Updated March10

Introduction to Tax Credits 

LEGISLATION 

Tax Credits Act 2002

Tax Credit (Prescribed Period of Awards) Regulations 2002

The Working Tax Credit (Entitlement and Maximum Rate) Regulations 2002

The Child Tax Credit Regulations 2002

The Tax Credits (Definition and Calculation of Income) Regulations 2002

The Tax Credits (Claims and Notifications) Regulations 2002

The Tax Credits (Interest Rate) Regulations 2003

The Tax Credits (Appeals) Regulations 2002

The Tax Credits (Appeals) (No 2) Regulations 2002

The Tax Credits (Notice of Appeal) Regulations 2002

The Tax Credits (Administrative Arrangements) Regulations 2002

The Tax Credits (Payment By Board) Regulations 2002

The Tax Credits (Payment By Employer) Regulations 2002

The Tax Credits (Income Thresholds and Determination of Rates) Regulations 2002

The Tax Credits (Approval of Home Childcare Providers) Scheme 2003

The Tax Credits (Immigration) Regulations 2003

The Tax Credits (Residence) Regulations 2003

The Tax Credits (Official Error) Regulations 2003

The Social Security (Working Tax Credit and Child Tax Credit)

(Consequential Amendments) Regulations 2003

The Social Security Commissioners (Procedure) (Tax Credit Appeals) Regulations 2002

The Tax Credits (Polygamous Marriages) Regulations 2003

Tax Credits (Provision of Information) (Evaluation and Statistical Studies) Regulations 2003

The Social Security Child Support and Tax Credits (Miscellaneous Amendments) Regulations (NI) 2005

The Tax Credits (Approval of Childcare Providers) Scheme 2005

The Tax Credit Up-Rating Regulations 2005

Tax Credits Act 2002 (Commencement No. 4, Transitional Provisions and Savings) (Amendment) Order 2005

Working Tax Credit (Entitlement and Maximum Rate) (Amendment) Regulations 2004

Tax Credits (Miscellaneous Amendments No. 2) Regulations 2004

Tax Credits Up-Rating Regulations 2004

Tax Credits (Miscellaneous Amendments No. 3) Regulations 2004

Tax Credits (Provision of Information) Evaluation and Statistical Studies (Northern Ireland) Regulations 2004

Tax credits (Approval of Child Care Providers) Scheme 2005

Tax Credits (Provision of Information) functions relating to Employment & Training Regulations 2005

Tax Credits (Miscellaneous Amendments) 2009

The WTC Entitlement and Maximum rate) Amendment Regulations 2009

INTRODUCTION

The tax credits system includes two elements, Child Tax Credit (CTC) and Working Tax Credit (WTC).

CTC is a means-tested credit payable to families with children under sixteen or under 20 and still in relevant education. CTC is payable to people regardless of whether in employment or not.  It is also payable to students including student nurses.

WTC is a means-tested credit for families or people with a disability who work sixteen hours or more per week. WTC is also available to single people and childless couples aged over 25 and working more than 30 hours per week.

CTC and WTC replaced:

From 5 April 2004, new Income Support and JSA(IB) claims do not include personal allowances and premiums for children. Her Majesty’s Revenue & Customs (HMRC) intends to transfer all personal allowances and premiums for children included in claims for Income Support and JSA(IB) to CTC at some point in the future.

Transitional rules also allow claims which already included child dependant additions on 5 April 2003 to retain them. This transitional protection is lost if entitlement to the addition ceases or stops due to exceeding the earnings limit and this occurs for more than eight weeks.

Claims for tax credits are decided by HMRC. A tax credit award usually starts on the date of claim (the date it is received by HMRC) and runs to the end of the tax year. If the date of claim is the beginning of the tax year, the award period is 365 days (366 if a leap year).  Otherwise the award period is less than a year. However, HMRC can terminate an award immediately if a person ceases to be entitled. In addition, changes in circumstances mean that awards can be changed during the award period.

