Tax credits update
Mark Willis explains some recent changes to the tax credits rules and looks at possible future reform by the new Government.
Amending regulations have made some changes to the tax credits rules from April 2010. This article examines the main changes and briefly considers possible future reform by the new Government.
It was announced in the Budget in March 2010 that the system for claiming the childcare element of working tax credit for short periods of time would be simplified to ensure that parents receive support when they need it most. The intention is that people who only pay childcare costs during the school holidays, for example, should receive the childcare element for that period only. Previously, childcare costs would often be averaged out over a whole year, often leaving people struggling to pay the childcare charge when it was due. New regulations came into force on 15th April 2010 to amend the rules so that there is no 'four-week run-on' after an award of childcare charges for a fixed period.1There is, as yet, no further guidance or changes to the claim form and the accompanying notes still contain an example of averaging over a year. Claimants will have to contact the Revenue to ask for childcare costs to be calculated over a fixed period and provide the start and end date.
Claimants now have the option to withdraw their claim at the annual review stage by specify that the annual declaration is not to be treated as a renewal claim from 6 April in the new tax year.2The annual review and declaration form (TC603RD) has not been changed so it is necessary to notify the Revenue separately to do this. This may assist some higher income groups who want to stop receiving payments or paperwork. However, a low or 'nil' award is always worthwhile as it can mean that a payment can be made for the whole year if income unexpectedly drops. Making a new claim after income has gone down can mean receiving less as it can only be backdated for 93 days. Anyone who chooses to withdraw a claim may be losing money to which they should be entitled. Claimants should be advised not give up their entitlement just because of the poor administration of the system, and that they may still have to repay any provisional payments. An alternative is to provide an overestimate of current year income and wait until the end of the tax year when actual income is known to receive any tax credits due.
Couples and annual declarations
From 6th April 2010, an annual declaration made by either member of a couple can be treated as a renewal.3This was previously the case where one person can act for both when making a telephone declaration, but only if they were still a couple when the declaration was made.4Problems could arise where a couple split up before making the annual declaration, for example in June, and had already received up to three months of provisional payments. If the partner who left did not make a declaration, there would be no claim from April to July, resulting in an overpayment. The change will help couples who separate during the renewal period so that if one person makes the declaration, their previous joint claim can be renewed up to the date of separation, thereby reducing the risk of an overpayment. Details of both partners' incomes are still required for the whole tax year, however, for the joint claim to be finalised up to the date of separation.
Payments into an account
The Revenue recently announced its intention to increase the number of claimants receiving tax credits into a bank or other account. There has now been a change to clarify when claimants may lose entitlement if they do not provide account details.5If the Revenue gives written notice that account details are required, payment by other means may be postponed after eight weeks. If account details are still not provided within three months, or by the start of the next tax year (if this is earlier), entitlement ceases from the date payments were postponed. The claimant may request an authority to open an account from the Revenue within this period and they have 3 weeks from the date this is provided (or until the end of the original period, if this is later). Entitlement to tax credits does not cease where the claimant is unable to obtain an account due to exceptional circumstances. Revenue guidance states this can include severely disabled people who do not wish to use an appointee, people with no fixed abode and people who are refused a 'card account' by the Post Office.6
Postponement of payments
Payments of tax credits may now be postponed where the Revenue has asked for further information or evidence in relation to an award. The Revenue has the power to request information from the claimant, childcare provider or employer. The request for information must be in writing and specify a date by which it must be provided, but not less than 30 days. Payments may now be postponed if the claimant has been asked to provide information or evidence and has not done so by the specified date.7There is no right of appeal against a decision to postpone payment and it is not clear how long a postponement may last in these circumstances, but payment should be reinstated when the information or evidence is provided. The Revenue may amend or terminate an award during the year if it has reasonable grounds for believing the award is wrong, a decision which does carry a right of appeal. Failure to respond to a written request for information by the specified date may also lead to a penalty, which is also appealable.
Revising decisions due to official error
A tax credits decision can be revised in favour of the claimant if it is incorrect due to an official error. An official error is defined as an error by the Revenue, DWP, or person providing services to the Revenue or DWP in connection with tax credits.8It excludes an error of law identified in a subsequent decision of an Upper Tribunal or court. The claimant must not have materially contributed to the error. This power to revise decisions on grounds of official error cannot be used against the claimant, only in their favour, i.e. to correct underpayments. The time limit for doing so has been extended to five years from the date of the decision, rather than five years from the end of the tax year to which the decision relates.
