7 August 2017

Tax credits notional entitlement and UC - An update

We wrote about the changes HMRC have introduced to the way they apply notional entitlement (notional offsetting) in our blog post in February.

HMRC apply notional entitlement in cases where a tax credit overpayment is created due to the late notification of a changehousehold make-up in a tax credits claim and a fresh, correct, claim is subsequently made.

HMRC have recently confirmed that they are considering the position for those claimants who live in UC full service areas and cannot, therefore, go on to make a fresh tax credits claim but they do make a correct UC claim instead. HMRC have not yet fully established their policy and processes for these cases but in the interim, they have told us that overpayment recovery action for these types of overpayments will be suspended until such time as the new policy and process are introduced.

However, even under notional entitlement, HMRC only agree to consider adjustments to the amount of overpayment to be recovered in relation to the notional entitlement. There is no guarantee that notional entitlement will be appropriate for all overpayments where recovery has been suspended under this announcement or that it will, in reality, make a difference even if it is applied. Unless and until claimants are notified that HMRC have changed the amount of overpayment to be recovered, claimants remain liable for the full amount of debt notified to them by HMRC.

We will update the website once more details are available.

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’