Claims for tax credits can be automatically backdated for up to 93 days providing all the conditions of entitlement are met throughout the backdated period.

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1.  WORKING TAX CREDIT

WTC is a means-tested tax credit paid to certain groups of people who are on low income and in full time work. You do not have to have paid national insurance contributions to qualify for WTC. Entitlement to WTC is based on income and not capital, but actual income from capital counts as income.

1.1 Who can claim?

A person and, where appropriate, her/his partner must be aged sixteen or over to make a claim.  There is no upper age limit.

Families, couples without children and single people who are at a disadvantage of getting a job or are aged 25 or over can all claim.  There is also an additional route to entitlement for people over 50 who satisfy specific rules.

A claim for tax credit must be made jointly by members of a couple, ie married or civil partners or living together as a couple.

1.2 Conditions of entitlement

To claim WTC, a person must be aged sixteen or over and:

1.2.1 Remunerative work

A person must be working the required number of hours or more per week and be expected to continue to do so for at least four weeks after claiming.  A person can be employed or self-employed and can have more than one job.  In calculating hours worked, any customary or paid holidays are ignored as well as meals and tea breaks unless these are paid breaks.

Work carried out by prisoners is not qualifying remunerative work. However, a prisoner’s income from work will be included in any claim by her/his partner for tax credits.

The work must be paid or done in expectation of payment.  Work done for a charitable or voluntary organisation or as a volunteer where payment is made for expenses is not considered to be remunerative work.

The requirement to work the required number of hours is ongoing.  A person should keep a careful record of hours worked.  S/he is also required to notify HMRC of changes in her/his working hours.

A person on sick leave or ordinary maternity leave, paternity leave, adoption leave or sick leave from a job or self employment where s/he worked at least sixteen hours a week before going on leave will be considered to be in remunerative work.

A person is also treated as being engaged in remunerative work during the first thirteen weeks of an additional maternity or adoption leave period provided s/he worked at least sixteen hours a week before the initial period of ordinary maternity or adoption leave began.

A person must also be working at the date of claim or have an offer of work which is due to start within seven days of the claim.  Modified rules apply to term time and seasonal workers not working at the date of claim.

1.2.2 50 plus element

A person will be entitled to the 50 plus element if s/he:

As an alternative, a person’s partner could have been getting one of the above benefits and claiming for the person.

A person who was in receipt of CA, Bereavement Allowance or Widowed Parent’s Allowance immediately before receiving one of the above benefits or national insurance credits can count time in receipt of any of these three benefits towards the six month period.

1.2.3 Disability and disadvantage in getting a job

A person claiming is treated as having a disability which puts her/him at a disadvantage in getting a job if:

1.2.4 Child or qualifying young person

A child is a person who is under sixteen and s/he will continue to be treated as a child until 1 September following her/his sixteenth birthday.

A qualifying young person is:

A person will be deemed responsible for a child/qualifying young person where the child or young person normally lives with her/him. Where a child/qualifying young person normally lives with two or more persons in different households and two or more claims are made, only one person will be deemed as responsible. Where there is disagreement as to who is responsible, HMRC will make a determination.

A person claiming is required to notify HMRC when a child or young person is no longer included in a claim.

1.3 Elements of WTC

WTC has eight elements.  

Note: The daily rate of the childcare element is calculated by dividing the weekly rate by 7 and rounding up to the nearest penny. The daily rate of all other elements is calculated by dividing the annual rate by 365 (366 for a leap year) and rounding up to the nearest penny.

The elements (other than the childcare element) are calculated on a pro rata basis.  This involves taking the annual rate for the relevant element, dividing it by the number of days in the tax year, rounding up to the nearest penny and multiplying it by the number of days in the relevant period. The relevant period is the number of days during the period of an award where:

and, where the award includes WTC,

Therefore an award period can be made up of one or more relevant periods.

