone call. Similarly if they stop working, the process works in reverse ensuring their in-work benefits stop when they should and enabling claims to out-of-work benefits.

The process is led by Jobcentre Plus. The claimant makes a single call to them and they take the relevant information and pass it to Local Authorities (for housing benefit and council tax benefit) and to HMRC for tax credits.

From a tax credits perspective there are some points to note:

More information about the process including detailed guidance and leaflets can be found here: http://www.dwp.gov.uk/local-authority-staff/housing-benefit/claims-processing/closer-working-with-dwp/in-and-out-of-work-project/

Fast track claims via Jobcentre Plus

A fast track process is in place between Jobcentre Plus and HMRC for certain types of claim. Historically this included anyone moving from a Jobcentre Plus benefit into work, or for those claiming a Jobcentre Plus benefit making a claim for child tax credit. The In and Out of Work process has meant the fast track is no longer needed for many of these claims.

However, there are still some customers of Jobcentre Plus who will still require a claim for tax credits and who cannot be helped through the In and Out of Work process.

In particular the process can be used for refugees who wish to claim tax credits, one of the benefits being that Jobcentre Plus can verify documentation which should ensure the claim is put into payment more quickly.

The process is manual and requires Jobcentre Plus to complete a TC600 claim form and send it with a pro-forma to a specialist unit in HMRC. This means that it should be dealt with much quicker than the normal HMRC channels, although it should be noted that the claim may still be subject to various pre-award checks. HMRC guidance suggests that claims should be put into payment within 7 working days.

This can be a useful process for vulnerable claimants and Jobcentre Plus staff should be reminded of the process to ensure it is used in appropriate cases. There is some HMRC guidance about the process on their website, although this makes reference to an E-Portal that is no longer in use. The process is clerical as described above.

Tell us once – telephone claims

The ‘Tell us Once’ service for reporting a death was rolled out in England, Scotland and Wales during 2011. Initially used for reporting deaths, it is currently being extended to include a birth service. If someone reports a death to a registrar and wants to take part in Tell us Once. Information about the death with be passed to HMRC for tax credits purposes.

Part of the service includes the registrar helping new parents fill in their child benefit claim form. In addition, parents who are on certain benefits (the full list of benefits have not yet been confirmed although it is likely to be income based benefits) will be given a special phone number for HMRC Tax Credit Office which will allow them to make a fast track claim over the phone.

 

Tax Credits: Help with disabilities

There are many ways of contacting HMRC which are outlined in the contacting HMRC section of the website. For those who have disabilities, effectively communicating with HMRC can be difficult. At present, no central computer system records special needs that a claimant might have, therefore reference should be made in all communications of any specific needs that HMRC should be aware of.

HMRC do provide special services for those with particular needs. A full list of all services is published on the GOV.UK website.

Following the closure of HMRC’s enquiry centres, claimants who need face to face help should contact the tax credits helpline to arrange a home visit. If it is an emergency, then claimants should request that they are seen as soon as possible. 

If the claimant is unable to use the telephone (for example because they are deaf, hard of hearing or have a speech impairment) they can ask for a face–to-face appointment with one of HMRC’s mobile teams by using the online booking form which can be accessed from the GOV.UK website.

Request a tax credit claim form on-line

Tax Credits: Enquiries

This section of the website provides basic information about enquiries. The material in this part of the website was written by the Low Incomes Tax Reform Group.

Tax credit enquiries are analogous to self-assessment enquiries in mainstream tax. They are furnished with more statutory safeguards than the in-year examinations. Nevertheless tax credit enquiries, unlike examinations but like self-assessment enquiries, may be conducted at random.

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 2014/15 should be sent in by 31 July 2015). In some cases the 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 2014/15 should be confirmed, or actual 2014/15 income notified, by 31st January 2016.

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:

Disputes

This section outlines the dispute process which is one of the ways in which a claimant can challenge an overpayment. This page is based on more detailed information in the LITRG ‘Challenging Overpayments’ Guide which is available for download in the ‘Challenging Overpayments’ section of our site.

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

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). This can be requested under their official guidance where the claimant is in financial hardship or in receipt of certain means tested (see dealing with debt section for further details). 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.

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 an extremely useful document within HMRC’s own guidance detailing the steps that advisers should follow in determining disputes under the new test.

Under point 4 in the summary table above, where both parties have failed in their responsibilities there will be a partial write off calculated by apportioning the part of the overpayment that is attributable to HMRC’s failure.

The guidance directs dispute staff to go on and consider four additional questions in this situation:

Did the claimant, for overpayments in 2008-2009 onwards, report any error on their award notice within one month of receiving it?

Did the claimant, for overpayments prior to 2008-2009, report any award notice error promptly?

Did HMRC delay in processing a change of circumstances for more than 30 days?

Did HMRC incorrectly process a change of circumstances?

In the first two cases, if the claimant informed HMRC within one month (or promptly for overpayments arising earlier than 2008-2009) the overpayment relating to the error on the award notice should be written off. If notification is made outside of these time limits, it would seem that the overpayment will only be written off from the date that HMRC were actually informed of the error.

In the last two cases, the part of the overpayment relating to HMRC’s error in not processing a change of circumstances within 30 days or processing a change incorrectly should be written off.

Any remaining overpayment would appear to be recoverable.

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 2013 as they were in receipt of income based Jobseeker’s allowance for the entire 2012-2013 tax year. The notice states that if HMRC do not hear from the couple, they will confirm the amount due for 2012/13 and make a decision on entitlement for 2013/14 on 31 July 2013. Dean and Sharon have 3 months from 31 July 2013 to dispute any overpayment listed for 2012/13.

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. However as this is the first year of operation of the time limit, consideration needs to be given for overpayments from earlier years and how the limit will work.

For 2012-13 final award notices only, the time limit will apply to overpayments relating to the 2012-13 tax year and historic overpayments for earlier years.

In other words, claimants should 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 have not already been disputed. If they do not, the chance may be lost (subject to the relaxation for some disputes between April and October 2013 described below under the heading ‘Interim arrangements from April 2013’).

Example 2: Ronnie has been overpaid during 2012-13 because HMRC did not initially process a change of circumstances that she reported. The overpayment of £1000 is shown on the final award notice dated 21 August 2013. Ronnie will have until 21 November 2013 to dispute that overpayment.

Example 3: Daniel and Hazel have been overpaid in 2012-13 by £850. They also have two overpayments from earlier years. One is from 2005-06 with £2,800 outstanding and the other from 2009-10 with £1,400 outstanding.

Their final award notice for 2012-13 is dated 3 August 2013 and shows all three overpayments.

They have until 3 November 2013 to dispute all three overpayments. Once that date has passed, HMRC’s intention is that they will lose the ability to dispute these overpayments (but see below for a relaxation of this rule in certain situations during 2013-14).

Final award notices for 2013-14 and subsequent years will only carry dispute rights against any overpayment that occurred in the year being finalised. For example, the final notice for 2013-14 will give three months to dispute any overpayment that occurred during 2013-14 but not any overpayment from 2012-13 or earlier years. The time limit for disputing those overpayments will have passed.

Example 4: Ronnie has been overpaid again during 2013-14 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 2014. Ronnie will have until 17 November 2014 to dispute that overpayment. She cannot dispute the overpayment that will show on the notice for the earlier year of 2012-13 (see example 2) as the time limit for that overpayment has expired.

Interim arrangements from April to October 2013

As noted above, the time limit runs (in most cases) from the date of the final award notice for the relevant tax year. Those who are familiar with award notices will know that this is not as straightforward as it sounds.

There are two major problems with the time limit:

Example 5: Peter and Angela have a joint tax credits claim. They receive an initial 2013-14 award notice and then two further notices after reporting changes to HMRC about their childcare costs. The couple separate in November 2013 and a potential overpayment is showing for 2013-14. The notice will say that the couple have three months to dispute that overpayment from the date of the notice, but as the claim is not yet finalised they will get another three months from their 2013-2014 final award notice to dispute the overpayment.

To address this second issue, interim measures were put in place between April and October 2013.

If a claimant has incurred an overpayment for the 2012-13 tax year, this will be confirmed after they renew their claim. It will be shown on their 2012-13 finalised award notice which will be issued in the summer of 2013. If that is the only overpayment showing on the notice, the claimant will have three months to dispute the overpayment from the date on the final award notice.

As explained above, for 2012-13 final notices, the three month time limit will apply to overpayments that occurred in 2012-13 as well as overpayments from earlier years. For finalised award notices for 2013-14 and later years the intention is that the time limit will apply only to those overpayments occurring in the year being finalised.

Continuing the example of Daniel and Hazel (Example 3 above), the problem with this approach is that at the same time as receiving their final 2012-13 notice, Daniel and Hazel will also receive their initial 2013-14 award. If they then report any changes during the 2013-14 tax year, or if their award is recalculated for any reason, they will receive a new notice. This notice will still show the three historic overpayments (2012-13 now being a previous year overpayment along with 2005-06 and 2009-10) with a notice that says they have three months to dispute those overpayments. These notices do not reflect HMRC’s policy intention and are misleading for claimants.

As a result of representations by LITRG, HMRC have agreed that between April and October 2013, they will accept disputes from people on earlier year overpayments where they have been issued with new award notices that restate the time limit.

Example 6: Suppose Daniel and Hazel have another child in September 2013 and report the birth to HMRC on 5 September. A new award notice will be issued which will show their three historic overpayments and tell them they have three months to dispute from 5 September. In strict terms, the time limit for disputing those overpayments expires on 3 November 2013 (three months from their final award notice for 2012-13).

However, under a relaxation of the rules, HMRC will accept a dispute within three months of the new award notice for 2013-14, which is three months from 5 September 2013 so gives a dispute deadline of 5 December 2013.

Example 7: Suppose Daniel and Hazel did not report any changes to HMRC before October 2013 and so did not receive any further notices for 2013-14. In that case the three month time limit of 3 November 2013 on their 2012-13 notice would stand and they could not dispute their three historic overpayments .

LITRG believe it is essential that claimants fully understand when the time limit runs for both current and historic overpayments. Until HMRC can communicate this clearly and fully, we believe they should continue to accept disputes in cases where people have had notices that state they have three months to dispute. It is expected that new materials will be produced in October 2013 to address these issues.

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 2012/13 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?

As explained above, the time limit is extremely complicated due to the inflexibility of the award notices and HMRC’s policy intention not matching what is actually stated on the award notices people receive.

It is crucial that advisers check award notices carefully to see whether they are interim or final notices, and to which tax year they relate.

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. The complaints process can be used if HMRC continue to refuse to accept this or in serious cases Judicial Review might need to be considered.

Exceptional circumstances

The seventh step of the process for TCO advisers requires consideration of whether any ‘exceptional circumstances’ were present which prevented the claimant from meeting their responsibilities (see 2 and 4 in the summary table above).

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..

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. Step 8 of the HMRC staff action guide on dealing with disputes states that telephone records should be checked if the claimant mentions a call in their dispute. In our experience HMRC do not always do this and it is therefore advisable to make it clear in any dispute that HMRC should listen to all relevant recordings and if necessary refer HMRC to their own guidance on this subject.

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.

Second disputes and next steps

As noted above, when a dispute is received, HMRC will suspend recovery of any overpayment.

If the dispute decision is negative, HMRC will re-commence recovery of the overpayment once again. 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.

In cases where the claimant has further evidence, previously unconsidered by HMRC, recovery will be once again suspended under COP26.

However, if a claimant submits a further dispute with no new evidence, COP26 states that HMRC will not suspend recovery even if HMRC have failed to take this previous information into account.

Given the history of poorly explained dispute responses, we are disappointed that HMRC have decided not to suspend recovery in cases where they have failed to consider a crucial piece of evidence. We continue to argue that recovery should be suspended in our own dispute cases in such circumstances, although the official policy is as set out in Cop26.

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.

Although there is no statutory right of appeal against HMRC’s exercise of their discretion, there is one judicial remedy – that of judicial review. See our judicial review section for more information.

Tax Credits: Penalties and interest.

This section of the website provides basic information about penalties and interest. The material in this part of the website was written by the Low Incomes Tax Reform Group.

Penalties

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 sets out the percentage reductions available.

Interest

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

Tax Credits: HMRC Charter

HMRC publish a range of their responsibilities in relation to tax credits in the Code of Practice 26 which is considered in detail in other parts of this website.

However, in relation to more general responsibilities these are set out in HMRC’s Your Charter. The Charter was introduced in 2009 and has statutory backing in the Finance Act 2009. Although it does not replace existing rights and remedies, it is a useful addition especially during the complaints process.

There are 9 rights for you and your client and 3 responsibilities upon you and your client.

These rights may be quoted at HMRC and they expect to be held to account to them. There is statutory backing for Your Charter and HMRC have to report on their adherence to the provisions.

If HMRC do not adhere to their undertakings it can be used as the basis for a complaint and possibly compensation and a consolatory payment. See our section on Complaints.

The full Charter is reproduced below. ‘We’ refers to HMRC and ‘you’ to the tax credits claimant, taxpayer or adviser.

1. Respect you

We recognise that you might be concerned about how we will deal with you.

We will:

2. Help and support you to get things right

We want to give you as much certainty as we can that you are paying or claiming the right amount.

We will:

3. Treat you as honest

We know that the great majority of people want to get things right. Unless we have a good reason not to,

we will:

4. Treat you even-handedly

We will be even-handed in the way we deal with you. We will take into account your circumstances and provide a consistent service. If you need help we will also give you the appropriate support so you can meet your obligations.

We will:

5. Be professional and act with integrity

Whenever you deal with us we will take responsibility for our actions and behave in a professional way.

We will:

6. Tackle people who deliberately break the rules and challenge those who bend the rules

The great majority of people are honest and get things right. We want to protect them from the effects of people deliberately breaking the rules. We will also challenge those who engage in avoidance, deliberately bending the rules. We will treat genuine mistakes, acting without reasonable care and deliberately misleading actions differently from each other.

We will:

7. Protect your information and respect your privacy

We recognise we have privileged access to your information. We will only ask you for information we need to do our jobs. We will protect that information.

We will:

8. Accept that someone else can represent you

You may want someone else to deal with us on your behalf. To protect your privacy, we will only deal with them if they have been authorised to represent you.

We will: 

You should always check that your representative has the right experience and knowledge to help you.

9. Do all we can to keep the cost of dealing with us as low as possible

We aim to take up as little of your time and money as we can.

We will: 

Your obligations

What we expect from you:

1. Be honest

We need you to be honest with us. If someone else acts for you, we expect them to be honest too.
We expect you to:

2. Respect our staff

Our staff will respect you and we ask you to show them respect too. If someone else acts for you, we expect the same respect from them.

We expect you to:

3. Take care to get things right

We need you to take responsibility for getting things right, even if you have authorised someone to act on your behalf.

We expect you to:

Obtaining copies of the charter

The charter is available @ https://www.gov.uk/government/publications/your-charter.

There is a British Sign Language video (opens new window) to view.

According to the GOV.UK website, for those using assistive technology the document can be made available in a more suitble format by e-mailing onlineservicessyndicationteam@hmrc.gsi.gov.uk. A copy can also be obtained in the following formats: British Sign Language DVD, Braille, large print, audio cassette or CD on Tel 020 7147 2365.

Tax Credits: Calculating tax credits income

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

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.

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 2014/15.

 

£

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 2015/16 tax credits award will be based on their joint income for 2014/15 (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: Intermediaries

This section of the site outlines how to become an intermediary in respect of tax credits and the processes HMRC have in place that can help intermediaries.

