Tax credits: new problems
Although the Welfare Reform Act 2012 provides for the abolition of tax credits, it is still possible for people who are not entitled to universal credit to make a new claim for tax credits for 2015/16 and the majority of claimants will see their awards renewed as normal. There are also some new developments in policy and legislation, described here by Mark Willis.
Recovery of in-year overpayments
From April 2015, a new policy is applied to recovery of overpayments that occur during the tax year. There are statutory limits on recovery of an end-of-year overpayment from ongoing awards; 10 per cent for those on maximum tax credits; 25 per cent for those with less than maximum; 100 per cent for those with the family element only.1 Previously, to prevent extreme hardship, HMRC committed to applying the same limits to recovery of an ‘in-year’ overpayment.2 However, under the new policy, HMRC may reduce or stop payments altogether in order to ‘prevent an overpayment building up’.
Zara, a lone parent on income support, with two children, aged 3 and 17, receives maximum child tax credit (CTC) for both children from April 2015. In October 2015, she reports that her 17-year-old has not been in education or training since April 2015. This means that Zara has incorrectly received CTC for two children for six months. HMRC stops the ongoing award because it says she has already received the correct amount for one child for a full year.
Advisers faced with such cases may have to present a number of options to claimants. If there is any scope for a mandatory reconsideration of the entitlement decision, this is always worth doing because recovery of the overpayment is suspended until the outcome of the mandatory reconsideration and appeal.3In the above example, if the 17-year-old is arguably still a qualifying young person (eg, education is temporarily interrupted), then it is important to request a mandatory reconsideration of the decision to remove entitlement from April 2015, using form WTC/AP within 30 days (or up to 13 months later if HMRC accepts special circumstances). HMRC’s target is 42 days to carry out the mandatory reconsideration, and if the claimant is still unhappy when notified of the outcome, there is then a right of appeal to the First-tier Tribunal on form SSCS5 within one month (or up to 13 months later if the tribunal accepts reasons). The remaining CTC for the 3-year-old should continue while entitlement for the 17-year-old is still to be determined. Even if the appeal is lost, this will usually take to the new tax year, so the legal limits to recovery will apply.
Alternatively, if an amount was clearly over-paid but there is an argument that this was HMRC’s fault, it is still possible to dispute recovery. In the above example, if HMRC failed its responsibilities (eg, Zara first notified HMRC of the change in April 2015 and was told she was still entitled for the 17-year-old), she should dispute recovery on form TC846 within three months of the notification of recovery (or later in exceptional circumstances). However, this is likely to prove difficult, as the official reasoning here is that stopping ongoing payments prevents an overpayment happening, so there will be no overpayment for 2015/16, so no recovery and no dispute process. This seems a bizarre view; if entitlement were to end mid-way through the year, there would clearly be an overpayment. However, as there is no right of appeal, it may be necessary to pursue this existential argument via a complaint and request payments on hardship grounds. In any case and at any time where recovery leaves families without enough to support children, request payments are adjusted to avoid hardship, as mentioned in COP26 page 3 & 14 and HMRC guidance (Tax Credits Manual TCM0216120). Finally, if Zara does not report the change to HMRC in October 2015, and instead thinks it may be better to wait until April 2016, when the overpayment will be bigger but recovery will be legally limited to 10 per cent of the ongoing award, she should be warned that she may face a penalty.
In the 2014 Autumn Statement, it was announced that eligibility conditions would be tightened for self-employed working tax credit (WTC) claimants to prevent abuse of the system.4This envisaged a requirement that anyone claiming WTC as self-employed registers with HMRC and provides their Unique Tax Reference. However, it was stated in the Budget 2015 that this requirement will be introduced in April 2016, but claimants will be encouraged to register before then, and in the meantime the definition of self-employed has been amended.