For example, a lone parent working 20 hours a week with one child aged fifteen claims on 31 December 2009 (ie 95 days before the end of the tax year). Her circumstances are unlikely to change. Her award period is made up of one relevant period of 95 days and she will be entitled to the following elements:

1.3.1 Adult element

Amount paid  £1,890 (£5.18 per day)

There is one rate payable per claim.

1.3.2 Second adult element

Amount paid  £1,860 (£5.10 per day)

A second adult element is payable in joint claims.  This will not be paid where:

1.3.3 Lone parent element

Amount paid  £1,860 (£5.10 per day)

A lone parent element is payable where the person claiming is single and responsible for a child or qualifying young person.

1.3.4 30 hour element

Amount paid  £775 (£2.13 per day)

A 30 hour element is payable where:

1.3.5 Disabled worker element  

Where both members of a couple each satisfy this condition, two elements will be paid.

1.3.6 Severe disability element

Amount paid  £1,075 (£2.95 per day)

A severe disability element is payable if the person claiming or, in the case of a joint claim, one of the people claiming receives:

Where both members of a joint claim couple each satisfy any of these conditions, two awards are payable.

1.3.7 50 plus element

Amount paid

16+ hours   £1,300 (£3.57 per day)

30+ hours   £1,935 (£5.31 per day)

A 50 plus element is payable for twelve months if the person claiming, or in the case of a joint claim, at least one person claiming:

A person who was in receipt of CA, Bereavement Allowance or Widowed Parent’s Allowance immediately before receiving one of the above benefits or national insurance credits can count time in receipt of any of these three benefits towards the six month period.

Entitlement is limited to a continuous period of twelve months. However, two or more periods of entitlement separated by 26 weeks or less are linked together to form one period of entitlement.

Where both members of a joint claim couple each satisfy the required conditions, two awards will be paid.

1.3.8 Childcare element

A childcare element is payable at the rate of 80% of eligible childcare costs up to a maximum figure (see 3.3 for full details of how the childcare element is calculated).

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2. CHILD TAX CREDIT  

2.1.1 Responsible for a child

To be in full time education, a young person must be studying more than twelve hours a week.

A person is not treated as responsible for a child or a qualifying young person who claims and is awarded Incapacity Benefit or ESA in her/his own right.

2.2 Elements of CTC

CTC has five elements:

The amounts above are per year and per day.

The elements are calculated on a pro-rata basis by taking the annual rate for the relevant element, dividing it by the number of days in the tax year (366 in a leap year) and multiplying it by the number of days in the relevant period.

The relevant period is worked out as outlined in 1.3.

2.2.1 Family element

Amount paid  £545 (£1.50 per day)

The family element is payable to all families who have responsibility for a child or young person and have an income of less than £50,000. Where the household income is more than £50,000, the family element is reduced by £1 for every £15 of excess income ie at a rate of 6.67 per cent. Only one family element is payable and the amount is the same for a single or joint claim.

2.2.2 Family element baby addition

Amount paid  £545 (£1.50 per day)

The family element baby addition is payable where there is a child under twelve months in the family. Only one baby addition is payable per family, even where there is more than one child under twelve months in the family.

2.2.3 Child element

Amount paid  £2,235 (£6.13 per day)

One child element is payable for each child or qualifying young person in the family.

2.2.4 Disabled child element 

Amount paid £2,670 (£7.32 per day)

A disabled child element is payable for each child in the family who:

This element still applies if DLA has stopped because the child is in hospital.

This is paid on top of the child element.

2.2.5 Severely disabled child element

Amount paid  £1,075 (£2.95 per day)

The severely disabled child element will be paid where there is a child entitled to DLA highest rate care component. It is paid on top of the child element and the disabled child element.