What is an intermediary?

HMRC defines an intermediary as one of the following:

It also includes other organisations such as welfare rights workers within Local Authorities.

What can an intermediary do?

According to HMRC, an intermediary can:

They cannot receive the payment on behalf of a tax credits claimant.

How to become an intermediary

HMRC authorise intermediaries using form TC689.

If it is a joint claim, both claimants should sign the form. For joint claims that have ended, it is sufficient for only your client to sign the form (without the other partner). In such cases HMRC should give all information about the previous joint claim and should not require a signature from the second partner.

To avoid delay in setting up the authority, you must ensure that all questions are completed and that signature(s) have been obtained. HMRC will not process incomplete TC689’s.

Once logged on the system, the TC689 lasts for 12 months unless a different end date is specified.

If you deal with tax credits on a regular basis you may wish to become a registered intermediary which will allow you to submit the TC689 electronically. See below for details of how to do this.

Registering as an intermediary organisation

HMRC have a process in place to allow organisations who deal with tax credits on a regular basis to become an intermediary organisation.

To do this your organisation will need to register with the Intermediaries, Agents and Appointees Team by completing form TC1136 and posting it to:

HMRC Benefits and Credits
Intermediaries, Agents and Appointees Team
PRESTON
PR1 4AT

Once authorised, you will be given a reference number for your organisation which can be used on the TC689 form. In addition, in cases where a TC689 is needed quickly, authorisations for tax credits can be submitted electronically using the on-line KANA version of TC689. Please note that the on-line TC689 form doesn’t have the customer(s) signature so you must keep an additional copy signed by the customer(s) as HMRC may request to see the original at any time as part of their assurance checks. HMRC will only accept a TC689 electronically from registered organisations.

Intermediaries helpline

There is an Intermediaries helpline which is separate from the main helpline and generally answered by knowledgeable HMRC staff who can deal with more problematic cases.

The phone number is 0345 300 3946 and lines are open 9am to 5pm Monday to Friday.

Intermediaries dispute and complaints team

In 2009, HMRC set up a small team within the Customer Support and Service Group which deals with disputes, explanation requests and complaints from certain intermediaries. At this time, only letters from voluntary organisations who receive no payment for helping claimants will be routed through the team. More information about this process can be found in a Low Incomes Tax Reform Group press release.

Tax Credits: Tax Credits Manuals

HMRC have 4 manuals that are published on their website and are useful for tax credits advisers.

These manuals explain in detail how HMRC interpret tax credits law, how their processes operate and how HMRC operate in specialist areas such as debt collection and compliance.

Tax Credits Technical Manual

Often referred to as the TCTM for short, this manual sets out how HMRC interpret the law relating to tax credits.

The manual is updated at various periods throughout the law as changes are made. A full list of updates can be found on the GOV.UK website.

The manual is split into 12 sections:

  1. Overview
  2. Entitlement
  3. Maximum Rates
  4. Income
  5. Change of circumstances
  6. Claims and notifications
  7. Calculation of entitlement
  8. Payments
  9. Decision Making
  10. Compliance
  11. Transition to Univeral Credit
  12. Consolidated legislation
  13. Abbreviations

This manual is useful if you are looking for information about certain parts of the legislation and can be quoted to HMRC in support of disputes and appeals. The layout is fairly self-explanatory and therefore easy to navigate if you know the topic you are looking for. There is a search function for the manual which allows you to search for keywords.

Tax Credits Manual (TCM)

The TCTM manual (above) sets out HMRC’s interpretation of the law. This manual shows how that law is put into practice by setting out HMRC’s processes. You may see it referred to as the ‘New tax credits manual’.

This manual has thousands of pages of information about processes. Generally each process has two main pages – an information page and an action guide (process) page. The first gives information about the process, often linking to the TCTM manual. The latter outlines the process in a step by step guide that staff follow.

The sheer volume and use of technical jargon makes the manual difficult to follow to those unfamiliar with the tax credits system. However, it does contain some very useful information that can be used in disputes, appeals and complaints. There are two main ways to use the manual.

The first is to search by topic area from the main index page. If you are looking for something more general this route works well.

The second way is to use the search function for the manual. You can search by date or topic.  

HMRC publish updates to the manual online. The updates are listed in date order.

New Tax Credits Claimant Compliance Manual

This manual, often referred to as CCM, is used by HMRC for tax credits compliance purposes. HMRC have a range of compliance powers including examinations, enquiries, discovery and penalties. This manual sets out how HMRC deal with each of these compliance powers.

The main navigation for this manual is via the index page. Below we have listed the main compliance functions and the chapters which contain relevant information.

Examinations

Enquiries

General

Penalties

This manual is particularly useful if you are representing a claimant who is undergoing some sort of compliance investigation. One of the most common enquiries focuses on undisclosed partners and Chapter 15 of the manual is useful reference in such cases.

The manual is updated regularly via the GOV.UK website. Although arranged by topic and therefore easier to navigate, there is also a search function for the manual.

Debt Management and Banking Manual

This manual is not specifically for tax credits, but it does contain a section on tax credits which advisers may find useful.

Specifically it contains information on:

The most up to date guidance on the policy for recovery of tax credits overpayments can be found in the HMRC guide ‘How HMRC handle tax credits overpayments’. This guide sets out the latest information on time to pay arrangements for tax credits claimants (as opposed to the Debt Management manual which covers tax as well). More information is available in our Dealing with overpayment debt section.

Tax Credits: Calculating tax credits

Tax credits, unlike other benefits, are based on an annual system. This section explains how to calculate tax credits.

Introduction

This section of the website explains in detail how to calculate tax credits so that advisers can check HMRC calculations. Legislation changes in April 2012 meant that the calculation of tax credits is different from earlier years. This section covers calculations under both sets of rules. Throughout the section we have tried to include a number of worked examples. These examples can be accessed as a PDF document by clicking on the relevant link.

Relevant income

In order to calculate tax credits, you need to determine the ‘relevant income’ to use. This may be the current year income or the previous year income. We explain in detail how to work out the relevant income in our ‘understanding the disregards’ section. In summary, the income to use for calculating any 2015-2016 award (whether initial, amended or final) is established using the following rules:

The disregard for income rises decreased from £10,000 to £5,000 on 6 April 2013. The £10,000 disregard was still used to finalise 2012/13 claims in the summer of 2013. You can find out more about the disregards in our understanding the disregards section.

Annual and daily rates

Tax credits are paid at a daily rate throughout the award period. This means that the annual amounts announced in the Budget and shown in the table have to be converted into daily amounts. This is done by dividing the annual rate by 365 days (366 days in a leap year) and rounding up to the nearest penny.

Note: this does not apply to the WTC childcare element because this is always worked out on a weekly basis.

The daily rates for 2014/15 and 2015/16 (as well as earlier years) are shown in this table. Note that 2015/16 is a leap year, which means 366 days are used in the calculations on this page. .

Maximum entitlement for people on certain benefits

TCA 2002, Section 7(2) states that the income test explained at the start of this section does not apply to people in receipt of certain means-tested benefits. Those benefits are:

During any period that a person is in receipt of one of these benefits, they are automatically entitled to maximum tax credits. There is no tapering away of entitlement, nor counting of relevant periods. Section 7(2) makes it clear that the income test is suspended for the period during which they are receiving any of the above benefits.

The only exception to this rule is during the four-week run-on when the income test will be applied as normal even if the person is receiving one of the benefits listed above.

Important definitions

In order to understand how to calculate tax credits, it is important to understand some of the key concepts used in the legislation.

Award period

TCA 2002, Section 5 defines an award period as the ‘date on which the claim is made and ending at the end of the tax year in which the date falls’.

This is normally the same as the tax year, 6 April to the following 5 April. When a claim is made at the beginning of the year, or is backdated to the start of the tax year via the renewals process, that is when the award period also begins. It lasts until the end of the tax year unless it is terminated earlier. This will also happen when tax credit claims are finalised in-year because the claimant is included in a claim for Universal Credit. See our stopping tax credits section for more information.

If an application for tax credits is made part way through a tax year, the award may only run for the remaining part of the year. If a claim is backdated, the award period will cover the first day of entitlement to the following 5 April and not just the period from the date the actual claim form is submitted.

Relevant period

This is a period during the award period in which the rate of tax credit a person is entitled to remains the same. A relevant period ends with a change of circumstances which changes the amount of tax credits they are entitled to.

Specifically, this means any change in the elements of WTC (other than childcare) and CTC to which the claimant is entitled. In the case of the childcare element of WTC, a relevant period comes to an end if there is a change of more than £10 in their average weekly childcare charges, or they cease paying childcare charges altogether.

Legislation vs. practice

The Tax Credits (Income Thresholds and Determination of Rates) Regulations 2002 (SI 2002/2008) set out a very detailed step by step process for calculating entitlement to WTC and CTC. Although referred to as ‘tax credits’, strictly WTC and CTC are two separate tax credits and the legislation requires that each one is calculated separately.

In practice, most tax credits calculations shown in books, on websites and even in some HMRC materials calculate WTC and CTC together. This is because the rules in the regulations work together in such a way that once WTC is tapered away, any remaining income is used to taper away CTC and therefore the same answer is obtained.

A similar situation occurs with the use of daily rates. The legislation states that both WTC and CTC are to be calculated using daily rates. However it is quite common to see calculations of tax credits done on an annual rather than daily basis. As long as advisers are aware that this may result in a figure that is not quite accurate, it is a perfectly acceptable practice. We show examples of both daily and annual calculations in the following sections.

For advisers who would like to understand the calculation of tax credits following the strict format in the legislation, we have included a detailed explanation at the end of this section. A detailed calculation can also be seen in the HMRC manual at TCTM07APPX2 . The remainder of this section will follow the simpler method by combining the calculation of WTC and CTC.

Thresholds

These thresholds are an important part of the tax credits calculation because if a claimant’s income is above the relevant threshold their tax credits will start to be reduced (referred to as ‘tapering’). Consequently, the calculation will only be correct if the correct threshold is used.

WTC only or WTC and CTC claims

The first income threshold for WTC only, and combined WTC and CTC claims, is £6,420. One area of confusion here is around claims for both WTC and CTC. Claimants often think that the CTC only threshold applies to them because they are not getting any WTC. However a distinction must be made between a claimant entitled to WTC who doesn’t actually receive any because their income is too high versus a claimant who doesn’t have any entitlement to WTC. Where a person’s circumstances are such that they qualify for the basic element of WTC, that element along with any other elements of WTC that their circumstances dictate, should be included in the calculation and the £6,420 threshold used.

CTC only claims

Where a claimant (or their partner) has no entitlement to the basic element of WTC, but they are responsible for a child or qualifying young person, the CTC only threshold should be used. For 2015/16 it is £16,105.

This threshold has slowly increased since tax credits began in 2003-2004. It was not until 2011-2012 that there was a reduction in the CTC threshold. The reason for this is that the threshold is set by determining the income level at which the WTC basic element and WTC couple/lone parent elements are reduced to Nil. Above this point, CTC will start to be reduced. In 2011-2012 these elements were frozen and the taper rate was increased from 39% to 41%, thus causing a reduction in the CTC only threshold. The threshold remained the same 2012-2013 because the WTC basic and couple/lone parent elements were frozen at the 2011-2012 rates. The threshold increased from April 2013 and April 2014 due to up-rating of the couple/lone parent element.

Second income threshold (2011-2012 and earlier years)

Calculating tax credits in 2011-2012 and earlier years was different to the current calculation. This is because in earlier years there were two income thresholds for WTC and CTC or CTC only claims. The first income threshold (either £6,420 or £15,860 in 2011-2012) was used to calculate entitlement to all elements except for the family element of CTC. The second income threshold was only used for the family element, which remained protected until income reached that second income threshold. From April 2012, this second income threshold was removed which means the calculation is slightly different.

The second income threshold is not a fixed figure, it depends on circumstances. However for the majority of claimants the threshold was £40,000 in 2011-2012 (£50,000 in 2010-2011 and earlier years) and it is often this figure that is quoted. Above this threshold the family element was tapered away.

Some people will have a higher second income threshold. This is because the other elements of tax credits are not tapered away fully by the time their income reaches £40,000. This is normally because they have more than two children, childcare costs or qualify for the disability elements. In such cases their individual threshold must be calculated.

Calculating tax credits 2012-2013 and later years

Each calculation of tax credits involves a series of steps which in brief are:

  1. Determine the number of relevant periods
  2. Calculate maximum entitlement for each relevant period by adding together the WTC and CTC elements that are applicable to the claimant’s circumstances.
  3. Apportion the income figure and the relevant threshold for each relevant period on a daily basis.
  4. Calculate the ‘excess income’ figure (the amount that the person’s income exceeds the threshold for that relevant period).
  5. Calculate the ‘reduction due to income’ by multiplying the ‘excess income’ figure by the first taper percentage (currently 41%).
  6. Take Step 5 away from the figure in Step 2 to find the tax credits for the relevant period.
  7. Add the amount due for each relevant period to find the entitlement for the tax year.

The income figure referred to in Step 3 is the figure determined after applying the income tests set out at the start of this section . This may be previous year income or current year income (actual or estimated) depending on the circumstances.

Daily vs. annual figures

Many tax credits calculations are done using annual rates whereas the legislation (and the tax credits computer system) requires a daily rate calculation.

The simplest calculation is where there is only one relevant period, with no changes to the maximum rate throughout the year. Example 1 shows the same award calculated using both daily and annual rates.

In this example, using daily rates results in a slightly higher entitlement. This is a result of rounding up daily rates to the nearest penny. As long as advisers are aware of the differences that may arise when calculating using annual figures, it is a perfectly acceptable method.

More than one relevant period

The last example involved a very simple set of circumstances with no change of circumstances during the year, so that tax credits entitlement remained the same and the whole tax year was the ‘relevant period’. Where there is a change in circumstances which alters the rate of tax credits or the elements to which a claimant is entitled, then the calculations must be done for each relevant period as Example 2 shows.

Separating WTC and CTC

When HMRC pay tax credits, they normally pay WTC to the person who is working (where both members of a couple work they can chose who receives payment) and CTC to the main carer. The childcare element is normally paid with CTC to the main carer even though it is an element of WTC.
The examples in this section have all calculated a total tax credits figure. However in order to check HMRC calculations, it is important to be able to work out how much of the total figure is WTC and how much is CTC.

To do this, an understanding of how the elements are tapered away is crucial. In Step 6 of the calculation summary at the start of this section, we said that the ‘reduction due to income’ figure (calculated under Step 5) should be deducted from the ‘maximum entitlement’ figure (calculated under Step 2) to find the amount of tax credits due for that relevant period. Whilst doing this does give the correct total figure, it doesn’t enable a breakdown of WTC and CTC to be calculated.

The legislation actually specifies that the elements that make up the ‘maximum entitlement’ figure are to be tapered away by income in a certain order. That order is:

Using Example 1 again: Joyce’s original maximum entitlement was:

 

£

£

WTC basic

5.36 x 366

1,961.76

WTC lone parent

5.50 x 366

2,013

WTC 30 hour

2.22 x 366

812.52

CTC child element

7.60 x 366

2,781.60

CTC family element

1.49 x 366

545.34

MAXIMUM CREDITS

22.17 x 366 days

8,114.22

This time the amount of each element is included for the relevant period. These figures are shown in italics and are needed in order to breakdown WTC and CTC payments.

The ‘reduction due to income’ figure in Joyce’s case is £1,467.80.

