Tax credits: changes and performance
Nearly five years on, and the tax credits scheme still appears to be a work in progress. Mark Willis looks at some of the latest changes and performance.
Changes in amounts from April 2008
The most substantial increase will be in the amount of child tax credit for each child, by £240 per year. The income threshold for working tax credit jumps to £6,420, making up for having been frozen at £5,220 for the past three years. This generosity is tempered by the rise in the withdrawal rate to 39 per cent, which the Government revealed 'helps to retain the current focus of tax credits'.1 Budget, March 2007 Most other elements rise with inflation, except for childcare costs, which do not change this year. The family element and baby addition are frozen at £545 per year, and the income threshold for family element only remains at £50,000 per year. The changes are expected to lift 300,000 children out of poverty, but further increases above inflation will be necessary to meet the target to halve child poverty by 2010.2 Treasury committee first report on the 2007 Comprehensive Spending Review, December 2007
Reasonable belief test replaced
HM Revenue and Customs (HMRC) has revised its code of practice on dealing with overpayments (COP26) from 1 February, replacing the 'reasonable belief' test with a new balance of responsibilities test. It sets out claimants' responsibilities for claiming correctly, checking awards, notifying changes, checking payments and reporting errors within one month (unless there are exceptional circumstances for not reporting within this time). HMRC commits to giving correct advice, accurately recording information, paying the right amount and sending out new award notices within 30 days of the claimant reporting a change of circumstances. It is implied that the responsibility falls back on the claimant if they have not received a new award notice within this time, so claimants should contact the helpline again to ensure the onus is back on HMRC. If the claimant notifies HMRC of an error on the award notice within one month, any overpayment as a result of HMRC's failure to correct the error will not be recovered - there is no requirement for the claimant to keep re-notifying of errors or to reasonably believe their award was correct. If the claimant reports the error more than one month later, then HMRC may recover any overpayment up to the time of notification. If the claimant has met all their responsibilities, but HMRC has failed to meet one of theirs, the overpayment will not be recovered. Where the claimant and HMRC have both failed to meet their responsibilities, HMRC may write off parts of an overpayment. At the time of writing, the form to dispute recovery (TC846) and the guidance manual for helpline operatives had not been updated.
Provisional payments
These are payments of tax credits that can continue at the start of each tax year, while claims are being renewed. From April 2008, if the claimant has not provided an up-to-date estimate of income, provisional payments will be based on the assumption that their 2007-08 income has increased on 2006-07 in line with average earnings.3 HMRC Autumn Performance Report 2007 The aim of this is to make provisional payments more accurate and reduce the risk or size of overpayments.
Tax credit overpayments and income tax refunds
HMRC has published draft legislation - as part of its consultation Payment, Repayments and Debt, January 2008 - that will allow income tax refunds to be used to recover overpaid tax credits. Earlier consultation confirmed that tax credits entitlements will not be used to repay income tax debts. Under this legislation, HMRC would not require the taxpayer's consent, and there is no right of appeal. There is no assurance that the set-off will only take place after any dispute about recovery or hardship has been considered. The draft legislation applies to England, Wales and Northern Ireland, but not to Scotland, although separate legislation is expected. The final date for comment is 6 March 2008.
Couple/single claims
HMRC has announced a breakthrough in dealing with claims moving from couple to single status. Claimants terminating their old joint claim can now make a new single claim in the same telephone call, and most should see no break in their payments.4 HMRC Autumn Performance Report 2007Their helpline guidance states that the claimant will be invited to make a fresh claim, they will be sent a claim form and will be asked to include a note requesting backdating.
HMRC recently changed its guidance on overpayments where claims have been made or continued in the wrong capacity, as a single person or a couple. Offsetting by the amount the claimant would have been entitled to if they had claimed correctly is only available in cases of 'genuine error'. Examples of 'genuine error' include claiming as a single person instead of as a couple when in a volatile relationship (Claimant Compliance Manual para 15640, available at
Joint working pilot
HMRC recently announced the results of a joint working pilot with Jobcentre Plus and the local authority benefits office in North Tyneside, aiming to provide a one-stop shop for people moving into and out of work.5 HMRC Autumn Performance Report 2007 All information and evidence was gathered and verified at the first point of contact and shared between all three agencies by email. The results of the pilot found that the time taken for benefits and tax credits to come into payment was reduced, and working tax credit was stopped on time when someone claimed JSA. The approach is now being trialed in six different local authority areas; Lambeth, Sedgemoor (Somerset), West Somerset, Merthyr Tydfil, West Lothian and Liverpool.