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3. CALCULATING TAX CREDITS

and, where the award includes WTC,

3.2  Step 2: calculate maximum tax credits

Calculate the maximum tax credits for the relevant period. This is done by adding together:

3.3 Step 3: calculate the child care element                 

The childcare element of WTC is payable at the rate of 80 per cent of eligible childcare costs up to a maximum figure. Where costs are paid for only one child, the maximum amount is £175 a week. Where they are paid for two or more children, the maximum amount is £300 per week.  These figures represent the maximum amount of eligible childcare costs to which the taper is applied to calculate the childcare element.

To calculate maximum amounts for a relevant period, divide the weekly maximum by seven, round up to the nearest penny and then multiply by the number of days in the relevant period.

3.3.1 Qualifying conditions

In order to qualify for a childcare element, a person must be:

In addition, the child or children cared for must be:

3.3.2 Meaning of incapacitated

A member of a couple is treated as incapacitated if:

3.3.3 Qualifying age

Qualifying age is from birth to:

3.3.4 Eligible childcare

Eligible childcare includes the following:

The Homecare Providers Scheme which came into force on 6 April 2006 expands the category of eligible childcare to include non-registered child minders in the child’s home who are approved by a health and social services trust.  Under this scheme, the child minder must make an application for approval to a health care trust.  In order to be approved, the applicant must:

3.3.5 Calculating childcare costs  

For charges paid weekly, the relevant charge is the average weekly amount paid in the four most recent complete weeks. Round this figure up to the nearest pound.

Where the weekly charge varies, the relevant charge is 1/52 of the total of charges over the previous 52 weeks (rounded up to the nearest pound).

Where the charge is for a fixed monthly amount, the relevant charge is that amount multiplied by twelve and divided by 52 (rounded up to the nearest pound).

Where the monthly charge varies, the relevant charge is 1/52 of the total of charges over the previous twelve months (rounded up to the nearest pound).

The actual childcare costs for the relevant period are calculated by multiplying the relevant weekly charge by 52, dividing by 365 (366 for a leap year) and multiplying by the number of days in the relevant period. To work out the childcare element, calculate 80 per cent of this figure or of the maximum eligible childcare cost for the relevant period, whichever is the lowest.  Round the amount up to the nearest penny.

A lone parent has started full time work (40 hours per week) and makes a claim for tax credits on 31 December 2009.  Her current year income is £10,430, an increase of £3,000 from last year.  She has two children, aged six and five, and pays a registered child minder £150 to look after her children.  Her circumstances are unlikely to change in the current year.

Where there is insufficient information available in order to calculate childcare costs in any of these ways, an officer of HMRC will estimate the charge. It will be calculated by any reasonable method, taking into account any information already provided.

Relevant childcare charges can be calculated where an agreement for childcare has been made but charges for that care have not yet been incurred.  The calculation of relevant future charges is based on an estimate provided by the child minder or childcare provider.

The childcare element will be recalculated where HMRC is notified of:

Where weekly childcare costs cease or decrease by at least £10 for at least four consecutive weeks, the person claiming WTC is required to notify HMRC within one month of her/him becoming aware of the change.

3.4  Step 4: Calculate income

To calculate tax credits, an assessment is made of a person (and any partner’s) income.  The calculation is the same for both WTC and CTC. 

The income test does not apply to a person who is entitled to Income Support, JSA (IB) or PC guarantee credit. In these circumstances, the person will receive her/his maximum tax credits for as long as s/he is entitled to the relevant benefits.

3.4.1 Relevant period

For tax credit purposes, income is calculated for the relevant period.

The income is calculated on a pro-rata basis by taking the income relating to the relevant tax year, dividing it by the number of days in the tax year (normally 365 but 366 in a leap year), and multiplying it by the number of days in the relevant period. Round this figure down to the nearest penny.

3.4.2 Relevant income

A person’s entitlement to tax credits depends on her/his relevant income. In the case of joint claims, the aggregate income of the couple is calculated.