This figure is deducted from the maximum entitlement figure to tell us Joyce’s entitlement for the year but it doesn’t tell us how much WTC she will get and how much CTC which is useful to know in order to check the award notice from HMRC.

This amount is first of all deducted from the WTC basic element. As her income is fairly low, this only reduces her basic element, it doesn’t take it away fully. Joyce’s WTC is, therefore, £493.96 (£1,961.76 - £1,467.80) + £2,013 + £812.52 which is £3,319.48. Because there is some entitlement to WTC, it means Joyce receives the maximum of her CTC elements of £2,781.60 + £545.34 which is a total of £3,326.94 CTC.

If Joyce had an income of £25,000, her reduction due to income would be £7,617.80 (income less threshold x 41%). Her tax credits entitlement would be reduced as follows:

 

£

£

£ reduction remaining

Reduction due to income

   

(7,617.80)

WTC basic element

1,961.76

Nil

(5,656.04)

WTC lone parent

2,013

Nil

(3,643.04)

WTC 30 hr

812.52

Nil

(2,830.52)

CTC child element

2,781.60

Nil

(48.92)

CTC family element

545.34

496.42

(Nil)

Joyce’s total tax credit entitlement is £496.42 for the year and that is a payment of the family element of CTC. Entitlement to all other elements has been reduced to Nil because of Joyce’s income.

One other point which this demonstrates is the importance of including all elements in a calculation. Even though a claimant might not actually receive a payment of WTC because their income is too high, including additional elements in the calculation (such as the childcare or disability elements) means that the person may receive more CTC because it won’t start to be reduced until much higher up the income scale.

The childcare element

As explained in our ‘understanding childcare’ section, the childcare element is calculated on a weekly basis rather than daily.

Technically, the legislation requires two small calculations to be done in order to determine the childcare figure to use in the calculation.

Calculation 1

The actual ‘average weekly childcare costs’ for the relevant period should be calculated.

This involves multiplying the ‘average weekly childcare costs’ (see ‘understanding childcare’ on how to calculate this figure) by:

(52 / N1) x N2

N1= Number of days in the tax year
N2= Number of days in the relevant period.

Calculation 2

The second step involves calculating the ‘prescribed maximum childcare costs’ for the relevant period. The maximum childcare costs that can be claimed are 70% of the prescribed maximums which are £175 for one child and £300 for two or more children.

This involves taking whichever maximum amount applies (£175 or £300) and dividing it by 7, rounding the result up to the nearest penny before multiplying by the number of days in the relevant period.

Once you have calculated both figures (the actual costs and the prescribed maximum costs), the lower figure is taken and multiplied by 70% (the answer then being rounded up to the nearest penny).

Where average weekly childcare costs exceed the maximum rate, then the steps above need to be followed as shown by Example 3.

In practice, if average weekly childcare costs are less than or equal to £175 or £300 there is no need to do both calculations (because the actual costs will always be lower than the prescribed maximum). The actual costs figure can simply be used in the calculation of maximum rate as Example 4 shows.

Calculating income cut off points

Sometimes it is useful for advisers to be able to calculate the cut-off point for a specific group of tax credits claimants, and as the family element of tax credits is no longer protected until income reaches a certain level, every claimant will have a different income level at which their tax credits will reduce to Nil.

The calculation of this income level for WTC only or WTC and CTC claimants (those who are on the 1st income threshold) is shown in Example 5.

Calculating tax credits 2011-2012 and earlier years

For WTC only claimants, the calculation of tax credits in 2011-2012 and earlier years was as outlined in the previous section and for that group nothing has changed calculation wise (although thresholds and taper percentages have changed over the years).

The main change is for claimants who are entitled to CTC. In 2011-2012 and earlier years there was a second income threshold. For most claimants this threshold was £40,000 in 2011-2012 and £50,000 in 2010-2011 and earlier years. The second income threshold was only relevant to the family element of tax credits and meant that families were guaranteed at least £545 until income exceeded the second income threshold.

For this reason, the calculation separated out the family element from all other elements.

Earlier in this section we calculated that Joyce, would be entitled to only £419.50 if her income was £25,000. If those circumstances had applied in 2010-2011, the calculation would have been as set out in Example 6.

As can be seen in Example 6, Joyce would have received the full amount of the family element because her income was below the second income threshold (in her case £50,000)

Calculating the second income threshold

For most people the second income threshold was £40,000 in 2011-2012 (£50,000 in 2010-2011 and earlier years). The one notable exception to this was for families whose elements of tax credits other than the family element had not been tapered away by the time income reached £40,000. Such families would have a higher second income threshold that needed to be individually calculated.

This was a complicated part of the system, not helped by HMRC who often quoted the £40,000 as an absolute cut-off point when in fact, as the examples below show, families with incomes much higher up the scale could still qualify because their second income threshold was higher than £40,000. Example 7 shows how this second income threshold was calculated.

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.
 

 

 

 

Tax Credits: Policy changes

In this section you will find information about tax credits policy changes.

Tax credits have undergone some fairly major changes in the last couple of years. The current policy section outlines changes to the system that have taken place over the last few years.

Information about changes to the system in 2015/16 and later years can be found in the future policy section.

In October 2010, the Government announced that both working tax credit and child tax credit would be replaced by Universal Credit. You can find out more about the move to UC in our transition to Universal Credit section.

Tax Credits: Benefits and Credits Consultation Group

BCCG is a forum hosted by HMRC to discuss tax credits, child benefit, guardian’s allowance and tax-free childcare with representatives.

The format and objectives of the group were reviewed during 2014 and members consulted on proposals to streamline the arrangements. Before then the Group provided:

The group used to meet bi-monthly and the minutes were published after each meeting on the HMRC website. We have provided links to them below.

During 2014, BCCG agreed to reduce the number and frequency of their meetings such that they now meet in various specific sub-committee arrangements to discuss items of current and specific interest, such as the in-year finalisation of tax credits.

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

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.

NOTE: As of April 2014, the HMRC intermediaries guide ‘How HMRC handle tax credits overpayments, has been taken offline for updating. We have continued to include the previous version on this page and will update it once the new HMRC guide is ready.

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 and Banking arm for collection by direct recovery. This is the case even if a claim ends and then re-starts for some reason (e.g. a claimant splits with their partner, makes a single claim and gets back together making a new joint claim – the overpayment from the original joint claim cannot be recovered from the new joint claim). It is worth noting that HMRC announced in the Autumn 2012 statement that they would be introducing new IT to allow ‘cross claim’ recovery whereby overpayments on a claim that has ended can be recovered from a future new claim even if it is made in a different capacity (for example an overpayment from an old single claim will be recovered against a new claim as a couple). It is expected that this will commence in October 2014. See below for more detail about how this new cross claim recovery will work

HMRC have published a guide for intermediaries online  which explains how HMRC handle tax credit overpayments, including their direct recovery policies.

Direct Recovery

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

HMRC revised their guidance around tax credit direct recovery cases in 2010 in a policy that is much more understanding towards claimants and more generous than the previous guidance. That said, its success very much relies on its implementation by staff.

The direct recovery process

The following table gives an overview of the direct recovery process. Further detailed information can be found in the HMRC guide for intermediaries.

  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 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 12 months but does not set out any longer payment options. It encourages claimants to contact the payment helpline on 0845 302 1429. The payment helpline is part of the contact centre directorate in HMRC.

 

A sample of the TC610 can be found on page 11 of the HMRC intermediaries guide.

Step 2

Debt passed to Debt Management and Banking (DMB)

If no response is received to the TC610, and no dispute has been filed, the debt will be passed from the Tax Credit Office system to Debt Management and Banking’s IDMS system

Step 3

Reminder letter sent by DMB

A reminder letter, IDMS 99 will be sent automatically.

Step 4

A further reminder letter sent by DMB.

If no response is received to the TC610 or the previous reminder (IDMS 99), a further letter will be sent asking for payment.

Step 5

Debt Management Telephone Centre (DMTC) will attempt telephone contact

DMTC will contact the claimant to discuss the overpayment and request payment.

 

If DMTC establish that the claimant cannot make a payment arrangement (based on the financial hardship criteria below) they will suspend collection for 12 months or consider remission.

 

See the HMRC intermediaries guide for further information.

Step 6

Personal contact

If the claimant has refused to pay in full or no contact could be made by telephone, the Debt Technical Office (DTO) will review the case to ensure the overpayment is due and also to see if any of the special rules applying to household breakdowns or dual recovery applies (see below for further information).

 

If no contact can be made, it may be referred to a field officer for a visit. A payment arrangement can still be agreed at this stage.

Step 7

Legal proceedings

If no contact can be made, or the claimant refuses to make a payment arrangement, HMRC will consider referring the debt to a private debt collection agency, coding out the debt through the person's tax code or using their distraint powers. They may also use the County Court, although distraint is their preferred approach.
 

 

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 12 months, but does not set out any longer payment options. Even 12 months is not long enough for most tax credit claimants with substantial overpayments.

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

Previously, DMB staff were instructed to ask for income/expenditure details for time to pay arrangements that lasted more than three years. Guidance given to staff from March 2010 means that full income/expenditure details are no longer required, except if repayments will take longer than 10 years.

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 staff are instructed to follow the ‘Tax Credits Negotiating Framework’ in dealing with these requests. A copy of this is available in Section 5 of the HMRC intermediaries guidance.

    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 they will clear the debt in less than three years. If a claimant cannot afford £10 per month, then DMB 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 writing off the debt on grounds of financial hardship. This new guidance does not affect time to pay arrangements already in place for less than £10 per month unless they stop for any reason.
     
  3. 10 years or more
    DMB 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 be accepted and HMRC should suspend the debt in those cases and review after twelve months.

    If a claimant has agreed to repay over a period longer than 10 years, provided payments are made as agreed, HMRC will write off any debt remaining at the 10-year point.

    A copy of the income/expenditure form used by HMRC can be found in the HMRC intermediaries guide. 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. The current guidance states 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 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 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 claimants thinks they should not have to repay, a dispute can be lodged, but it may be necessary to liaise with DMB 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 (new policy implemented 15 July 2013), it is still worth asking DMB directly if they will suspend recovery. If they refuse, then it is crucial that the claimant set up a time to pay arrangement otherwise DMB will continue with their recovery action. This is especially important if distraint is the next step in the process.

Although distraint and referral to debt collection agencies are 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. Previously HMRC were unable to recover their costs in going to the county court and obtaining judgement. These changes now align HMRC’s position with that of other creditors. This change came as a result of a consultation exercise carried out between 1 July 2010 and 23 September 2010. The consultation looked at the principle of charging costs where debt cases are entered in the county court in England and Wales and judgment is awarded in their favour. Following the consultation exercise, changes were introduced to the Ministry of Justice’s (MoJ) Civil Procedure Rules to award fixed costs to HMRC in successful court claims in England and Wales for recovery of tax. A summary of responses was published in January 2011.

Debt collection agencies

HMRC say that they may refer debt cases to private Debt Collection Agencies (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. HMRC now routinely use private DCA to collect tax credit debts. 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.

Claimants should receive a final letter from HMRC urging them to make contact and agree a time to pay arrangement (over the default 12 months or longer if circumstances dictate) before the case is referred 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 asks for hardship provisions to apply or disputes the overpayment in any way, the case should be passed back to HMRC.

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. In the earlier years of the system, HMRC prioritised debt recovery by value. Since 2009 they have moved away from this approach and used a campaigns based approach with attempts to segment the overpayment population based on behaviour and risk. As a result of this new approach, they have started to use new mechanisms for debt collection, one of which is collection via the PAYE tax code.

A change to the PAYE regulations was needed to enable debts to be collected in this way from those in PAYE employment or those in receipt of a UK-based pension. A consultation document was issued on the detailed regulations and the raising of the recovery limit to £3000. The responses to this consultation were published on the HMRC website. The regulations came into force on 20 July 2011.

In October 2014, new regulations came into force raising the overall recovery limit for relevant debt which can be recovered via the PAYE tax code. The new maximum limit is £17,000. The actual limit that applies depends on the claimant’s expected PAYE income in the tax year for which the code is determined.
 

The expected amount of PAYE income of the claimant in the tax year for which the code is determined

The total amount of debt that may be recovered in that tax year

Less than £30,000

No more than £3,000

£30,000 or more but less than £40,000

No more than £5,000

£40,000 or more but less than £50,000

No more than £7,000

£50,000 or more but less than £60,000

No more than £9,000

£60,000 or more but less than £70,000

No more than £11,000

£70,000 or more but less than £80,000

No more than £15,000

£90,000 or more

No more than £17,000


As a result, DMB will now identify tax credits direct recovery overpayments that are suitable for collection via an adjustment to the claimant’s PAYE tax code. This will apply to anyone in PAYE employment or in receipt of a UK-based pension. The first debts will be included in the 2012/13 code from 6 April 2012. It will continue to be used in 2014/15 and thereafter.

It should be noted that this method of recovery is voluntary under the legislation. However in practice HMRC appear to only allow the claimant to refuse if they offer to repay via another method.

The HMRC guidance explains the process as follows:

'DMB will issue a letter, to the selected customers, which explains that HMRC are considering collecting the tax credit overpayment by adjusting their tax code and increasing the amount of tax they will pay in the next tax year. The letter asks the customer to call DMB on 0845 302 1421 within 30 days, from the date of the letter, if they do not want HMRC to take this action.

The customer can contact DMB to discuss an alternative method of repaying the overpayment. DMB will not be aware of other financial commitments the customer has and it may be that in some circumstances agreeing a time to pay for the tax credits overpayment is more appropriate. If the customer does not contact DMB then checks will be made to ensure a code adjustment can be made. Existing safeguards that limit the amount that can be collected through PAYE will be preserved.

In a joint household award, two people will be named in the letter. DMB will attempt to adjust the tax code of the first named person. However, if this cannot be done DMB will then attempt to adjust the tax code of the second named person.

Where the code can be adjusted a form P2 Coding Notice will be sent to the customer around January / February.

If the code cannot be adjusted DMB will write to the customer and request an alternative method of repaying; normally by direct debit.

Where a couple are no longer together (Household Breakdown) DMB will not attempt to collect the overpayment by adjustment to either of their tax codes. In these circumstances DMB will expect each former partner to pay 50% of the overpayment. (But please refer to the guidance below if one former partner wants to pay more than 50%).'

Some further points to note about the process:

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.

Under the current version of COP26, 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, which depend upon a claimant’s income, are as follows:

Sometimes HMRC will adjust an award during the award period in order to try to prevent an overpayment from accruing. In such cases the limits set out above apply to restrict recovery.

From April 2015, tax credits payments will be stopped in-year where, due to a change in circumstances, an award is reduced to the extent that the claimant has already received 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.

Potential overpayments that are identified during the award period in this way are loosely termed in-year overpayments.

In the March 2014 Budget, the Chancellor announced that from April 2016 households with income over £20,000 will have their rate of recovery increased from the current 25% to 50%. See our policy section for details of this announcement.

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 applies from October 2014 onwards.

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 award 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, it will not be included in this ongoing recovery.

Ongoing tax credit payments will generally be reduced by 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 further, or collect an overpayment over a longer period, or write off an overpayment altogether if the claimant is experiencing particular financial hardship.

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 or the overpayment is written off on hardship grounds. The helpline should refer the case to the Tax Credit Office who will make a decision on whether the recovery rate can be varied.

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 fraud or error.

