Tax credit crunch

Issue 209 (April 2009)

Tax credits were designed to be responsive and flexible, supposedly delivering support to reflect families' current needs and resources. Mark Willis looks at how the system responds to the effects of the recession.

Protective claims

A 'protective claim' should be made by someone whose income was previously too high to receive tax credits, but whose income in the coming year is uncertain. Anyone in the following groups is eligible for tax credits:

  • responsible for a child;
  • disabled and working at least 16 hours a week;
  • aged 25 and over, working at least 30 hours a week;
  • aged 50 and over, returning to work of at least 16 hours a week.

If someone is eligible for tax credits but not entitled to a payment because her/his income is too high, a 'nil award' is made. Someone with a nil award should still report changes and respond to the annual review. If income in 2009/10 turns out to be less than in 2008/09, the tax credit award is based on the current year's income. The claimant may then become entitled to receive tax credits, payable from the start of the tax year. Waiting until income has gone down to make a claim could mean losing out, as a new claim can usually only be backdated three months.

Job cuts

As thousands of people cope with the stress of their jobs being lost or cut back, the impact on tax credits may be the last thing on their mind. Stopping work or reducing hours to below 16 or 30 hours is a change which must be reported to the Revenue within one month or an overpayment is likely and a penalty is possible. Entitlement to working tax credit (WTC) continues for four weeks after someone has stopped working, or reduced their hours to less than 16 a week. This four-week run-on should be paid automatically after the claimant tells the Revenue that s/he has stopped work, and counts as income for means-tested benefits. If it is delayed, a payment of arrears should be treated as capital for housing benefit (HB) and council tax benefit (CTB) and disregarded for 52 weeks.1

Employees who have been temporarily laid off or put onto a reduced working week may lose entitlement to WTC. Someone who is no longer 'normally working' at least 16 (or 30) hours a week for more than four weeks may no longer qualify for WTC, or lose the 30 hour element. If hours fluctuate, there is no hard and fast rule as to how hours should be calculated.2So if the Revenue averages hours over a certain period and decides the claimant is not working sufficient hours to qualify for WTC, the claimant can appeal and argue that 'normal' working hours should be determined differently. If entitlement to WTC ends, and the person later returns to work, s/he needs to make a new claim, or if still getting child tax credit (CTC), to report this change within three months to qualify for WTC again.

A self-employed person whose trade or business is experiencing a slowdown can still qualify for WTC if s/he spends at least 16 (or 30) hours a week on her/his business. This can include time spent visiting potential customers, making trips to wholesalers/retailers, advertising, cleaning premises or equipment, book-keeping and research.3

Income

Someone who has lost her/his job or reduced her/his hours is likely to have a reduced annual income. The Revenue may revise a tax credit award at any time on the basis of estimated current year income, where this is less than the previous year income. Reporting a reduction in income could lead to an increased tax credit payment, although this is counted as income for HB/CTB. It is very important to be accurate with the estimate and keep the Revenue informed of any subsequent increase (e.g., returning to work), as this may not be disregarded. An alternative option is to wait until the end of the tax year when the exact final income is known. This should reduce the risk of overpayment and could lead to a lump sum payment of arrears, which should not affect HB/CTB.

In some cases, additional payments may be made by an employer when someone loses her/his job, i.e. statutory or contractual redundancy pay, pay in lieu of notice and other taxable payments made when a job ends. With the exception of pay in lieu of notice (except in some cases involving damages for breach of contract or practice), the first £30,000 of the total of such payments is ignored. The excess counts as income. Even then, an increase on previous year income of less than £25,000 is disregarded during the current year.

Benefits

Someone who has lost her/his job may have to claim jobseeker's allowance (JSA). If income-based JSA is in payment, the claimant is entitled to the maximum tax credit according to her/his circumstances. The maximum tax credit is also payable to someone entitled to income-related employment and support allowance, income support or pension credit, and should be paid for the period in receipt of benefit with no income test. In most cases this will be CTC only because the claimant will no longer be working. However, people on sickness or maternity leave and couples where one partner is working 16-24 hours a week may still qualify for WTC as well, although WTC is counted as income for these benefits.

Recovery of overpayments

If someone's circumstances have changed and s/he is still repaying an overpayment at a level s/he agreed to when their income was higher, it is possible to ask for recovery to be waived or rescheduled over a longer period. The Revenue has said that repayment may be accepted over three years if the disposable income details sound reasonable.4An overpayment may be written off altogether where there are exceptional circumstances of hardship or other factors such as mental health problems.5

 


Please be aware that welfare rights law and guidance change frequently. Therefore older Bulletin articles may be out of date. Use keywords or the search function to find more recent material on this topic.

  • 1. Reg 46(9) and Sch 6 para 9(1) HB Regs 2006
  • 2. CTC/2103/2006
  • 3. Tax Credits Claimant Compliance Manual, 6770
  • 4. Minutes of Tax Credits Consultation Group meeting, 16 October 2008
  • 5. Debt Management and Banking Manual, 555600