The person will have to provide evidence of her/his income to make a claim. Records of all income and any childcare costs will need to be maintained. Evidence such as a P60 will be relevant when making a claim.

The claim form only asks for previous year’s income. This income will normally be used to calculate the award (although see section 3.4.4). 

3.4.3 Using previous year’s income

In most instances, the income from the previous year will be used to calculate an award. The previous year’s income refers to the income earned in the last tax year (ie a claim made in September 2009 will normally be based on income for the period 6 April 2008 to 5 April 2009).

The previous year’s income will be used to calculate an award even where a person volunteers current year income details at the date of claim.

The assessment will be made on the previous year’s income and then, where appropriate (see 3.4.4) revised using current year income, providing HMRC has been informed of the changes in income.

3.4.4 Using current year’s income

Where there has been any decrease or increase above a certain limit on the previous year’s income, the current year’s income will be used to calculate the award.

The current year’s income refers to the current tax year. For example, a claim made in September 2009 may be based on the projected income for the current year, ie the period 6 April 2009 to 5 April 2010.

The current year’s income may be used where:

As previously stated, the claim form only asks for previous year’s income.  However, it is important to notify any increase or decrease in income in the current year as failure to do so could result in overpayment or underpayment of tax credits.

3.4.5 How is income calculated?

As a general rule, income is taken into account if it is taxable (there are exceptions) and taxable income includes:

Income for tax credits can be calculated in four stages.

3.4.5.1 Stage one

Calculate and add together:

and apply disregard.

This includes all state pensions, occupational pensions, personal and private pensions, Widow’s Pension, Widowed Mother’s and Widowed Parent’s Allowance, Industrial Death Benefit and Survivor’s Guaranteed income payment and child’s payment under the Armed Forces Compensation Scheme.

It does not include any:

Investment income includes interest on investments, including government stocks and bonds, discounts on securities, income from securities payable out of public revenues in the UK, share dividends, payments from the estate of a deceased person, payments from a trust, taxable payments from a life assurance policy, life annuity contract or capital redemption policy, and interest arising from a debt owed to the person.

There are no capital limits for CTC and WTC. Instead, the actual income received from capital (before tax is deducted) is taken into account.

It does not include:

Property income includes any taxable profits derived from rent or other receipts in respect of land or property.

Foreign income is any income arising from possessions (including property), pension or investments coming from outside the UK.  This covers most overseas income.  It does not include:

A person will be treated as possessing income which s/he has deprived her/himself of for the purposes of securing or increasing entitlement to tax credits.  A person can also be treated as having income available to her/him at the date of application, even if s/he does not in fact have it. This could include insurance policies and investments that can be turned into cash.

This does not apply to income from:

Notional income can also include assumed income where a person provides a service for which s/he does not receive payment, or the payment is insufficient for the services provided. The income assumed will be a comparable amount for the service provided. 

This does not apply where a person is:

The pension, investment, property, foreign and notional income of a person, and where appropriate her/his partner, is added together. If the annual amount is less than £300, it is disregarded. If the annual total is more than £300, only the amount in excess of £300 is taken into account as annual income.

3.4.5.2 Stage two

Calculate and add together:

Employment income is the gross income received from an employer (including taxable expenses) less any contributions to a personal or occupational pension (approved by HMRC) and/or certain deductions.

To calculate annual earnings from a fixed gross weekly earnings figure, divide gross weekly earnings (minus relevant deductions) by 7 and multiply by 365 (or 366 in a leap year). 

Earnings include:

Deductions can be made for the following in accordance with amounts allowed under relevant sections of the Income Tax (Earnings and Pensions) Act 2003, (ITEPA):

The following are not considered as earnings where they attract tax relief under the ITEPA or HMRC Concessionary Schemes:

Social security income includes:

Student grants and loans are ignored except for grants for dependants which are taken into account. 

The grant for dependants is taken into account except for the additional allowance payable for a student eligible for a childcare grant and the allowance for books, travel and equipment.