If a decision on hardship is required, TCO will pass the case to Debt Management and Banking (DMB) who will contact the claimant to check what is affordable. Once this information has been gathered, HMRC will decide whether to vary the recovery rate or remit (either fully or partially) the overpayment. The criteria used to determine this will be the same as that for direct recovery (see section 4.4 below). Once a decision has been made by DMB, they will inform TCO who will write to the claimant.

If advisers have all of the relevant information collected, they can write to the Tax Credit Office, Preston, PR1 4AT to make a request in writing.

Financial hardship

The information in this section applies to both direct and ongoing recovery cases. 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. 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 write off the debt on financial hardship grounds.

Prior to March 2010, HMRC’s policy on financial hardship was practically non-existent. It was unclear to advisers when HMRC would write off 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, DMB 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.

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 writing off 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).

Pensioners are not mentioned as a specific group in the new HMRC guidance; however, where a pensioner is in receipt of pension credit and there is no realistic chance that their situation will improve, we believe the same criteria should be applied.

Claimant is on sickness/incapacity benefit

Where a claimant is in receipt of a sickness benefit such as incapacity benefit or employment and support allowance, cannot afford to offer any repayment to HMRC and there is little prospect of them ever gaining employment, HMRC should write off 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.

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 written off 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

The above information regarding financial hardship applies to both direct recovery and ongoing recovery cases.

The process for those subject to ongoing recovery is outlined in section 4.3 above.

For those in the direct recovery process, DMB 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) (0845 366 1206) 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 write off the overpayment in full.

If DMTC refuse to consider hardship or make a referral to a DTO, the HMRC intermediaries guidance should be quoted and a complaint 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.

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 policy is to 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. 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.

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 HMRC intermediaries guide and in the Debt Management Banking Manual Online.

DWP and tax credits debt

Previous pilots

The Financial Secretary to the Treasury announced, via written ministerial statement in September 2009, that a pilot would take place in 2010 to trial the recovery of HMRC tax credits and self-assessment debts from certain DWP benefits. HMRC then announced an expansion of that pilot and from 14th March 2011 they contacted around 4000 tax credits claimants and 4000 self-assessment customers with letters offering them the opportunity to join the scheme. The scheme was voluntary and claimants could choose whether to take part.

Further details about the pilot can be found in our policy section.

No results of the extended pilot have been published and no further announcements about this method of recovery have since been made.

Similarly, in the Autumn Statement 2012, HMRC announced a new pilot with DWP looking at ways of recovering money where debts are owed by the same person to both HMRC and DWP. Further details about the pilot can be found in our pilots being trialled section. No further announcements have been made about this pilot.

Universal Credit

DWP will recover tax credit overpayment debts automatically from Universal Credit awards. 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. 

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 DMB will review the circumstances:

Further guidance for cases involving claimants with mental health issues can be found in the tax credit section of the DMB 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 telephone centre (0845 3661206)to explain the situation if this applies.

Tax Credits: Contacting HMRC about tax credits

This section of the site gives you information about the different ways of contacting HMRC about tax credits. It also gives information about security procedures in place when contacting the tax credits helpline. 

Contacting HMRC

General advice

The main telephone number is the tax credit helpline: 0345 300 3900 (textphone 0345 300 3909). From abroad, you can ring +44 2890 538 192. The helpline is open 8am-8pm, Mondays to Fridays, 8am-4pm on Saturdays (closed Sunday, Christmas Day, Boxing Day and New Year’s Day).

The telephone line is very busy and HMRC say the best times to call are between 8.30 am and 10.30 am and 2pm to 4pm, Tuesdays to Thursdays.

HMRC use an automated response system to direct callers to the helpline (sometimes referred to as ITA). This is designed to help direct callers to relevant information on the GOV.UK website, provide basic generic messages which may help answer some queries and direct the call to an adviser who can help with the call query. The system relies on speech recognition and LITRG have produced a helpful guide to offer some useful hints and tips on using this system (please note the e-mail options to notify changes of name/address are not currently relevant for tax credits).

This number can be used to: 

Advisers who are from registered organisations can use the intermediaries helpline as an alternative to the helpline for a similar range of issues. More information can be found in our intermediaries section.

Claims and renewals

New claims should be sent to:

HMRC - Tax Credit Office
Liverpool
L75 1AZ

Renewal forms should be sent to:

HMRC - Tax Credit Office
Comben House
Farriers Way
Netherton
L75 1AX

Reporting changes of circumstances

Claimants can report changes via the tax credit helpline (details above). Changes can also be reported in writing to:

Change of circumstances
Tax Credit Office
Preston
PR1 4AT

More information about reporting changes can be found in our how to notify changes section.

Disputes and Complaints

Disputes and complaints can be sent in writing to the following address marked for the attention of the ‘dispute team’ or ‘complaints team’.

Tax Credit Office
Preston
PR1 4AT

Once a dispute or complaint is received by HMRC, a letter should be sent acknowledging receipt and giving the claimant a named caseworker and direct dial number.

Mandatory Reconsiderations (see Appeals section)

Appeals should be sent to:

Appeals Team
Tax Credit Office
Preston
PR1 4AT

Face to face advice

Historically, HMRC had enquiry centres that claimants were able to visit, albeit they were advised to arrange an appointment first.

In March 2012, HMRC announced that they would replace their Enquiry Centre network with a new system of support for taxpayers and tax credits claimants who need extra help with their tax affairs. Following a pilot in the North East of England to test the new approach, which included closing several Enquiry Centres, HMRC decided that the benefits of the new service offered a better system of support for customers. The new service was rolled out across the UK at the end of May 2014, with a programme of closure seeing the remaining Enquiry Centres all closed by 30 June 2014. You can read HMRC’s briefing note on the GOV.UK website.

The service means that the telephone helplines are the initial way that customers can speak to HMRC. Customers who are identified as needing extra help (according to criteria HMRC have developed) will then be offered support best suited to them, this might still be by phone, but with a specialist telephone adviser who can deal with the queries in-depth or by arranging a set time to call or perhaps a face to face meeting with someone from HMRC at a place convenient to the customer, calling on a team of HMRC specialist mobile advisers. More information can be found here.

Claimants with disabilities may need face to face advice by way of home visit. Following the closure of HMRC enquiry centres, claimants who are deaf, hard of hearing or have a speech impairment and are unable to use the telephone can use an online form to request a face to face appointment.

Claimants with disabilities

For those who have disabilities, effectively communicating with HMRC can be difficult. At present, no central computer system records special needs that a claimant might have, therefore reference should be made in all communications of any specific needs that HMRC should be aware of.

HMRC do provide special services for those with particular needs. A full list of all services is published on GOV.UK.

Claimants with disabilities may need face to face advice by way of home visit. Following the closure of HMRC enquiry centres, claimants who are deaf, hard of hearing or have a speech impairment and are unable to use the telephone can use an online form to request a face to face appointment.

Translation services

HMRC offer translation services to those whose first language isn’t English.

According to their information:

'HMRC will allow a friend or family member to interpret for customers who don't speak English as a first language. When you contact one of HMRC's helplines they will ask you if you have a friend or family member who is willing to interpret for you and if you are happy for them to do so. This friend or family member needs to be over 16 years of age and should be with you when you call HMRC.

If you do not have or do not wish to use a friend or family member, HMRC offers a free language interpretation service. You can use this service when you telephone HMRC or when you come in to an HMRC Enquiry Centre. You can contact one of our helplines or your Tax Office and they will arrange this service, but please give them as much notice as possible.'

Useful tips when contacting HMRC

When dealing with overpayments, issues often arise about whether a claimant has reported a particular change or whether they have been given incorrect advice by HMRC. It is much easier to dispute an overpayment if the claimant has evidence of their contacts with the department. We recommend that claimants:

Security arrangements

In late 2009, HMRC introduced a new security process on the tax credit helpline called IDAS (ID Authentication Service). All claimants who contact the tax credit helpline will be asked to go through the new security. This includes people contacting the helpline to request claim forms.

How does IDAS work?

IDAS uses information held by credit reference agency Experian, combined with HMRC’s own data to verify the callers identity.

The first time a claimant calls, they will be asked whether they consent to HMRC using Experian data. HMRC will need the claimants NINO, DOB and name at this point. If the claimant agrees to this, they will be asked questions based on the Experian data. The helpline advisers cannot see a full credit report, they will be prompted by the system with only certain questions based on that credit report. Questions will be things like ‘Who is your mobile phone contract with?’.

If the claimant does not consent, or there is not enough data from Experian to generate these questions, the claimant will be asked questions based on HMRC information drawn from various sources.

Once this process has been successfully passed, the claimant will be asked to set up some shared secrets which will be used to identify them on subsequent calls. If the claimant declines to set up shared secrets they will need to go through the whole process again on their next call.

What if a claimant fails IDAS or the process cannot be completed?

Representatives from the Benefits and Credits Consultation Group (BCCG) have reported instances of claimants being told that the process cannot be completed where there is not enough data to generate the questions.

In other cases, claimants have been asked difficult questions that they have not been able to answer.

In both circumstances, the helpline will advise the claimant that they must have a face to face meeting and provide documentation to prove their identity. Only once this process has been completed will HMRC allow the claimant to transact over the phone.

The helpline should make arrangements with the Needs Enhanced Support (NES) team and the claimant should receive a call from that team within 48 hours to make an appointment and advise what documentary evidence is needed. Claimants who are requesting claim forms should get an appointment within 5 days.

If the claimant provides this documentary evidence, the NES adviser should set up the shared secrets in the same way as the helpline.

How does IDAS affect intermediaries?

Intermediaries should not be asked to go through the IDAS process. It is for claimants only. The normal security questions for intermediaries (based on the TC689) and agents (64-8) should continue to be used.

If an intermediary does not have an authority in place, but has the claimant with them, the helpline will ask the claimant to go through the IDAS process. Once the security check is passed, the claimant can ask the helpline adviser to speak directly to the intermediary.

Problems with IDAS

Representatives on the BCCG group have raised many concerns about the IDAS process particularly with regards to its impact on those with disabilities and those who live some distance from an enquiry centre.

HMRC introduced some changes to the process in March 2010 which includes alternative arrangements for those who don’t have any of the prescribed identification, who don’t have a NINO or who live an unreasonable distance from an enquiry centre.

HMRC introduced IDAS in tax credits without producing an equality impact assessment (EQIA), but after much pressure from the Benefits and Credits Consultation Group HMRC agreed to carry out a belated EQIA and this was published in February 2011. Following this consultation, HMRC published their Final Report and Action Plan for IDAS in July 2011. In this final report, HMRC acknowledged that the full EQIA consultation process should have been completed prior to the IDAS service going live. They also reiterated that it is not accepted HMRC practice to implement changes without showing that they have given due regard to the need to consider the impact on equality first.

As a result of the consultation, HMRC announced some specific measures to address concerns raised in the consultation. Some of these have now been implemented. The first was to carry out a pilot allowing people to obtain claim forms without carrying out the IDAS procedure, as of May 2012 we understand this is still ongoing. HMRC also stated they would introduce a family and friends translation service which they have now done. More details about this can be found above. Finally, they said they would commission further work to understand the needs of their disabled customers.

These measures are most welcome, however many of the points listed by HMRC in their response simply state provisions and processes that already exist such as specialist services in place for those with hearing/speech impairments, home visits, transactions in writing as an alternative to phone, translation services and access to general advice without the need to pass security. Whilst these services seem acceptable on paper, in practice claimants are often not aware that they exist or they find the service is inadequate (for example, lengthy delays in receiving a reply to written correspondence). While HMRC acknowledge some of these issues and promise that some action will be taken, a great deal of work is still needed to ensure that vulnerable customers are able to access the services they need either themselves or via an intermediary if that is their preferred method.

You can find full details of the consultation, including the written responses and HMRC’s final report and action plan, in our tax credits public consultations section.

Online services and GOV.UK verify

During renewals 2014, HMRC piloted online tax credit renewals. The new system allowed some claimants to renew their claim online without having to contact the helpline or post their form back. For renewals 2015, online will be HMRC’s preferred channel of renewing claims.

The expectation is that most tax credit claimants who want to use this option will need to confirm their on-line identify via the new GOV.UK Verify security system. The Verify system is still being developed, tested and changed. It uses third party companies (such as Experian) to confirm a person’s identity by using various types of data such as address details, financial information, passport details, driving licence details. Users will be asked questions based on the data. They will also be asked to enter a code received on their mobile phone.

Once identity is confirmed, the company notify HMRC and you set up your on-line account (including security passwords ) and you can access the Government systems which are then linked to Verify.

A person’s identity is verified by the third party company each time they want to use a service. The person can choose which third party company they want to use. As of April 2014, there are three companies – Experian, Digidentity and the Post Office. More will be added over time. There is no account with Government.

You can read more about the Verify service on the GOV.UK website.

There are a number of concerns about the verify process, especially for some tax credit claimants who may not have the documents needed to verify themselves (a passport or driving licence) or who do not have a mobile phone. It is expected that HMRC will have an alternative process in place for people who wish to renew online during 2015 renewals but who cannot use the verify system.
 

 

 

 

 

 

Tax Credits: Navigating HMRC

This section of the website explains the function of different parts of HMRC in relation to tax credits.

Her Majesty’s Revenue and Customs (HMRC)

HMRC is a non-ministerial government department which means that they do not operate under the day-to-day control of a government minister. The Queen appoints Commissioners who have the responsibility for the administration of the Department. The Commissioners are responsible for delivering the objectives established by the Chancellor, this includes the administration of the tax credits system. HMRC publish an organisational chart that shows board members and their responsibilities.

Benefits and Credits (B&C)

HMRC is structured around four operational groups, each led by a Director General. B&C is one of these operational groups and it is led by Nick Lodge (Director General) who is a Commissioner.

B&C is the part of HMRC that is responsible for tax credits, child benefit, guardian’s allowance and tax-free childcare.

Tax Credit Office (TCO)

The TCO is part of B&C and is responsible for many of the operational parts of the tax credits system and back office processes. The TCO process claims, carry out compliance checks, deal with disputes, appeals and complaints, amongst other things.

Generally, the TCO are a ‘back office’ which means that they don’t interact with claimants in the same way that advisers on the tax credits helpline do. Normally, contact with the TCO is with a specific TCO worker about a specific issue, such as an appeal or a compliance investigation.

HMRC’s tax credits helpline advisers send referrals to the TCO for issues that they cannot immediately deal with such as backdating and notional offsetting requests.

Debt Management and Banking (DMB)

DMB is the part of HMRC responsible for collecting debt owed to the department. This includes tax credits debt as well as normal tax debt. Tax credits overpayments start out with the TCO but after an initial attempt at recovery the debts are passed to DMB.

Contact Centres

HMRC have a network of contact centres that deal with telephone calls from claimants. Often referred to as the tax credit helpline (0345 300 3900 or 0345 300 3909 for textphone), it is actually a group of contact centres spread across the UK who deal with calls to the main helpline number.

The tax credit helpline escalate cases to the TCO if they cannot deal with a particular issue.

Complaints and disputes

The other main group within the TCO which is likely to have contact with advisers deal with explanation requests, disputes and complaints. They are generally a back office team, meaning there is no single contact number for them, but any letters sent out by the team should include a direct dial number for the officer dealing with that particular case.

Intermediaries Dispute and Complaints Team (IDCT)

IDCT is part of the TCO and deal with explanation requests, disputes and complaints from voluntary sector intermediaries. The team were set up to specifically deal with advisers’ queries. Due to limited resources, the team only deal with correspondence from voluntary sector intermediaries who give free advice and representation. Otherwise the case will be dealt with by the standard teams.

