16 March 2018
UPDATE - Notional Offsetting, tax credits
Update - 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.