Any income not included above but subject to taxation is taken into account.

A self employed person will have her/his income assessed on the basis of taxable profits for the relevant period. This includes trading outside the UK and profit from renting out property if this is counted as a business. The gross amount of any contributions to an approved personal pension scheme or retirement pension can be ignored.

3.4.5.3 Stage three

Add together all the income from steps 1 and 2 to find the total income and apply any disregards.

3.4.5.4 Stage four: disregarded income

Income disregarded in full for the purposes of tax credits includes:

If a person’s income does not exceed the income threshold, the maximum tax credit is awarded.

Where income exceeds the income threshold, a taper is applied to reduce entitlement below the maximum.

The above are annual rates. The threshold amount is calculated on a pro rata basis by taking the relevant threshold figure, dividing it by the number of days in the tax year and multiplying it by the number of days in the relevant period.  Round this figure up to the nearest penny.

3.6 Step 6: Compare income with threshold amount

If income is the same as or less than the threshold amount, maximum tax credits, the childcare element and the family element are paid.

If income exceeds the threshold amount, calculate 39 per cent of the excess. This is known as the reduction figure.

The reduction figure should be rounded down to the nearest penny.

3.7 Step 7: Apply reductions

The amount of tax credits is calculated by applying the following reductions.

The family element is reduced separately, and only where income is more than £50,000. The family element is reduced by £1 for every £15 of income over £50,000.

3.8 Step 8: Calculate entitlement to tax credits

Entitlement to tax credits will be:

The family element is paid to all families with income of less than £50,000 a year, with no reduction applied. Where income exceeds £50,000, the family element of CTC is reduced at the rate of £1 in every £15 in excess of £50,000.  For example, a couple with a fifteen year old child and a yearly income of £50,120 will receive a family element of £537.00 per year (£545 - £8) or £10.32 weekly.

3.9 Examples

3.9.1 Example 1

Jane, who is 29, is a lone parent with one child aged four.  She works 25 hours a week.  Her current year income is £7,800 which is the same as last year.  She pays £135 per week to a registered child minder who looks after her child.  Her circumstances are unlikely to change in the current year.  She is claiming at the start of the tax year.

Jane’s relevant period is 365 days.

As Jane is entitled to WTC, the threshold amount is £6,420.

Reduce maximum WTC by the reduction figure.

3.9.2 Example 2

Liz and Mark, both aged 35, are married with one child aged fourteen.  Mark works 35 hours per week. Their current year income is the same as last year at £18,500. Their circumstances are unlikely to change in the near future.  The claim is made at the start of the tax year.

Their relevant period is 365 days.

Not applicable as there are no eligible childcare costs.

Reduce maximum WTC by the reduction figure.

Reduce maximum CTC by the income remaining.

3.9.3 Example 3

Mary and Ruth, both aged 49, are civil partners with two children aged sixteen and seventeen who are still at school.  They both work 35 hours a week. Their current year income is £36,500, an increase of £26,500 from last year as Ruth has just started work. Their other circumstances are unlikely to change in the current year.  They make a claim for tax credits at the start of the tax year and also provide details of current year’s income.

The initial claim will be assessed on their previous year’s income of £10,000 and then revised using current year income of £36,500 minus £25,000, therefore £11,500. 

The revised assessment will therefore be as follows.

Mary’s relevant period is 365 days.

Not applicable as there are no eligible childcare costs.

The reduction figure is £1,981.20.

Reduce maximum WTC by the reduction figure.

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4. CALCULATING CHILD TAX CREDIT

The following calculation relates to a person claiming CTC who has no entitlement to WTC.

Step 1: work out the relevant period;

Step 2: calculate maximum CTC;

Step 3: calculate income;

Step 4: calculate the threshold amount;

Step 5: compare income with threshold amount;

Step 6: calculate entitlement.