HMRC Enquiry Centres (EC)

HMRC have closed their offices across the country that were referred to as enquiry centres. HMRC can still provide limited face to face advice or home visits where appropriate and only by appointment, for those identified as needing extra support (using HMRC criteria) in their dealings with HMRC. See contacting HMRC about tax credits for more information.

Tax Credits: National Insurance Credits

A person who receives Working Tax Credit but doesn’t pay National Insurance (NI) contributions, because their earnings are too low, may receive automatic NI credits that help to protect entitlement to state pension and certain bereavement benefits.

National Insurance - the basics

There are various earnings-related rules about National Insurance contributions. If you earn weekly, then a weekly earnings limit is used and if you earn monthly, then a monthly limit is used. NI contributions and credits relate to each pay period. You are allowed to earn a certain amount before you have to pay anything but if you earn less than the lower earnings limit in a week, then that wage won’t normally contribute to your National Insurance record. The actual rates and thresholds usually change each year and can be found on the GOV.UK website.

If you earn above the National Insurance Primary Threshold, currently £155 per week, then you should pay National Insurance contributions and that should be clear on your pay or wage slip. If you earn above the Secondary Threshold (currently aligned £156 per week) your employer will also be liable to pay the employer rate of national insurance related to your employment/earnings.

If you earn above the Lower Earning Limit (LEL) for National Insurance, currently £112 per week but below the Primary Threshold (£155 per week), then you won’t actually pay any NI contributions on that wage but your record will be automatically credited with basic NI credits for that week.

If you earn below the Lower Earnings Limit (LEL) for National Insurance, then you won’t be liable to pay NI contributions and that week won’t generally contribute towards your NI record.

More information about National Insurance contributions is on the GOV.UK website.

However, if you earn below the Lower Earnings Limit, aren’t already paying NI contributions and you also receive Working Tax Credit (WTC), then you may be entitled to receive National Insurance credits which protect your NI contribution record towards receipt of certain state benefits and state pension.

There is more information about NI credits on the GOV.UK website.

WTC and NI Credits

Broadly, people who get WTC with earnings below the LEL (or as a self-employed person your earnings are below the small profits threshold, £5965 per year) should get the following types of NI credits:-

Joint claims and NI credits

If you have a joint claim to WTC, the legislation treats WTC as paid to the person with earnings. If a couple both have earnings, then the person who is physically paid the WTC will receive the credits This latter point is extremely important as many sources of information on this topic from HMRC and DWP refer to people ‘getting’ or ‘receiving’ WTC in order to receive the credits which can mislead joint claimants into believing that it makes no difference whom they choose to be paid the WTC. Following representations from LITRG, since 2012 TC600 notes now carry a warnings message, however prior to this date the notes were silent on this point. If any claimant has missed out on credits as a result of making the wrong election prior to 2012/13, providing their partner was not given or did not need the credits, a complaint should be made to the Tax Credits Office (TCO and onwards to the Adjudicator’s Office if necessary. More information can be found in our making a complaint section.

NI credits paid in respect of WTC entitlement should be made automatically but you can ask HMRC for a statement of your National Insurance record to check whether you have paid the correct contributions and whether you are receiving any automatic credits. More information on how to do this can be found on the GOV.UK website.

Tax Credits: Passported benefits

Passported benefits cover a wide variety of benefits and entitlements that claimants may be entitled to when they are awarded tax credits.

Passported benefits cover a wide variety of benefits and entitlements that claimants may be entitled to when they are awarded tax credits. The passporting system is complex and each passported benefit has a different criteria and income threshold. Below we have provided a list of the main passported benefits along with links to further information.

One point of note about the income thresholds quoted in the table. Income for tax credits purposes is not necessarily the same as household income for a particular tax year. Income for tax credit purposes refers to the income figure used to calculate any award once the disregard has been taken into account.

 

Benefit /
entitlement

Basic TC
criteria

More
information

Sure Start
Maternity
Grant

CTC at a rate higher than the family element; or

This is a £500 payment from the social fund to help with the costs of a new baby.

 

See also -

WTC including the disability or severe disability element

Help with
health costs

CTC with or without WTC and household income for tax credits purposes of £15,276 or less; or

Claimants can get free NHS prescriptions, dental treatment, wigs, fabric supports, eye tests, vouchers towards the cost of glasses or contact lenses and help with cost of travel for NHS treatment or referral by a doctor or dentist.

 

See also -

WTC only including the disability or severe disability element and household income for tax credits purposes of £15,276 or less.

Healthy Start

CTC only (no WTC unless received during the four week-run period only) and household income for tax credits purposes of £16,190 or less.

Healthy start offers free milk, fresh fruit and vegetables, infant formula and vitamins to qualifying families.

Claimants must be receiving CTC only and not WTC. However, WTC paid during the four week run-on period does not count as WTC for this purpose.

 

See also -

Free School
Meals

England and Wales - CTC only (no WTC unless it is paid in the four week run-on) and household income for tax credits purposes of £16,190 or less.

See also

 

Scotland - CTC only (not WTC unless it is paid in the four week run-on) and household income for tax credits purposes of £16,190 or less;  or CTC and WTC paid at the maximum rate with household income for tax credits purposes under £6,420 (with effect from 6 April 2010)

Northern Ireland - CTC only (not WTC unless it is paid in the four week run-on) and household income for tax credit purposes of £16,190 or less; *or full time nursery and primary school children whose parents receive WTC and CTC and have household income for tax credits purposes of £16,190 or less. *From September 2014, this is extended to also cover post-primary school pupils.

Help with
funeral
expenses

CTC at a rate higher than the family element; or

This is a payment from the social fund to help with funeral expenses.

 

See also -

WTC including the disability or severe disability element

Help with
court fees

WTC only (without CTC)

Claimants may be able to get help with court fees if they are receiving tax credits. The only automatic passport is for those claimants in receipt of WTC without CTC.

However, claimants receiving CTC may also qualify for remission based on their income.

For more details see the HM Courts Service leaflet.

Help with
the costs
of prison
visits

CTC only; or

Some tax credit claimants may be able to get help with the costs of prison visits.

 

See also -

CTC and WTC; or

WTC only with a disability or severe disability element; and Household income for tax credits purposes is £17,474 or less

Tax Credits: Rates and tables

Tax credits annual and daily rates

DWP benefit rates

Tax Credits: Understanding the disregards

The disregards for income rises and falls are a unique feature of the tax credits system that cause a great deal of confusion amongst claimants.

The aim of this guide is to explain the disregard, how it operates, the problems it can cause and explain how the new disregard for falls in income operates by providing detailed examples.

Introduction

The reason why overpayments are endemic in the tax credits system is that it works on the basis of pay now, establish entitlement later. Unlike other welfare benefits, entitlement to tax credits is based on the tax year, 6 April to the following 5 April, and it is not until after the end of the tax year that entitlement for that year can be finally determined.

In summary, the claim ‘cycle’ works like this:

The income tests

TCA 2002, Section 7(1) states that entitlement to tax credits is dependent on the ‘relevant income’ not exceeding certain thresholds. This relevant income test does not apply to people in receipt of certain means-tested benefits (income support, income-based jobseeker’s allowance, income-related employment and support allowance and pension credit) who are therefore entitled to receive the maximum amount for their particular circumstances..

This means that each time HMRC calculate an award of tax credits, they must determine what income figure (the ‘relevant income’) to use in order to calculate entitlement. This normally requires a comparison between income for the current year and previous year.

However, the first award following a fresh claim is always based on income from the previous year. The TC600 claim pack only collects information about the previous tax year. So if a claimant applies for tax credits on 6 June 2013, HMRC will award tax credits for 2013-2014 based on their income for 2012-2013.

TCA 2002, Section 7(3) goes on to explain how to determine relevant income. In summary this is:

For income rises – income disregard £5,000

(a) If current year income (CYI) is greater than previous year income (PYI) by no more than a certain amount (known as an income disregard, the final award is based on PYI;

(b) If CYI is greater than PYI by more than the specified income disregard, the final award is based on CYI less the income disregard, and an overpayment may arise.

For falls in income – income disregard £2,500

(c) If PYI exceeds CYI by no more than a certain amount (known as an income disregard) the final award is based on PYI ;

(d) If PYI exceeds CYI by more than the specified income disregard, the final award is based on CYI plus that specified income disregard.

All other cases

Where none of the above apply, the claim is based on CYI.

In this context, CYI means income for the year for which the award is being calculated whilst PYI refers to income for the year before. For example, when calculating an award for 2015/16, 2015/2016 will be the current year and 2014/15 the previous year.

History of the income disregards

The income disregard, for rises in income, from 2003-04 to 2005-06 inclusive was £2,500. Its purpose was to provide a ‘buffer zone’ in which a family’s income could increase during the course of a year without affecting their tax credit entitlement. Though considered generous at the time it was introduced, the £2,500 buffer zone proved insufficient to prevent hardship to families whose income increased above that amount. Therefore in 2006-07, in a bid to reduce the volume of overpayments arising from increases in income, the income disregard was increased quite dramatically to £25,000.

That was probably the most significant of the changes announced in the Pre-Budget Report on 5 December 2005, and the overpayment figures relating to the 2006-2007 tax year showed a significant fall in both the number and amount of overpayments. HMRC have attributed this largely to the increased income disregard.

The effect of the increase was to bring greater certainty for claimants in a system where a major problem had been the sheer unpredictability of what families could expect to receive. The June 2010 Emergency Budget announced further changes to the disregard both by introducing a disregard for falls in income of £2,500 from April 2012, but also by reducing the disregard for increases in income from £25,000 to £10,000 from April 2011 and then down to £5,000 from April 2013.

As a result of these changes, it is likely that overpayment figures will rise again as the disregard for increases in income gets nearer to the original £2,500.

Applying changes to the disregards

The disregard for income rises has changed more than once since the tax credits system began and HMRC introduced a disregard for falls in income from April 2012. There is sometimes confusion about when newly announced disregards should be applied.

In simple terms, a new disregard applies to the calculation of all claims for the year it was introduced and later years.

The £25,000 disregard applies only to income rises in 2006-07 and subsequent years – overpayments being recovered from final awards for 2005-06 and earlier years will still be calculated by reference to the £2,500 disregard applying in those years.

Similarly, the £5,000 disregard (implemented from 6 April 2013) applies only to income rises in 2013-2014 and later years. The £2,500 disregard for falls in income applies only to 2012-2013 and later years.

Example

Sanjay receives his renewal papers for the 2010-2011 tax year in May 2011.
When finalising the 2010-2011 tax year, HMRC will compare CYI (2010-2011) against PYI (2009-2010). The £25,000 disregard will be applied to any income rises between the two years. This is because the claim being calculated is 2010-2011 and the decrease in disregard did not occur until 6 April 2011 (2011-2012).

Sanjay’s initial award for 2011-2012 will be based on income from 2010-2011. Any re-calculation of his 2011-2012 award, including when HMRC finalise it, will be done by comparing his 2011-2012 income (or estimated income if before finalisation) against his 2010-2011 income. The £10,000 disregard will be applied during the comparison.

Income rises

Operation of the disregard for income rises between current year and previous year

Each time HMRC calculate tax credit entitlement (other than for initial awards) it normally requires a comparison between income for the current year and previous year.

Two of the income tests are relevant to rises in income. For 2013-2014 awards:

The effect of this is to create a disregard for rises in income from one year to the next, so that claimants will not face an immediate reduction in their tax credits should they start a higher paid job or increase their income in some other way.

Example 1

Jason claims tax credits on 6 June 2014. His initial award is based on previous year self-employed income of £8,000. In October 2014, Jason gets a second job and his income for 2014/15 is actually £12,000. When HMRC finalise Jason’s 2014/15 claim, they will use an income figure of £8,000 because Jason’s CYI is higher than PYI but by less than £5,000.

Note that in 2015/16 Jason’s claim will be based on his actual 2014/15 income of £12,000 (which at that point has now become his PYI) and so Jason’s increase in income will reduce his tax credits for the following year (2015/16).

Example 2

Sanjita claims tax credits on 6 April 2014. Her initial award is based on PYI self-employed income of £8,000. Soon after claiming, she gets a new job with an increased salary. Her 2014/15 income is actually £28,000. When HMRC finalise Sanjita’s 2014/15 claim they will use an income figure of £23,000 (£28,000 minus £5,000) because her CYI is higher than PYI by more than £5,000.

Importance of reporting income rises

It might at first seem that any income rises of £5,000 or less, because they have no effect on the current year’s award, need not be reported to HMRC until the renewal process gets underway at the start of the following tax year. But in fact it is sound advice to report such changes during the current tax year, even if they have no effect on the current year’s entitlement, in order to avoid overpayment of provisional payments in the early part of the following tax year.

Example 3

Jason, from example 1, had two choices when he started his second job. By waiting until renewal time to tell HMRC of his rise in income, his 2014/15 claim would be unaffected (because the rise in income was less than £5,000). However his 2015/2016 claim would be based for the first part of the year on an income of £8,000 until HMRC found out the correct income of £12,000. This would mean Jason is overpaid for the first few months of 2015/16.

By telling HMRC of his rise in income when it happens, HMRC can use the £12,000 figure from April 2015 when they start provisional payments ensuring that his 2015/16 award is paid using the most up to date information.

As well as encouraging people to update income figures before the end of the year, HMRC have introduced other measures to guard against overpayments generated by provisional payments that reflect outdated income figures.

The first, introduced at the end of the 2006-07 tax year, involved HMRC contacting ‘key groups of claimants’ to ‘obtain more up-to-date income information on which to base the next year’s payments while the finalisation process is completed’.

Secondly, since 2008-09, where claimants have not provided up-to-date information about their income and circumstances, the income figure used to calculate provisional payments has been up-rated by the average percentage increase in earnings.

Falls in income – the new disregard

The final two income tests in TCA 2002, Section 7 apply to falls in income from one year to the next. Prior to the 2012-2013 tax year, HMRC did not apply this disregard.

Falls in income prior to 2012-2013

Claimants who thought their income might be lower in the current year were able to contact HMRC with an estimated current year income and have their award re-calculated based on that estimate. This generally meant tax credits would increase.

Example 4

Ferdinand and Miranda had a joint income of £27,000 in 2010/11 (£13,500 each). Ferdinand lost his job and the couple estimated that their 2011/12 income would only be £16,500. They reported this estimated income to HMRC on 1 July 2011, and their tax credits were adjusted accordingly.

From 6 April to 30 June, Ferdinand and Miranda were paid tax credits based on a joint income of £27,000 (their 2010/2011 income). From 1 July 2011 to 5 April 2012 Ferdinand and Miranda received tax credits based on an income of £16,500 (based on Miranda working for the entire year at a salary of £13,500, and Ferdinand being paid (say) £3,000 for the early part of the year in which he was still in work.) Their tax credits increased from 1 July 2011 due to the estimated fall in their income.

An alternative option open to claimants in this position was to wait until the end of the tax year, allowing their award to continue based on previous year income, and declare their actual lower income for the current year at renewal time. This would result in an underpayment and the claimant receiving a lump sum of arrears after the end of the tax year because their claim would be reassessed using their lower current year income. When deciding whether to opt for a lump sum or an immediate increase in weekly claimants, the impact on means-tested benefits, such as housing benefit and council tax benefit should be considered.

