Tax credits and coronavirus

Over two million people affected by the coronavirus (COVID-19) pandemic have claimed universal credit (UC) in the past two months. But claimants already getting tax credits have the option of staying in the tax credits system instead. Mark Willis explains.

Claiming universal credit
For some claimants UC may be the best option, but some may find that they are not entitled to UC – for example, due to capital over £16,000 or a student who does not fall into an eligible category. When a UC claim is made and the DWP is satisfied certain basic conditions are met, tax credits are automatically terminated, even if the claimant is not entitled to UC.1See ‘Defective claims revisited’, Welfare Rights Bulletin 267, December 2018 The Secretary of State for Work and Pensions is ‘actively looking at that particular scenario, where people, not realising some of the eligibility rules, have then made the application and are no longer going to receive working tax credits’ and is ‘looking very carefully into what changes we could make to address that situation’.2House of Commons, Hansard, 4 May 2020, Vol 675, col 431 In the meantime, if there is no entitlement to UC, advisers may wish to exhaust all options to get back onto tax credits.

Reclaiming tax credits
Tax credits are being abolished and new claims are not possible, with certain exceptions, including renewals. The wording allows someone who had a tax credit award in one tax year to make a claim for the next tax year.3Art 7(6) Welfare Reform Act 2012 (Commencement No.23 and Transitional and Transitory Provisions) Order 2015, No.634 Similarly, the abolition of tax credits does not apply to a tax credit award where the claimant had an award for the previous tax year.4Art 3(5)(c) Welfare Reform Act 2012 (Commencement No.32 and Savings and Transitional Provisions) Order 2019, No.167 Arguably, these provisions allow a tax credits claim to be made for 2020/21 by someone who had an award for 2019/20, regardless of whether this was terminated due to making a UC claim. However, this would be a difficult argument: transitional rules prevent a tax credits claim by a ‘UC claimant’, defined not only as someone who is entitled to UC, but also those awaiting a decision, or with a mandatory reconsideration or appeal pending.5Reg 6 Universal Credit (Transitional Provisions) Regulations 2014, No.1230 A tax credits claim is difficult as there is no claim form, and HM Revenue and Customs (HMRC) has not accepted telephone claims in this context. It would have to be in writing, including all the information required by the claim form, and a request for HMRC to accept it, and appeal if it is rejected.6Reg 5(2)(b) Tax Credits (Claims and Notifications) Regulations 2002, No.2014, and CI v HMRC (TC) [2013] UKUT 547 (AAC)

Challenging the decision to terminate tax credits
There may not be a specific right of appeal against this decision, but there is a right of appeal against the final decision on tax credits, which is triggered by the termination decision. The decision to terminate tax credits has been considered by the Upper Tribunal, which required ‘an explanation of the system that led to the stop notice being issued’, and left undecided the possibility that the claimant ‘could have protected herself by withdrawing her claim before the stop notice was issued’.7HMRC v LH (TC) [2018] UKUT 306 (AAC) If the UC claim was withdrawn before the stop notice was issued, and before a decision was made on it, then it is arguable no valid UC claim was made, so the termination is not triggered. If the UC claim indicated a need for further examination regarding age, residence or student status, it is arguable that the stop notice was issued in error, as the DWP could not have been satisfied that these basic conditions for UC were met.8Reg 8 Universal Credit (Transitional Provisions) Regulations 2014, No.1230

Rates
The basic element of working tax credit (WTC) increased by £1,045 to £3,040 for 2020/21, above the previously announced increase with inflation, which had been the first increase for four years. This is expected to be for one year only and matches the increase for UC claimants. Claimants not entitled to WTC, in receipt of child tax credit and legacy benefits only, do not get an equivalent increase. Some maybe better off switching to UC, depending on a full benefit check, taking into account lower rates for under-25s, and for most disabled children.

Working hours
There has been a change to the entitlement conditions for WTC from 23 May 2020 to allow someone to remain entitled if her/his work is stopped or hours reduced due to coronavirus.9Tax Credits (Coronavirus, Miscellaneous Amendments) Regulations 2020, No.534 The amended regulations apply to someone who is a furloughed worker, or employed or self- employed, and has reduced hours (including a reduction to nil) or is unable to work as a consequence of shielding her/himself or another member of her/his household. A temporary change to working hours due to coronavirus does not affect WTC entitlement and does not need to be reported. Claimants will be treated as working their normal hours, based on the information held by HMRC. There is a further period of eight weeks after the claimant is no longer impacted by coronavirus and returns to work, during which s/he can be treated as in work if s/he intends to resume sufficient hours. A permanent cessation in work or reduction in hours would lead to entitlement ending, after the four-week run-on. Claimants are still required to notify HMRC if they lose their job, are made redundant or cease trading. In these cases, the four-week run-on would be payable.

Childcare
Childcare has been limited to children of key workers and vulnerable children, but the government has asked childcare providers to prepare for wider reopening from 1 June10.Department for Education guidance, Actions for Early Years and Childcare Providers during the Coronavirus Outbreak, 15 May 2020 WTC claimants whose children are still attending childcare may continue to be entitled to the childcare element, based on their average weekly costs as previously declared. There is a requirement to notify HMRC if childcare costs stop or reduce by £10 a week or more for four consecutive weeks. WTC claimants who have stopped paying for childcare in effect get a four-week run-on of the childcare element. Those who are still paying for childcare that is not currently being provided, should notify HMRC. The regulations refer to ‘childcare provided’ which ‘include care which will be provided’.11Reg 14(6)(b) Working Tax Credit (Entitlement and Maximum Rate) Regulations 2002, No.2005 Arguably, as long as the payments are made on the basis that childcare will be provided in future, then they can be covered.

Income
The coronavirus crisis coincided with the end of a tax year, when tax credit claimants see their 2019/20 entitlement finalised, and provisional payments for 2020/21 continue, pending an initial decision for the new tax year. Claimants should report actual income for 2019/20 as soon as possible. However, a reduction in income compared to 2018/19 will only have an impact on the 2019/20 award if the reduction is more than £2,500. If this results in an underpayment, it should be paid as a lump sum. It is also advisable to provide an estimate of 2020/21 income and ask for the initial award for the new tax year to be calculated on the basis of this figure, so payments can be increased. However, this has to be an accurate estimate for the whole of the 2020/21 tax year and must be kept up to date to avoid the risk of an overpayment. HMRC is not obliged to use the figure provided and may use its own estimate, but the claimant can request a review if unhappy with the income figure used. There are also changes to income rules to clarify that the Self-Employment Income Support Scheme and any other government support scheme for the self-employed will count as trading income.12Tax Credits (Coronavirus, Miscellaneous Amendments) Regulations 2020, No.534 Payments instead of free school meals, payments to emergency health and social care volunteers and the £60,000 death in service payment for families of NHS workers are disregarded.

Overpayment recovery
The DWP has suspended recovery of benefit overpayments for three months, which includes overpayments of tax credits being recovered from DWP benefits.13DWP press release, ‘Recovery of benefit overpayment suspended’, 3 April 2020 The transfer of tax credit debt from HMRC to the DWP has also been suspended. However, HMRC has not suspended recovery of all tax credit over-payments being deducted from ongoing tax credit awards. HMRC is using discretion to suspend recovery during the coronavirus outbreak, but this is only being considered on an individual basis if requested, via the Tax Credit Payment Helpline on 0345 302 1429.

There are also changes to income rules to clarify that the Self Employment Income Support Scheme and any other government support scheme for the self-employed will count as trading income.13 Payments instead of free school meals, payments to emergency health and social care volunteers and the
£60,000 death in service payment for families of NHS workers are disregarded.