4.1  Step 1: Work out the relevant period

The relevant period is worked out as outlined in section 3.1.

4.2 Step 2: Calculate maximum Child Tax Credit

In order to calculate the maximum amount of CTC the following elements are added together:

The family element is not included at this stage.

4.3 Step 3: Calculate income

Calculate the relevant income for the tax year. Income for CTC is calculated in the same way as for WTC.

4.4 Step 4: Calculate threshold figure

The threshold figure for April 2009/2010 for those claiming CTC only is £16,040.

4.5 Step 5: Compare income to threshold figure

If the income is the same as, or less than, the threshold amount, maximum CTC plus the family element is paid.

If income exceeds the maximum amount, calculate 39 per cent of the difference and round down to the nearest penny. This is the reduction amount.

4.6 Step 6: Calculate entitlement to CTC

Take the reduction amount away from the maximum CTC. The amount payable will be the difference plus the family element.

The family element is paid to all families with income of less than £50,000 a year, with no reduction applied. Where income exceeds £50,000, the family element of CTC is reduced at the rate of £1 in every £15 in excess of £50,000 (see 3.8).

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5. CLAIMING TAX CREDITS

A claim for tax credits must be made to the appropriate office in writing on an approved form. The same form is issued for both the CTC and the WTC and no distinction is made between the two tax credits on the form. A valid claim in writing includes e-mail through HMRC’s website. A claim made in another way may be treated as sufficient to be considered as a valid claim.

The date of claim will be the date on which the application is received at the appropriate office. However, the claim may be backdated for up to 93 days where a person has qualified for tax credits during this period.

A married couple, a couple living together as husband and wife, civil partners or a same sex couple living together must make a joint claim. A person who is not a member of a couple makes a single claim.

The claim must include all the relevant information. In particular, it must include a national insurance number or information that would enable a national insurance number to be allocated to the person claiming unless there is a reasonable excuse for not providing this information.  This requirement does not apply to a person who is subject to immigration control because s/he does not have leave to enter or remain in the UK and who has not been given a National Insurance number.  Remember, there is a legal status entitlement attached to tax credits and specific rules for couples where one partner only has legal status.  For more details contact the Law Centre.

A claim will normally be made in advance of the tax year with the award period lasting for a year. Where the claim is made during the tax year, the award period will run to the end of the tax year. An award period can be made up of one or more relevant periods. See section 1.3 for further information on a relevant period. 

The information given in response to the final notice will be used to calculate the next tax year’s entitlement. Therefore, it is important to respond to the final notice (see 6.4) and ensure that any relevant change of circumstances is notified.

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6. DECISIONS

There are different types of decision that can be made on a claim.  These are:

6.1 Initial decision

On receipt of a claim, HMRC is required to notify the person claiming of the award, if any, of tax credit. This is known as the initial decision and will be based on the information on the claim form which asks for previous year’s income.

The notification of award will contain details of the changes of circumstances which the person must report, and the time limits for reporting them.  It also gives details of the changes of circumstances which the person should report (see section 7).

6.2 Revised decision

Following the initial decision, HMRC will review the claim on the basis of the information supplied, where there has been a change of circumstances which affects the amount of the award.

As the award may be affected by a relevant change of circumstances, it is important that the change of circumstances is reported (see section 7).

6.3 Other revised decisions

HMRC can also review any award of a tax credit at any time where it has reasonable belief that the rate of award is incorrect. This may lead to the award being amended or terminated.

6.4 Final notice

At the end of each tax year (between April and July), HMRC will send out final notices to each person who has been awarded tax credits for the whole or part of the tax year. Each person in a joint claim will receive one. This should be an automatic process and a person claiming should not have to ask for one.

The notices confirm details of each tax credit award, including initial and any revised decisions, for the tax year just ended (ie 2008/2009). They are the process by which both the amount awarded for that year can be checked and finalised and a claim for the new tax year (ie 2009/2010) is renewed (see section 6.5). They take the form of annual review packs.