Example 5

If Ferdinand and Miranda had chosen to wait until renewal time to tell HMRC their income for 2011/12 was £16,500, they would have received a lump sum payment of £4305 (£27,000-£16,500 x 41%)

IMPORTANT NOTE: The advice given above regarding reporting a fall in income is based on our interpretation of the legislation. In particular, the decision on whether to report an income change in part relies on the fact that if reported at renewal time, any underpayment will be paid to the claimant immediately as required by Section 30 Tax Credits Act 2002. However, the HMRC manual suggests that in practice HMRC may use any such underpayment and offset it against any ‘notional’ overpayment that has occurred in provisional payments of the new tax year. If this happens, the claimant should immediately contact HMRC and ask for the underpayment to be paid to them in full and if this is refused should lodge an appeal against the final award for the year just ended at the same time filing a complaint.

Falls in income in 2012-2013 and later years

From 6 April 2012, HMRC apply an income disregard for falls in income as well as rises. The power to do this has always existed in TCA 2002, Section 7, but until now HMRC have chosen not to use it. This ‘new’ disregard will be applied to the calculation of any award for 2012-2013 and later years.

The income tests as they apply to falls in income are:

The new disregard simply means that awards will not be adjusted until current year income falls by more than £2,500 when compared to previous year income.

Example 6

If Ferdinand and Miranda’s situation from Example 4 arose in 2012-2013 we would see a different outcome. Their initial award would still be based on income from the previous year (2011-2012) of £27,000. However, when the couple contact HMRC with their estimated current year income of £16,500, HMRC will no longer revise their current claim based on that figure.

Instead it will be based on £16,500+£2,500 (the income disregard), i.e. an income of £19,000. Providing that their estimated income (£16,500) turned out to be correct, their 2012-2013 claim would be finalised on this amount as well.

The following examples show further how this disregard works in practice.

Example 7

Annie, a lone parent, is paid £12,000 a year, but loses her job in July 2014. She contacts HMRC, and re-estimates her 2014/15 income to be £3,000. Her revised award will be calculated as though her estimated income were £5,500, because the first £2,500 of the fall in her income will be disregarded.

Whilst this is a relatively simple concept where someone only has one fall in income, it can become more complicated as the following examples illustrate:

Example 8

Jeremy has an income of £15,000 in 2013/14. His initial award for 2014/15 is based on £15,000 (previous year income). Jeremy’s work hours are reduced and he believes his income will only be £10,000 for 2014/15. He contacts HMRC, who revise his award to be based on £12,500 (not the actual £10,000 estimate) due to the £2,500 income disregard.

Jeremy’s hours are further reduced, so that by Christmas 2014 he anticipates his income for 2014/15 will be £8,000. He contacts HMRC again and they revise his award to be based on £10,500 (His estimated income of £8,000 plus the £2,500 disregard).

When Jeremy finalises his 2014/15 claim, his actual income turns out to be £13,000. His 2014/15 claim will be finalised using an income of £15,000.

This is because the award is finalised by comparing CYI to that of the previous year. His CYI (2014/15) is £13,000 and his PYI was £15,000. Although his current year income is less than previous year income, it has not fallen by more than £2,500 and so his award is finalised on previous year income.

In previous years, Jeremy’s claim would have been finalised on the CYI figure of £13,000. Jeremy will also have an overpayment as the estimates he gave during the year turned out to be too low.

The situation becomes more complex when the income disregard for falls in income is coupled with the disregard for rises in income over a three year period.

Example 9

Peter has an actual income of:
2012-2013 £15,000
2013-2014 £10,000
2014-2015 £14,000

In this situation, Peter’s 2013-2014 claim would be finalised using an income figure of £12,500 because the first £2,500 of the fall between PY (2012-2013) and CY (2013-2014) is disregarded.

His 2014-2015 claim would be finalised on an income of £10,000 because CYI (2014-2015) has increased when compared to actual PYI (2013-2014), but by less than £5,000 (the disregard for income rises from 2013-2014). One important point to note when looking at the 2014-2015 claim, 2013-2014 is the previous year and it is the actual income figure for that year (£10,000) rather than the ‘deemed’ income figure of £12,500 actually used in 2013-2014.

In summary the figures below show Peter’s actual income for each year along with the income used to finalise his tax credits award for that year.

2012-2013 £15,000
2013-2014 £10,000 £12,500
2014-2015 £14,000 £10,000

The interactions of both income disregards over several years means that income for tax credits purposes rarely reflects the actual income for any given year. More disturbing is that in Example 9 Peter receives far more tax credits in 2014-2015 when his income increases than he received in 2013-2014 when his income fell and he needed the extra money.

Income decreasing then increasing in year

In Example 8, we noted that there is a particular issue where income falls and the claimant gives an estimate but that estimate turns out to be too low because their income has increased again in the same year. Where this happens, substantial overpayments can be created.

It is for this reason that when claimants estimate that their current year income will be lower than previous year, they should take care to ensure that the estimate is not too low. As explained above (example 5), one way of ensuring this does not happen is to wait until actual current year income is known before reporting it to HMRC i.e. after the end of the tax year. This will mean the claimant receives an underpayment. There may also be other advantages in relation to means-tested benefits such as housing benefit and council tax benefit by taking a lump sum rather than an immediate increase in weekly payments.

IMPORTANT NOTE: The advice given above regarding reporting a fall in income is based on our interpretation of the legislation. In particular, the decision on whether to report an income change in part relies on the fact that if reported at renewal time, any underpayment will be paid to the claimant immediately as required by Section 30 Tax Credits Act 2002. However, the HMRC manual suggests that in practice HMRC may use any such underpayment and offset it against any ‘notional’ overpayment that has occurred in provisional payments of the new tax year. If this happens, the claimant should immediately contact HMRC and ask for the underpayment to be paid to them in full and if this is refused should lodge an appeal against the final award for the year just ended at the same time filing a complaint.

In reality, most claimants who have a fall in income need the increased tax credits as soon as possible.

From April 2012, any falls in income of less than £2,500 will mean the current year award is not revised as outlined in the previous section. Prior to that date, any fall in income would result in a re-calculation if the estimate was given to HMRC.

Prior to the 2007-2008 tax year, where someone reported a lower CYI estimate to HMRC, they would amend the tax credit claim and pay a lump sum for the underpayment that had accrued between 6 April and the date the award was amended.

The problem with this approach was that if the estimate turned out to be too low, an overpayment up to the value of the lump sum plus the new rate of payments was created. This problem was partly alleviated by a new measure introduced in 2007-2008 and which continues today.

HMRC will still continue to amend claimant’s awards where a lower CYI estimate is given, but they will only amend the on-going payments. Any underpayment that has accrued up until that point will be held back and noted as a ‘potential payment’ on the claimant’s award notice. If the estimate turns out to be correct, the potential payment becomes an underpayment and will be paid to the claimant shortly after their claim for the year is finalised.

If the estimate turns out to be too low, the ‘potential payment’ will be used to reduce any overpayment.

Example 10

Revisiting Ferdinand and Miranda from Example 6: when Ferdinand and Miranda estimated their CYI as £16,500 (a fall from their PYI of £27,000), HMRC would base their final award on an income of £19,000 (being the new estimate + the £2,500 disregard). As a result payments would be altered and increased from 1 July 2012 to 5 Apr 2013.

However, for the period from 6 April to 30 June 2012, Ferdinand and Miranda will have been paid tax credits on an income of £27,000, when in fact they should have been paid on an income of £19,000. This means they have been underpaid for a 3 month period. HMRC will hold back the amount for these 3 months as a potential payment which will be paid as a lump sum after the end of the year providing the couple’s estimate of their income for 2012-2013 proved to be correct (i.e. was £16,500).

Example 11

If Ferdinand and Miranda’s estimate of £16,500 turned out to be incorrect and their actual income for 2012-2013 was £20,000, their 2012-2013 award would be finalised using an income of £22,500 (their actual income plus the £2,500 disregard).

This means that between 1 July 2012 and 5 April 2013, the couple are overpaid because payments were based on an income of £19,000 when it should have been £22,500. However, during the period 6 April 2012 to 30 June 2012, the couple received tax credits on an income of £27,000 which was too high and a potential payment had accrued for that period. Although the potential payment will be reduced, because their income only fell to £22,500 rather than £19,000, the remainder of it will be offset against the overpayment in the second half of the year. As a result there will either be an overall underpayment for 2012-2013 (if the remaining potential payment is higher than the overpayment accruing between 1 July 2012 and 5 April 2013) or an overpayment (if the remaining potential payment is lower than the overpayment that occurred between 1 July 2012 and 5 April 2013).

It should be noted that although we talk about in-year under and over payments, by law underpayments and overpayments don’t exist until the year is finalised. We simply use these terms to explain how awards are calculated and re-calculated throughout the year as income changes.

Accrual of income during the year

One of the features of the annual basis of assessment for tax credits is that income, as assessed for tax credits purposes, is deemed to accrue evenly day by day throughout the year. Therefore, in tax years when the income disregard for increases in income was only £2,500, claimants reporting such an increase would notice that an overpayment had accrued for the period before they reported the increase, as well as after, even if they reported the increase promptly. A simplified example will illustrate how this worked.

Example 12

Fergus and Deirdre made a joint claim for tax credits in 2005-06. In the first six months of 2005-06, only Fergus was working. Their joint income for 2004-05 was £12,000 a year, Fergus’s annual salary. Therefore, for the first six months of 2005-06 their tax credit award was based on a joint income of £6,000 (half of Fergus’s earnings).

Fergus continued on the same salary level in 2005-06. Halfway through the tax year Deirdre started working, also earning £12,000 a year, so their joint income for the second half of the year increased to £12,000.

Fergus and Deirdre reported this change to the Tax Credit Office straight away, who processed it promptly. The Tax Credit Office re-calculated their tax credits accordingly ignoring the first £2,500 of the income increase.

Because of the way the regulations spread income over the whole tax year, when Fergus’s and Deirdre’s income for the whole of 2005-06 is recalculated, it is spread evenly over both six-month periods. Thus, because their annual income is now £18,000 (£12,000 for Fergus and £6,000 for Deirdre), their joint income for the first six months is deemed to be £9,000, not £6,000. Even with the £2,500 disregard, this is bound to make a difference to their entitlement for those six months and could mean that an overpayment will have arisen in that period.
 

This ‘washback’ effect of income-based overpayments was hardly noticeable when the disregard increased to £25,000 but the problem has started to re-appear now that the disregard has fallen to £10,000 (from April 2011). It is likely to continue to worsen when the disregard falls further to £5,000 (from April 2013). But in earlier years, the fact that overpayments could arise even if claimants reported everything promptly, and did all that they were supposed to do, was barely acknowledged in HMRC literature and guidance. Hence, a lack of claimant understanding – not helped by incomplete or misleading guidance from HMRC – merely compounded the problem of overpayments in the early years.

HMRC’s power to estimate income

TCA 2002, Section 7(10) states that:

‘The Board may estimate the amount of the income of a person, or the aggregate income of persons, for any tax year for the purpose of making, amending or terminating an award of a tax credit; but such an estimate does not affect the rate at which he is, or they are, entitled to the tax credit for that or any other tax year.’

This allows HMRC to estimate a person’s CYI, but they cannot do so when finalising entitlement for that year. Until recently, HMRC did not use this power; however, they have started to use it in specific compliance-related circumstances, such as where a self-employed person returns an estimated income by 31 July and does not contact HMRC with their actual income by the following 31 January.

HMRC must by law finalise the claim for the year just ended using the estimated figure as an actual. However, as the claimant has not made contact, if HMRC cannot confirm their estimate using information from the claimant’s self-assessment returns, they will estimate a very high income figure on the current year award which consequently reduces payments to Nil. The aim of this is to prompt contact by the claimant. However, they cannot use their very high estimate to finalise the current year claim and so must obtain the actual amount from the claimant or revert to the previous estimate given by the claimant at the point of finalisation. As this is a new practice, it is unclear whether HMRC will continue to use this power or extend its use to other areas.
 

Tax Credits: How to notify changes

According to GOV.UK, changes can be reported in two ways:

Telephone:

The main telephone number is the tax credit helpline: 0345 300 3900 (textphone 0345 300 3909). From abroad, you can ring +44 2890 538 192.

In writing:

Change of circumstances
Tax Credit Office
Preston
PR1 4AT

Given the potential consequences of overpayments and penalties if changes are reported late, it is crucial that records are kept when changes are reported.

For calls to the helpline, it is recommended that claimants record the date, time, operator name and brief details of the call.

For letters sent to the Tax Credit Office it is recommended that a copy of each letter is kept and that it is sent recorded delivery (requiring a signature) as a minimum. At the very least a proof of posting should be obtained. Claimants should also ensure they check each award notice carefully to ensure the latest change has been recorded. If it hasn’t they must inform HMRC within 30 days that their award notice is incorrect.

Additional information about changes of circumstances

The HMRC tax credit technical manual contains a section about changes of circumstances. Specifically for information about:

HMRC have confirmed that where a claimant is notifying HMRC that a young person who appears on their claims for both child tax credit and child benefit is either staying on or leaving full-time non-advanced education or approved training, the notification to either the tax credit helpline or the child benefit helpline will be updated on both child benefit and tax credit records. However, as this is just an internal administrative arrangement, claimants should not rely on this option and must still check that their awards are correct and notify both child benefit office and tax credit office separately.

Tax Credits: Who can claim?

To be entitled to tax credits, a claim must be made. Without a claim, there can be no entitlement. Surprisingly, the Tax Credits Act 2002 (TCA 2002) sets out very few requirements about who can and cannot claim.

Claimants must be at least 16 years old and must be ‘in the United Kingdom’. Members of a couple must make a joint claim with their partner, whilst single claimants must claim alone. Claims can also be made by polygamous units. We discuss these requirements in detail in the remainder of this section.

Couples

Members of a couple must make a joint claim with their partner. Although this may appear a fairly straightforward and sensible requirement, it is one of the more complicated and problematic parts of the tax credits system. You can read more about the detailed requirements in our Understanding Couples section of the site.

Being in the UK

Tax credits may be claimed by persons who are in the United Kingdom. The United Kingdom is England, Scotland, Wales, Northern Ireland, and adjacent islands, but does not include the Isle of Man or the Channel Islands. If a person ceases to be in the UK, their entitlement to WTC and CTC ends at that point under TCA 2002, section 3(4), unless any of the exceptions outlined below apply.

The basic rule is that in order to be ‘in the UK’ you need to be present in the UK and ordinarily resident here throughout the period of an award. Additionally from 1 May 2004 for Child Tax Credit you must also have a right to reside and, for claims made after 1 July 2014, you must have been ‘living in the UK’ for the 3-months preceding your claim. This basic rule is subject to some exceptions which are explained below.

The 3-month rule

The residence rules for child tax credit changed from 1 July 2014, when the 3-month rule was introduced. The rule, introduced by The Child Benefit (General) and the Tax Credits (Residence) (Amendment) Regulations 2014 (SI.No.2014/1511) does not apply to claims made (or treated as made) prior to that date.

To meet the basic condition of ‘being in the UK’, a claimant must have been living in the UK for a consecutive period of 3 months in the period immediately prior to the claim and where the claim is treated as made earlier (backdating), the rule applies to the 3 months leading up to the date the claim is treated as made, ie the earlier date. It is not yet clear how HMRC treat occasional days outside of the UK in that period and whether it will disrupt someone being classed as living here if they returned to their home country for a weekend.

The rule applies to all claims for child tax credit, but there are specific exceptions set out below.

The 3-month rule does not apply where the claimant:

Presence and temporary absences

HMRC interpret presence as requiring a physical presence in the UK throughout the award period. This general requirement is subject to three important exceptions.