The subsequent legislative change from 6 April 2015 amends the definition of ‘self-employed’ in the WTC regulations, from: ‘engaged in carrying on a trade, profession or vocation’ by adding ‘on a commercial basis and with a view to the realisation of profits, either on one’s own account or as a member of a business partnership and the trade, profession or vocation is organised and regular.’5 The amended wording spells out what may be commonly understood as self-employed, but may put some groups in an uncertain position – eg, foster-carers who may be classed as self-employed under current guidance, despite having no profits and not usually viewed as being on a commercial basis.6 HMRC staff guidance is expected to be updated to reflect the new definition.
As mentioned in Bulletin 244 p2, a new development appears to allow the effective privatisation of tax credits investigations and decisions. A contract worth £70 million with a US-based company, Concentrix, has been agreed to carry out several HMRC functions under the Tax Credits Act. The legal basis for this delegation of power can be found in section 14(1)(c) of the Commissioners for Revenue and Customs Act 2005, but whether it was the intention of parliament for responsibility to be shifted from public servants to a private company is not clear. Although government contracts can be found on www.gov.uk/contracts-finder, at the time of writing this one is not yet available (UPDATE: View the contract here and Concentrix Intermediaries line: 0845 266 8998)). The contract award notice has been published and is described as ‘a contract for providing additional capacity and capability to HMRC to correct working tax credit claims that are potentially running with incorrect information’.7
The delegated functions apparently include revising decisions, making and notifying final decisions, reviewing decisions (mandatory reconsideration), deciding whether to accept a late application for a review, making payments, imposing penalties of up to £3,000, contacting employers and childcare providers, requesting information and deciding what is an official error. In the exercise of these functions, Concentrix is bound by the same legislation and caselaw as HMRC, and should also meet, or even surpass, its standards of customer service as described in the HMRC Charter.8HMRC has a duty to monitor the exercise of these functions by Concentrix.9
Claiming universal credit
There is no longer an exclusion preventing people in receipt of tax credits from making a new claim for universal credit (UC). However, in the initial stage of the introduction, there are very limited circumstances in which a tax credits claimant would meet the gateway conditions for UC, which include: not expecting to earn more than £338 a month, not self-employed, not sick or pregnant, and (in the areas introduced as part of the UC expansion from February 2015) not responsible for children.
This means that for the bulk of the country, the only tax credit claimants who are likely to be able to switch to UC are those without children, getting WTC in the four0week run-on after stopping work or term-time workers during the summer vacation.
However, the last of these conditions does not apply in the UC areas introduced before the February 2015 national expansion, so claimants with children in some parts of the country can now claim UC.10 This will affect existing CTC claimants in those areas whose circumstances change, particularly lone parents when their youngest child turns 5, as income support ends and they must claim UC. The other main group of tax credit claimants who will be affected by UC sooner rather than later are those in a UC area who form a couple with a UC claimant. In this situation, the tax credit award ends, and there is a new process of ‘in-year finalisation’ and no annual review at the end of the tax year. An outstanding overpayment of tax credits can be treated as an over- payment of UC and recovered from UC.11
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 12A Tax Credits (Payment by the Commissioners) Regulations 2002 No.2173; Budget 2014 announced proposal to introduce a 50 per cent rate for people earning over £20,000 from April 2016
- 2. Minutes of the Tax Credits Consultation Group Meeting,17 July 2007
- 3. COP26, p1
- 4. Autumn Statement 2014, para 1.230
- 5. Working Tax Credit (Entitlement and Maximum Rate) (Amendment) Regulations 2015 No.605
- 6. TCM0124100
- 7. http://ted.europa.eu/udl?uri=TED:NOTICE:192701- 2014:TEXT:EN:HTML
- 8. www.gov.uk/government/publications/your-charter
- 9. sI4(4) Commissioners for Revenue and Customs Act 2005
- 10. The Welfare Reform Act 2012 (Commencement No.9, 11, 13, 14, 16, 17 and 19 and Transitional and Transitory Provisions (Amendment)) Order 2015 No.38. See also areas marked with an asterisk on www.gov.uk/jobcentres-where-you-can-claim-universal-credit.
- 11. Reg 12 The Universal Credit (Transitional Provisions) Regulations 2014 No.1230