15 February 2017

Changes to notional offsetting for tax credits

HMRC, via the Benefits and Credits Consultation Group, have announced changes to their notional offsetting policy.

Notional offsetting was introduced in its current form in 2010. If a claimant is late reporting a change to their household status, either because they are no longer part of a couple or they are no longer single, an overpayment is created. Notional offsetting allows this overpayment to be reduced by the amount the claimant(s) would have received if they had made the correct claim at the right time.

When the policy was introduced, HMRC said it would not apply in deliberate error cases however over time, the number of cases classified as deliberate error has increased meaning less claimants can access notional offsetting.

HMRC have now said:

Notional entitlement was introduced a number of years ago.  It is clear that, since its introduction, HMRC has moved further away from the original policy intent of the notional entitlement measure in terms of:

·       the classification of “deliberate error”;

·       administering Notional Entitlement in a proactive environment with the intention to reduce Debt;

·       inconsistencies in when Notional Entitlement is applied.

We have now revisited that intent and, with effect from Autumn 2016, HMRC will ensure that the application of Notional Entitlement is applied to any overpayment which has occurred due to a change in the adult composition of the household in the current year – regardless of why the customer had not told us. HMRC will also be pro-active in applying the Notional Entitlement criteria, as opposed to the current practice of relying on a request from the customer. In addition, we will explain about Notional Entitlement in the letter we send to the customers who are changing their household makeup when we close their previous claim to Tax Credits.

 A scan is now in place which cross-checks all house-hold breakdowns with the National Insurance Numbers (NINos) on all new claims to ensure we capture and test all customers with potential eligibility.

We have contacted HMRC to confirm that notional offsetting will continue to be available across tax years (current year and previous year). We have also asked for confirmation about whether it is necessary for a claimant to have made a new claim in order to access notional offsetting and what will happen to claimants who can no longer claim tax credits and instead must claim UC. We will update the website when a response is received.

You can read more about notional offsetting in our understanding couples section.

Update – March 2018 – Since this policy change was communicated to us by HMRC we have been seeking clarification of the policy with HMRC – in particular whether removal of the ‘deliberate error’ restriction applies to cases where a change is reported in the current tax year (or HMRC determine via a compliance investigation a change has occurred) but dates back to a previous tax year. Initial conversations with HMRC suggest that their intention is to continue restricting notional offsetting in cases that cross into a previous tax year where the person has acted ‘fraudulently’. We are not aware of any published guidance confirming the position nor defining ‘fraudulent’ behaviour for this purpose, however anyone in this situation should be aware of the Adjudicator’s 2017 report which quotes HMRC as saying ‘Eligibility for NE (Notional Entitlement) is to be considered in all cases where a tax credit claim has ended due to a household breakdown and a new household make up has been established and the claim for tax credits has been awarded, with a gap of 31 days or more in-between those two successful claims. Instead of withholding NE as the consequence for late or non-reporting of a change of circumstances, we should be making better use of the penalty process which has a slightly different (and correct) definition for fraudulent behaviour’. This certainly suggests that notional offsetting should be available in all cases and instead the penalty regime should be used for people who were late reporting a change or who did not report it all. Until HMRC publish further guidance, we recommend that if HMRC refuse to apply notional offsetting then a complaint is made referring to the text of the Adjudicator’s report and highlighting that the policy is currently unclear’