The first involves those who are temporarily absent from the UK. Providing a claimant is ordinarily resident and remains so throughout the absence, they will be treated as present and thus in the UK during the first 8 weeks of any absence. This is extended to 12 weeks where the absence is in connection with:

Any absence must be temporary from the start. It must also be unlikely to last more than 52 weeks. If the absence is expected to last for longer, the person ceases to be treated as in the UK from the date they leave. TCTM 02040 states that the question of whether the absence is unlikely to exceed 52 weeks need only be considered once, at the beginning of the absence.

The second exception is for Crown Servants who are posted overseas. For the purposes of the tax credit legislation, a Crown Servant posted overseas is a person performing the duties of any office or employment under the Crown in Right of the United Kingdom.

The Crown Servant must be ordinarily resident in the UK or must have been immediately before the posting or the first of consecutive postings. Alternatively, immediately before the posting, or the first of consecutive postings, they were in the UK in connection with that posting. This alternative requirement is of particular help to members of the armed forces who may be posted abroad too quickly to enable them to establish ordinary residence before they leave.

Partners of Crown Servants are also covered by this exception. There is no requirement for such partners to be ordinarily resident in the UK. However, regulations require them to be either present in the UK or accompanying the Crown Servant on their posting. The rules on temporary absence also apply to partners of Crown Servants, allowing absence from the UK itself or from the place where the Crown Servant is posted. For members of the armed forces who are deployed on operations away from an overseas base, the TCTM02050 confirms that:

Where a member of the Armed Forces is posted or deployed from an overseas base to an operational area and is unaccompanied by their spouse or partner, then that spouse or partner in the country where the overseas base is situated shall continue to be treated as “in the UK”.’

The final exception to the general presence rule is for those who are entitled to WTC and CTC by virtue of European law. In such cases, entitlement is governed by EU law which overrides UK domestic law. An example of such a situation is someone living in Spain who continues to claim CTC under EU law.

Special cases

The usual residency rules apply to seafarers and offshore workers. The UK includes its territorial waters and therefore someone working within those waters will continue to be in the UK for tax credit purposes. If they are outside of those waters, including the continental shelf, they will no longer be treated as in the UK.

The temporary absence rules apply to seafarers and offshore workers, and if the absence is less than 8 weeks, they continue to be in the UK for tax credit purposes.

As with any other incidence of temporary absence, if the period away is in excess of 8 weeks, they must notify HMRC who will end their claim. If they were claiming jointly, their partner can then claim as a single person (with only their income taken into account) until such time as the worker returns. At this point, another notification is needed to HMRC to end the single claim and start a new joint claim. In practice this leads to a complicated claim history, particular at renewal time when renewal papers will need to be completed for each separate claim.

Ordinary residence

The Tax Credits (Residence) Regulations 2003(SI 2003/654) state that ‘A person shall be treated as not being in the UK for the purposes of Part 1 of the Act if he is not ordinarily resident in the UK’.

There is no further definition of ordinary residence in the legislation. Despite the same term being used in the tax system, national insurance and child benefit, HMRC guidance asserts that the definition for tax credits is different. HMRC guidance states that:

'a person is ordinarily resident if they are normally residing in the United Kingdom (apart from temporary or occasional absences), and their residence here has been adopted voluntarily and for settled purposes as part of the regular order of their life for the time being.'

The guidance (TCTM02028- 02031) goes on to give a great deal of information on the factors that HMRC will consider when determining if someone is ordinarily resident. This can be invaluable for advisers who need to argue against any decisions on this ground. It is clear that decisions should be made based on the facts and evidence available at the time of the decision and that a decision should not be amended retrospectively if a person ended up spending more or less time in the UK than was reasonably expected at the time of the original decision. However, HMRC seemingly will amend an earlier decision where ‘it turns out that the facts at the time were different from the facts as they were understood to be when the decision was made.’

As with the requirement to be present in the UK, there are some exceptions. The regulations provide that people who are in the UK as a result of deportation, expulsion or other removal by compulsion of law from another country shall be treated as ordinarily resident in the UK.

Another notable exception is for the purposes of WTC where a person exercising their EU worker rights in the UK or a person with a right to reside in the UK pursuant to Council Directive No 2004/38/EC is treated as being ordinarily resident.

Finally, there are special transitional provisions which mean some claimants who transition from income support or income based jobseeker’s allowance are exempt from the ordinary residence requirement. Further details can be found in regulation 7 of the residence regulations.

Right to Reside

When tax credits were introduced in April 2003, there was no requirement to have a right to reside for either WTC or CTC. However, from 1 May 2004, a person is not treated as being in the UK for CTC purposes if they do not have a right to reside in the UK.

Although the requirement applies only to CTC, a WTC claimant who is a national of an EEA country and who is not exercising their rights as a worker under EU law, will not be treated as being ordinarily resident unless there is right to reside.

As with ordinary residence, there is no definition of ‘right to reside’ in the legislation nor any definitive list of who may have a right to reside in the UK. HMRC’s manual TCTM02024 helpfully sets out a list of groups who HMRC consider have the right to reside in the UK for tax credit purposes. They are:

This bullet point list is a very brief outline of people who may have a right to reside in the UK. Given that this is a highly specialist area, more aptly covered by residency and immigration experts, we recommend that advisers consult the relevant chapters in the HMRC manual TCTM02070 onwards for fuller detail of each of the bullet points. 

From July 2014 onwards, closer scrutiny applies to the question of whether an EEA national can be defined as a worker or self-employed person for the purpose of establishing their right to reside. Both HMRC and DWP have introduced a minimum earnings threshold which is linked to the Primary Earnings Threshold set for National Insurance purposes. This approach draws on the argument that in order for the person to be a ‘qualified person’ as a worker or as a self-employed person, the work or self-employment must be genuine and effective, rather than marginal and ancillary (as required under EU law). To check whether this test is met the individual must earn a minimum amount from the work. In practice it means that, for tax year 2015-16, for a person to have a right to reside in the UK as a worker or self-employed person, they must earn (for self-employment, this is broadly simple ‘profit’) an average of £155 per week in each of the 3 months preceding their claim (this establishes that their work is genuine and effective). In cases where the person does not meet that income threshold, HMRC will consider their full circumstances including whether their right to reside may be established under other criteria (as in the above list). There is more detailed explanation in HMRC’s guide.

Couples where only one partner is in the UK

The importance of making a claim in the correct capacity, either jointly as part of a couple or as a single person, is highlighted earlier in our Understanding couples section. One area of particular difficulty in determining whether to make a single or joint claim is where one partner is in the UK and the other is not. The interaction with various EU law rules makes this a difficult area. See EU cross border workers. HMRC have set out a list of circumstances where a person should make a single or joint claim. TCTM2010 states that a single claim should be made where a person is:

A joint claim should be made where:

Subject to immigration control

The general rule is that those who are subject to immigration control are not entitled to WTC or CTC. As with most rules in tax credits, this is subject to a number of important exceptions.

The term ‘subject to immigration control’ has the same meaning as Immigration and Asylum Act 1999, section115(9).

TCTM02102 summarises those who are subject to immigration control as:

The exceptions

Until 6 April 2014, there had been five exceptions to the general rule but the Tax Credit (Miscellaneous Regulations) 2014  (SI.No.658/2014) removed Case 3 - entitlement to tax credits for those subject to immigration control who have had a temporary breakdown in their supply of funds from abroad. A person can still claim tax credits in the following circumstances even if they are subject to immigration control:

  1. They were given leave to enter or remain in the UK on condition that someone else undertook to be responsible for their maintenance and accommodation, and they have been resident in the UK for at least five years commencing on the date of entry to the UK or the date on which the undertaking was given (whichever is the later).
  2. They were given leave to enter or remain in the UK on condition that someone else undertook to be responsible for their maintenance and accommodation, and that person (or persons) has died.
  3. They are claiming WTC, are a national of Turkey and they are lawfully present in the UK. This exception doesn’t apply to CTC, however there are some transitional rules that allow some former income support and income-based jobseeker’s allowance claimants to claim CTC using the exception.
  4. They are claiming CTC, and are a national of state with which the European Community has concluded an agreement for equal treatment for workers in the field of social security. This currently includes San Marino, Algeria, Morocco, Tunisia or Turkey. They must also be lawfully working in the UK. People can also be treated as lawfully working in the UK if they have retired on reaching pension age; have given up work to look after children or because of pregnancy, widowhood, sickness or invalidity, and accident at work or an industrial disease. This exception does not apply to WTC.

Note – from 1 April 2012, a new concession was introduced for people who are victims of domestic violence. It applies to people granted permission to enter or remain in the UK as the partner/spouse of someone who is either British or already has permission to settle in the UK and means that they are allowed to apply for leave to remain in the UK in their own right. Until they are granted their own permission, they are allowed access to public funds (and therefore can claim tax credits) if the UKBA accepts their claim under the Destitution Domestic Violence concession. People in this position should contact the UKBA to apply for the DDV concession.

Exception for couples

Where one member of a couple is subject to immigration control and the other is not, or comes within one of the exceptions above, a joint claim can be made and both claimants will be treated as though neither is subject to immigration control. However, the second adult element of WTC will generally not be awarded.

But if the person making the claim is within exception 3 above, they can only claim WTC (unless the transitional provisions apply); and similarly if they are within exception 4 they can only claim CTC.

Similarly, where one member of a polygamous unit is subject to immigration control and any other member is not, or is within one of the exceptions, a joint claim can still be made by the unit.

Asylum Seekers

The TaxCredits (Immigration) Regulations 2003(SI 2003/654) also deal with claims by asylum seekers. Such people are generally subject to immigration control and are not entitled to tax credits.

Asylum seekers are generally subject to immigration control and are not entitled to tax credits. However, if their claim for asylum is accepted and they are granted refugee status, Regulation 3(5) allows tax credits to be backdated to the date the claim for asylum was submitted. This applies only if the person claims tax credits within one month (three months prior to 6 April 2012) of receiving notification of their refugee status..  Any backdating will be reduced by support received from the Government under the Immigration and Asylum Act 1999 unless any DWP backdating has already been reduced to take these payments into account.  For further information about backdating in general see our claims section.

The following examples show how backdating for refugees works.

Example 1

Faizah claimed asylum as a refugee on 12th May 2007 and is granted refugee status on 10th June 2012. She applies for tax credits on 5th July 2012 (within one month). The claim for tax credits is treated as being made on the date she claimed asylum (12th May 2007).

Example 2

Zabia claimed asylum as a refugee on 28th September 2007 and is granted refugee status on 10th June 2012. She applies for tax credits on 29th July 2012 (more than one month after notification of her refugee status). Her tax credits are backdated by only one month from the date she applied.

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 2008/09 to 2014/15. 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

£

2014/15

5,000

NIL

10,000

10,000

2013/14

(15,000)

NIL

10,000

NIL

2012/13

3,000

NIL

10,000

13,000

2011/12

2,000

NIL

10,000

12,000

2010/11

5,000

NIL

10,000

15,000


As can be seen, Bill makes modest trading profits in 2010/11, 2011/12 and 2012/13. He then sustains a serious loss in 2013/14.

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 2014/15 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 2010/11 to 2014/15 to nil.

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

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: 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 up to £5000 and decreases up to £2500 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 £5 000 increase disregard) shouldn’t affect the tax credit award that year, although it may impact on the amount of tax credits the following year (due to the £2,500 disregard).
 


 

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 Ghurkhas 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: 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 transition to universal credit section for more information

 

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, Part II of the Children (Scotland) Act 1995, or Part IV of the Children (Northern Ireland) Order 1995 and the cost of that accommodation or maintenance is borne wholly or partly by local authority or other public funds .

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 23 Children Act, Section 26 Children (Scotland) Act or Article 27 Children (Northern Ireland) 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 QYPfrom 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.

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 will automatically stop 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 registered or certified as blind, 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: WTC elements

Both WTC and CTC comprise a number of elements. To be entitled to WTC, everyone must meet the criteria of the basic element. Only if those criteria are met can any of the other WTC elements be added to the claim. The rest of this section explains the WTC elements in more detail.

Basic element of WTC

WTC is payable to claimants who are in ‘qualifying remunerative work’ and who are on a low income or who incur eligible childcare costs. Payment can be enhanced if claimants fulfil the conditions of the various other elements of WTC. 

The basic element is the foundation block of WTC. Without it, the claimant (or their partner in some instances) cannot access any of the other WTC elements. The Tax Credits Act 2002, s.10 states that entitlement for WTC is dependent on the claimant, or both claimants, being engaged in ‘qualifying remunerative work’. It is the basic element that defines qualifying remunerative work.

For claims from 6 April 2015 onwards, new rules apply around what is accepted as qualifying remunerative work. The rules change, introduced in SI 605/2015, change the first condition of the overall qualifying remunerative work test, so that claimants must be either employed or self-employed, as defined in the legislation.

The legislative definition of those terms are:

Qualifying remunerative work

To be engaged in qualifying remunerative work a claimant must meet four conditions and not be in one of the specific, excluded groups.

Condition 1

The claimant must be either employed or self-employed and be working at the date of claim, or have accepted an offer of a job which is expected to start within 7 days of the making of the claim.

Condition 2

This condition requires the claimant (and potentially their partner) to fulfil certain age qualifications and be working for a minimum number of hours per week. There are three variations to condition 2. The claimant must satisfy the criteria of at least one of these to be treated as being in qualifying remunerative work.

In summary the requirements are as follows:

In the case of a single claim:

In the case of a joint claim where there is no responsibility for a child or qualifying young person:

In the case of a joint claim where there is responsibility for a child or qualifying young person:

The requirement that couples with children must work at least 24 hours between them was introduced from 6 April 2012. Prior to that date, such couples could qualify for WTC by only working 16 hours per week. Both members of a couple who meet the 24 hour requirement are treated as being in qualifying remunerative work, even if one of them works less than 16 hours.

Example 1
Richard and Sarah have two children. In 2011-2012, they receive WTC and CTC as Richard works 20 hours a week. Sarah does not work. From 6 April 2012, their WTC ended because they were not working a total of 24 hours between them. The couple have two choices, Richard can increase his hours to 24 or Sarah can get a job for at least 4 hours a week.

Example 2
Ken is aged 61 and is married to Deidre. Their son is studying for his A-Levels at college. Ken works 20 hours a week. They receive WTC and CTC in 2011-2012. Their situation remained unchanged from 6 April 2012 because Ken is aged 60 or over and qualifies for WTC by working at least 16 hours as week. The 24 hour rule for couples does not apply in this situation.

Condition 3

The work must be expected to continue for at least 4 weeks after the making of the claim, or if someone hasn’t actually started work, from the date the work starts.

Condition 4

The work must be done for payment or in expectation of payment. The legislation gives no further definition of what this means, however for self-employed claimants this condition must also be read in conjunction with the definition of self-employment to the extent that the activity must be on a commercial basis and with a view to the realisation of profits and be organised and regular. HMRC guidance states:

Work done in expectation of payment means more than a mere hope that payment will be made at a future date. There should be a probability rather than just a possibility that a payment will be made. If a person reasonably expects payments for work done then the condition is satisfied. However, if the person knew before starting the work that payment was unlikely to be made, the remunerative condition is not satisfied. Work done setting a business up is not generally classed as being done in expectation of payment. A person will only reasonably expect to be paid for work done once the business is up and running. Where a retail trade is being carried on the price paid for the goods is not remuneration for the salesman. Whether a self employed retailer is working in expectation of payment cannot be determined simply by the mark up on goods sold. It does not necessarily matter that a self-employed earner might trade at a loss.  (TCTM02411)

Exclusions

Even if a person meets all of the above conditions, they may still not be treated as being in qualifying remunerative work if any of the following exclusions apply. For this purpose, payment of a social security benefit is not work. Also excluded is:

Working hours

Condition 2 details the number of hours a claimant will need to work in order to claim tax credits. However, one of the most difficult areas of WTC can be determining someone’s working hours. Over the years, HMRC have provided very little guidance for people who don’t work a normal 35 hour week for one employer. Although more guidance has been produced recently, it is still difficult and an area that is now the focus of increasing compliance activity by HMRC.