Income-related benefits and the four-week run-on
When claimants stop working sufficient hours to qualify for working tax credit (WTC), they are entitled to a four-week 'run-on' of WTC. When they stop work, they may also qualify for income-based jobseeker's allowance, income-related employment and support allowance, income support or pension credit. Generally, these benefits act as a passport to maximum tax credits, regardless of income in the rest of the year. Claimants are no longer automatically entitled to maximum WTC due to receipt of these benefits during the four-week run-on after stopping work.9Prior to this change, there was a risk that people could be trapped in a vicious circle where receipt of these benefits and WTC were incompatible. WTC is still counted as income for these benefits.
Recovery of overpayments from benefits
From May 2010, the Revenue is trialling recovery of tax credit overpayments by making deductions from social security benefits. The trial will involve 5,000 tax credit claimants, who will receive a letter from the Revenue asking if they want to participate. Regulations have been amended to allow amounts to be deducted from income support, income-based jobseeker's allowance, income-related employment and support allowance or pension credit. The maximum rate of the deduction is £9.75 a week and tax credits debt will be at the bottom of the current priority list of deductions. If a claimant is already repaying a benefit overpayment then no tax credit recovery will be taken until that debt has been cleared. Participation will be on a voluntary basis and the claimant can withdraw from the agreement at any time. If a claimant does not agree to deductions or does not respond to the letter, there will be no further action regarding recovery from benefits and the debt will be pursued by other methods.
Couples where one is subject to immigration control
From 6 April 2010, the couple element in working tax credit (WTC) has been removed from couples without children where one member is subject to immigration control.10Previously, the exclusion only applied where one partner did not have leave to enter or remain in the UK, which primarily affected illegal immigrants, 'overstayers' and asylum seekers. The amended rule also affects people who have leave to enter or remain on the condition of having no recourse to public funds, or on the basis of a maintenance undertaking, or pending an immigration appeal. A joint claim must still be made if one partner is affected by this rule, but the couple element is not payable if there are no dependent children. If both members of a couple are subject to immigration control, they are not entitled to tax credits.11The Revenue has undertaken to write to claimants affected by this change (estimated at around 2,500 in total), and to 'write-off' any related overpayments which arise between 6 April 2010 and the date the awards are amended.
Tax credits Condemned?
At the time of writing, the future direction of tax credits is uncertain under the new Conservative-Liberal Democrat coalition Government. In their manifesto, the Conservatives stated that they support tax credits, but would stop paying them to better-off families with incomes over £50,000. They also pledged to reform the administration of tax credits to reduce fraud and overpayments, and to end the 'couple penalty' for all couples in the tax credit system.12There is some common ground with the Liberal Democrats, who stated that they will restrict tax credits and target payments towards those who need them most. However, they also proposed reducing overpayments by fixing payments for six months at a time, something familiar to those who remember Working Families Tax Credit, a predecessor to tax credits.
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- 1. The Working Tax Credit (Entitlement and Maximum Rate) (Amendment) Regulations 2010 S.I. No. 918
- 2. The Tax Credits (Miscellaneous Amendments) Regulations 2010 S.I. No. 751
- 3. Ibid.
- 4. Tax credits (Claims and Notifications) Regulations, Reg. 34(3)
- 5. Tax Credits (Miscellaneous Amendments) Regulations 2010 S.I. No. 751
- 6. Tax Credits Technical Manual TCTM 0810
- 7. Tax Credits (Miscellaneous Amendments) Regulations 2010 S.I. No. 751
- 8. Tax credits (Official Error) Regulations, 2003 S.I. No. 692, as amended by S.I. 2010/751
- 9. Tax Credits (Miscellaneous Amendments) Regulations 2010 S.I. No. 751
- 10. The Tax Credits (Miscellaneous Amendments) (No. 2) Regulations 2009, S.I. No. 2887
- 11. Tax Credits (Immigration) Regulations, 2003, S.I. No. 653, reg 3(2)
- 12. See Dynamic Benefits, Centre for Social Justice, December 2009, and Don Draper, Couple Penalty 2008-09, Christian Action Research and Education, August 2009