Checks and penalties
Compliance checks were carried out on 137,930 claims in 2006-07, or about 1 in 40 of all tax credit claims. The majority resulted in a change to the award, identifying or avoiding incorrect payments. Penalties may be imposed for failing to notify a required change in circumstances, failing to provide information requested or making incorrect statements. In 2006-07, 1,365 claims were subject to penalties to a total value of £610,000.6 HMRC Departmental Accounts 2006-2007 As part of a wider review, HMRC has recently been developing ideas and consulting on how to modernise and align penalties across the tax system. There is a right of appeal against a decision to impose a penalty. Also, if a penalty would cause hardship, the claimant can ask HMRC to exercise its discretion not to recover all or some of it.
HMRC aims to settle most appeals without a tribunal hearing. If the claimant does not agree to settle the appeal, or cannot be contacted within 28 days, the appeal submission should be written and sent to the tribunal. In February 2005, 70,000 tax credit appeals were still waiting to be settled or referred to the tribunals service.7 Tax credits: Putting Things Right, Parliamentary Ombudsman Report, June 2005, and Tax Appeals: consultation document, October 2007 In 2006-07, around 20,000 more tax credit appeals were lodged, while 728 were received by the Tribunals Service, and about 500 were heard.8 Ministry of Justice, in response to FoI request HMRC has claimed that 38 per cent of appeals concern decisions such as disputed recovery of overpayments with no right of appeal.9 Tax Credits: Getting it Wrong?, Parliamentary Ombudsman report, October 2007 A tribunal chairman has the power to decide where there is a dispute about a decision being appealable.10 Reg 46(3) Social Security and Child Support (Decision Making and Appeals) Regs 1999 If there has been an unacceptable delay, advisers can write to the district chair of the tribunal service to request that he or she instruct HMRC to produce appeal papers or orders a hearing. There are about 20 published Commissioners' decisions on tax credits, and some on their interaction with other benefits - see the legal section (on p. 14) for a useful income support decision (CIS/1813/2007) on whether overpaid tax credit counts as income.
In 2006-07, HMRC received formal complaints in 54,483 cases, around 1 per cent of all claims. Three quarters were about its decision on disputed overpayments and the next largest category was delays. According to HMRC, most get a response within six weeks.11 HMRC Departmental report Spring 2007 Their complaints leaflet states that the complaint should be handled by a named caseworker, giving direct contact details. The Adjudicator's Office investigates complaints after HMRC's procedure has been exhausted, and received 1,774 complaints about tax credits in 2006/07.12 Adjudicator's Office Annual Report 2007 The Parliamentary Ombudsman accepted 120 new cases for investigation referred by MPs in the same year.13 Tax Credits: Getting it Wrong?, Parliamentary Ombudsman report, October 2007 The majority of complaints that reach these stages are upheld, resulting in overpayments being written off or in compensation.
The Government maintains its faith in tax credits as the most effective way of tackling child poverty, but has also acknowledged some problems and made changes in response to criticism. However, there are still a lot of lessons to be learned, and advisers have a vital role in persevering with appeals and complaints and monitoring whether the system is fit for purpose.
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1      Budget, March 2007 »
2      Treasury committee first report on the 2007 Comprehensive Spending Review, December 2007 »
3      HMRC Autumn Performance Report 2007 »
4      HMRC Autumn Performance Report 2007 »
5      HMRC Autumn Performance Report 2007 »
6      HMRC Departmental Accounts 2006-2007 »
7      Tax credits: Putting Things Right, Parliamentary Ombudsman Report, June 2005, and Tax Appeals: consultation document, October 2007 »
8      Ministry of Justice, in response to FoI request »
9      Tax Credits: Getting it Wrong?, Parliamentary Ombudsman report, October 2007 »
10      Reg 46(3) Social Security and Child Support (Decision Making and Appeals) Regs 1999  »
11      HMRC Departmental report Spring 2007 »
12      Adjudicator's Office Annual Report 2007 »
13      Tax Credits: Getting it Wrong?, Parliamentary Ombudsman report, October 2007 »