The Working Tax Credit (Entitlement and Maximum Rate) Regulations 2002 give some definition of working hours. For apprentices, employees or office-holders, the number of hours they are engaged in qualifying remunerative work is the hours of work they normally perform under their contract of service, apprenticeship or in the office in which they are employed.

In the case of agency workers, it is the number of hours they are normally paid for by the employment agency they are contracted to work for. Finally, for a self-employed person, it is the number of hours they ‘perform’ for payment or in expectation of payment.

In calculating the number of hours a person works any period of customary holiday, paid holiday, time allowed for meals or refreshment (unless the person expects to be paid for that time) is disregarded. Any time allowed for visits to hospital or other establishment for the purposes of monitoring a person’s disability is included but only if the person expects to be paid for that time.

Variable hours

The legislation is of no further help to people who do not work the same hours each week. However, HMRC have various guidance in their manuals, on the GOV.UK website, the TC600 guidance notes and tax credit leaflets which give examples of how to deal with variable hours.

In summary, a common sense approach must be taken if someone has a recognised cycle. So for example, if a person usually works 28 hours per week but takes two days off unpaid and only works 17 hours one week, their normal working hours will still be 28. This can be the case even if a person works less hours for several weeks and a judgement needs to be made in each case where there has been a change in normal working hours.

Periods of unpaid leave of up to 4 weeks do not disrupt normal working hours. Similarly people who do regular overtime can include that in their normal working hours, even if they don’t have that overtime occasionally. For example, if a person is contracted to work 25 hours a week but with overtime has worked 30 hours every week for the last 12 months, it is unlikely that his working hours will fall below 30 if there are two weeks where he only works 25 (due to lack of overtime).

Some people work different hours each week. If there is a pattern to the work, for example a person works 14 hours one week and 18 the next, there is a two week cycle and the person can look at their average across that cycle. In this example the normal working hours would be 16.

Term time and seasonal workers

Special rules exist for people who work at a school, other educational establishments, or other places of employment and have a recognisable annual cycle to their employment. This cycle must include holiday periods (e.g. school vacations) during which they do not work. In this situation, such periods are disregarded when working out normal working hours for WTC purposes.

Example
Nasreen is a dinner lady in a secondary school who works 9 am to 3 pm Monday to Friday during term time: a 30 hour week. During 10 weeks of holidays she does not work. The school holidays are disregarded in determining the number of hours Nasreen works, so she is treated as working 30 hours a week all year round.  

However, seasonal workers who do not have an annual cycle and work only a few months of each year (such as summer fairground workers) can only claim WTC for the periods they actually work. The TC600 guidance notes include the following example:

Example
Julie usually does 35 hours work a week for three months each summer. She can claim Working Tax Credit during this three-month period but when she finishes this seasonal work, her Working Tax Credit will stop, unless she gets another job within a week of finishing.

Foster Carers

Foster carers and shared lives (or adult placement) carers are treated as being in qualifying remunerative work and therefore entitled to WTC.

HMRC instructions tell TCO staff to accept the number of working hours declared on the claim form. This is despite the fact that income tax concessions applying to both sectors from 2003/2004 mean that the vast majority of carers are treated as having a nil income/profit.

However, respite carers who care for a person who is not a member of their household, and whose payment from the local authority (or voluntary organisation or primary care trust) is exempt from income tax under the Rent a Room scheme, are not able to count their caring activities as qualifying remunerative work for WTC purposes. This exemption also applies to foster carers and shared lives/adult placement carers who opt for the Rent a Room scheme.

Apprenticeships

HMRC say that the hours worked as an apprentice count as remunerative work for WTC purposes where there is a contract of employment or apprenticeship and payment for the work done whilst on the scheme is classed as earnings (as opposed to reimbursement of expenses) and subject to income tax and National Insurance contributions.

However, if the only payment is a non-taxable training allowance, monies in connection with participating in the Intensive Activity Period (part of jobseekers’ allowance schemes), a sports award or other tax-exempt discretionary payments, working hours done under the apprenticeship will not count as remunerative work.

Self employed

For claims before 6 April 2015, the number of hours a self-employed person works were those done for payment or in expectation of payment. No further guidance is given. This is a particularly important area given the rise in compliance investigations by HMRC where they believe a person is not doing work in expectation of payment.

For claims from 6 April 2015 onwards, the number of hours a self-employed person works should be taken as those done in pursuing the activitity where is it done on a commercial basis, with a view to making a profit and which is organised and regular.

The HMRC compliance manual (CCM6755) states that any hours which will be costed to the client/customer as spent in producing/providing the individual order or service count when working out hours for self-employment. In addition, the following activities also count:

The guidance goes on to say that:

The amount of time being spent on these activities may also depend upon how established the business is. If a business is in its early days, it is more likely that the claimant will have to invest large amounts of time and effort in building up business contacts for little or no outcome. However, over time the amount of unproductive time spent in this way reduce considerably. If it does not, it may be an indication that the work is not genuinely remunerative.

The compliance manual also acknowledges that particular trades may present claimants with more difficulty in calculating their working hours and guidance is given for bed and breakfast owners, artists, writers, property renovators and door to door sales people (CCM6760). See the understanding self-employment  page for more detail about compliance investigations and the self-employed.

Workers who are laid off

As a response to the economic climate, HMRC issued guidance explaining how people who are laid off or who have a temporary reduction in working hours should calculate their working hours.

Providing their hours are reduced or they are laid off for four weeks or less, there is no interruption to normal working hours for tax credits. However, if people know from the outset that their hours are likely to be reduced for more than 4 weeks, or that they have been laid off indefinitely or for more than 4 weeks, the change in hours will be effective from the date the claimant is notified of this. This 4 week ‘grace’ period is separate from the four week run-on which commences after the grace period.

Example
A claimant is laid off on 8th January. Her employer tells her that she can expect to go back to work on 1st February. Because she has been laid off for less than 4 weeks she is treated as being in remunerative work.
On 26th January, her employer tells her that they do not know if she will be able to go back to work at all. Because she has been laid off for more than 4 weeks and her employer does not know when she will be able to return to work, she is treated as if she finished work on 26th January. The 4 weeks run on would apply from 26th January. (TCTM02461)

HMRC have other guidance at TCTM02457 which suggests that each case must be considered individually and even longer periods off work may not disrupt the person’s normal working hours if they have a cycle of work. In practice, HMRC tend to apply the four week criteria above as standard.

Directors

The position of Directors for WTC has caused much discussion in the tax world over the last few years. However, HMRC have confirmed that for WTC purposes, a Director, as an office holder, does not have to be engaged under a contract of service in order to claim WTC. This interpretation of the regulations means that Directors do not need to pay themselves the National Minimum Wage in order to claim tax credits as such a requirement only exists where there is a contract of service.

Periods of leave and time off work

The Working Tax Credit (Entitlement and Maximum Rate) Regulations include provision for people who are absent from work to continue to be treated as being in qualifying remunerative work during certain periods of leave.

Maternity, Paternity, Adoption and Shared Parental Leave

During any period a claimant receives maternity allowance, statutory maternity pay, or adoption pay they are treated as being in qualifying remunerative work. The same should apply during absences from work whilst on ordinary maternity leave (26 weeks), ordinary adoption leave, or the first 13 weeks of additional maternity leave or adoption leave.

During any period that a claimant receives ordinary statutory paternity pay, additional statutory paternity pay or is absent from work whilst on ordinary paternity leave they are treated as being in qualifying remunerative work.

Parents of babies born between 3 April 2011 and 5 April 2015 had the right to take additional paternity leave. This resulted in changes to the tax credit system for those taking paternity leave which meant claimants were also treated as in qualifying remunerative work during any period of additional statutory paternity leave providing that during that period they would have been paid additional statutory paternity pay had the conditions of entitlement in Parts 2 or 3 of the Additional Statutory Paternity Pay (General) Regulations 2010 been satisfied.

This meant, effectively, that they could continue to receive tax credits for so long as their partner would have been entitled to statutory maternity pay (SMP) or additional SMP. For example, a woman who took 24 weeks of maternity leave and received SMP for that period. She then went back to work and her husband took additional paternity leave. He was entitled to take 26 weeks additional paternity leave but could only continue to receive tax credits for 15 weeks, being the balance of time remaining on the woman’s SMP entitlement.

For children born or adopted from 5 April 2015 onwards, parents can qualify for shared parental leave. This scheme allows parents to share statutory parental leave periods and there is more information on the GOV.UK website. It can be used alongside of, or instead of, traditional maternity or adoption leave.

Statutory shared parental pay is payable for part of the leave period. For tax credit purposes, a claimant will be regarded as remaining in remunerative work whilst they are in receipt of statutory shared parental pay, providing they were in qualifying remunerative work (or treated as being) immediately prior to the period of statutory leave.

The person must have been engaged in qualifying remunerative work immediately before the period of leave began for any of the above extensions to apply. For first time parents, when determining whether they meet this requirement, they should be treated as if they already had responsibility for a child or qualifying young person.

HMRC interpret these provisions as requiring the claimant to continue to meet the conditions in Regulation 4(1) Working Tax Credit (Entitlement and Maximum Rate) Regulations 2002. This interpretation has specific impact on couples with children who are subject to the requirement to work 24 hours. A couple, where one partner works 16 hours and the other 8, are both treated as being in qualifying remunerative work because their combined working hours total 24. If the person working 8 hours goes on maternity leave, they continue to be treated as being in qualifying remunerative work. However, if the person working 16 hours loses their job during the maternity leave period, neither claimant will be treated as being in qualifying remunerative work from the point at which the job is lost (subject to the four week run-on) because their total working hours are now less than 24.

Example
Ian and Barbara have two children. Ian works 16 hours and Barbara works 8 hours a week. Barbara is expecting her third child and goes on maternity leave in July 2013. She continues to be treated as being in qualifying remunerative work during that period. Ian loses his job in September 2013. The couples WTC ceases at that point because neither of them are treated as in qualifying remunerative work as their combined hours are less than 24.

Example
Megan and Peter have one child. Megan works 22 hours a week and Peter works 4 hours a week. They qualify for WTC and CTC from April 2012. Megan goes on maternity leave in July 2013. In October 2013, Peter loses his job. As Megan is only treated as working 22 hours a week, the couple will lose their entitlement to WTC from October 2013.

Although HMRC have taken this interpretation of the regulations, alternative interpretations may be possible and could be challenged by advisers at an appeal tribunal. The same rules apply to the self-employed, if they would have been entitled to the relevant benefits or leave had they been employed.

Sick leave

Claimants are treated as in qualifying remunerative work during certain periods of sick leave if they are in receipt of:

The last three bullet points are time limited to 28 weeks. A self-employed person is also treated as in qualifying remunerative work for up to 28 weeks if they would have qualified for one of the benefits listed above had they been employed.

Both employed and self-employed claimants must have been in qualifying remunerative work immediately before the period of sick leave began in order to continue to receive WTC.

Other time off work

A claimant is treated as being in qualifying remunerative work for any period during which they are on strike for up to 10 days at a time, provided they were working up to the beginning of that period. If the strike goes on for longer than 10 days, they will lose their WTC entitlement; but curiously any strike pay still counts as income for tax credit purposes.

Anyone receiving pay in lieu of notice is not treated as working during the period covered by the pay, but this does not affect their entitlement to the four-week run-on payment of WTC if they qualify for that.

If a claimant is suspended from work while complaints or allegations against them are investigated, they are still treated as being in qualifying remunerative work, as long as they were working up to the date they were suspended.

Gaps between jobs

Tax credits legislation allows a gap between jobs of up to 7 days without any interruption to WTC. A claimant is treated as in qualifying remunerative work for the required number of hours as if they have been engaged in such work during these 7 days.

Four week run-on

In certain circumstances, claimants continue to be treated as being in qualifying remunerative work for a period of 4 weeks after their work ends.  This is called the ‘four week run-on’. The four week run-on was introduced in its original form from 6 April 2007.

From that date, if a claimant has been working for not less than 16 or 30 hours a week, and they either drop their working hours to below 16 a week or stop working altogether, they will be treated as continuing to work for the four weeks immediately afterwards. Thus their WTC entitlement will continue during those four weeks after they have finished work, or reduced their hours.

It should be noted that HMRC have issued guidance on their website which allows claimants who are laid off from work for less than 4 weeks from the offset to remain in qualifying remunerative work. This is on the basis that a disruption to normal working hours of less than 4 weeks does not change their normal pattern. The 4 week run-on is different and in addition to this 4 week ‘grace’ period.

The original regulations were unclear whether the childcare element was included in the four week run-on, but subsequent amendments made clear HMRC’s policy intention that it should be.

Originally, the four week run-on did not apply to WTC claimants who worked 30 or more hours a week and whose working hours fell to below 30 but above 16 hours a week. From July 2009, the four week run-on was extended to this group of WTC claimants.

Also with effect from July 2009, parents whose working hours fall to the extent that the childcare element of WTC is lost (but entitlement to the basic and other elements of WTC remains) also receive a run-on of this element for four weeks.

Further changes from April 2010 mean that if a means tested benefit is claimed during the four week run-on (which under normal tax credit rules would entitle a person to maximum tax credits) maximum credits will not be payable and the normal income test will be applied.

As the qualifying criteria for WTC changed again in April 2012 for couples with children, so has the criteria for the four-week run-on. Where a couple’s combined working hours fall below the required 24, the four week run-on will apply.

Disability element of WTC

When tax credits were introduced in April 2003, they replaced several other benefits including Disabled Person’s Tax Credit (DPTC). The disability element of WTC replicates DPTC by allowing a claimant who qualifies for it to work fewer hours than normally required for entitlement to WTC. If a claimant doesn’t have responsibility for children, or is aged 60 or over, it means they can claim working tax credit by working at least 16 hours rather than 30. It is also worth a considerable amount of money to low income claimants. The disability element in 2013/2014 is worth £2,855 a year.

Disability plays an important part in the tax credit system, but often it is one of the most difficult parts to understand. A claimant with disabilities may not necessarily be disabled for tax credit purposes. HMRC consider the disability element of tax credits as high on their list of areas where people make errors, indeed their own staff find it a difficult area to deal with. As a result much HMRC compliance activity is directed towards claims involving a disability element. 

You can find the full qualification criteria for this element in our understanding disability section.

Severe disability element of WTC

This element is different to the disability element. Claimants can get this even if they don’t qualify for the disability element. This is because there is no requirement that the disabled person must work to get this element so if the worker has a partner who doesn’t work but meets the condition below, they will get the severe disability element included.

You can find the full qualification criteria for the severe disability element in our understanding disability section.

30 Hour element of WTC

Single claimants who work at least 30 hours per week will have the 30 hour element included in their award.

Similarly, if one member of a couple works at least 30 hours per week, the 30 hour element can be included. If both members work at least 30 hours, only one 30 hour element is included.

The 30 hour element is also included if at least one of the claima