A pack will be issued with the following details.

A person will also be asked to confirm that income for the tax year 2009/2010 will be within the range specified on the form. A person claiming is expected to confirm the details are correct or to notify HMRC of any changes.  

In automatic reply cases, (ie where a person has a nil award or is only receiving the family element of Child Tax Credit) only TC603R will be issued.  This will tell the person that s/he will automatically be finalised and the entitlement renewed unless the information provided of the previous and current year’s details on the form is incorrect.  The person claiming is advised to contact HMRC if the details are wrong. HMRC will accept that the circumstances were as set out in the notice, unless notified of a change.

In all other cases, although there may be no changes to report, a person will be asked to respond and confirm that the details are correct, as appropriate.  A declaration or statement in response to a final notice must be made:

In the case of an existing joint claim and where a response is made orally, one of the couple may act for both.

6.5 Decision after final notice

On return of the final notice form(s), a final decision (decision after final notice) will then be made on entitlement to tax credits for the year just ended (ie 2008/2009) which may include confirmation of the initial decision or detail any overpayment or underpayment. The final decision can be revised if a person makes a new response to the final notice before the final date given for the original response.

The return of the end of the year notice will also be treated as a renewal claim for the tax year 2009/2010. A new initial decision will be made for this year. Until this happens, tax credits will continue to be paid on a provisional basis at the 2008/2009 rate. The initial decision for 2009/2010 can be subsequently revised if HMRC is informed of a relevant change in circumstances.

If the return is made by 31 July 2009, the effective date of the claim will be 6 April 2009 and the award will be automatically backdated. If the return is not made by 31 July 2009, provisional awards will stop and any amount paid as a provisional award after 6 April 2009 will be recovered as an overpayment.  

If the return is made after 31 July but before 31 January 2010 and good cause has been established, the effective date of the claim will be 6 April 2009 and the award will be automatically backdated. This does not apply where the person claimed previously as a single person and s/he is now a member of a couple or there was a previous joint claim and s/he is now a single person.

Good cause is not defined in the regulations. If a person cannot establish good cause, the effective date of the claim will be the date the return is received by HMRC and the normal rules for backdating will apply.

If a person fails to respond until after 31 January 2010, a claim cannot be renewed. Instead a fresh claim must be made which can only be backdated for 93 days.

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7. CHANGES IN CIRCUMSTANCES

Awards of CTC and WTC will usually run for the whole of the tax year if made in advance, or from the date of claim until the end of the tax year if made during the tax year.

Certain changes of circumstances will affect entitlement to tax credits and must be notified to HMRC within one month of the change or the date the person became aware of the change if this is later.

HMRC may impose a penalty for failure to notify the following changes within one month:

7.1 Changes in family status

7.2 Reduced childcare costs

7.3 Reduced working hours

7.4 Children and young people

7.5 Other changes of circumstances

A person does not have to notify HMRC of the changes set out in 7.5.1 to 7.5.3 when they occur but can wait until annual renewal.

However, please note that it is in a person’s best interests to notify changes promptly. If the change leads to an increase in entitlement, in most circumstances it can only be backdated to three months from notification. There are a number of exceptions to this:

The circumstances which HMRC does not require to be reported until annual renewal are:

7.5.1 Increased working hours and income

7.5.2 Increased childcare costs

7.5.3 Children/young people

7.6 What happens following change of circumstances

The claim will then be recalculated and relevant period established and a revised award will be issued.

Where HMRC decides not to make an award or to terminate an award, any entitlement or subsequent entitlement for the same year is dependent on a new claim being made.

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8. WORKING TAX CREDIT RUN-ON

A person who has been in remunerative work of sixteen hours or more and:

will be entitled to a four week run-on of WTC.

To qualify, a person must have been in remunerative work immediately before the change in hours worked.  Where the run on rule applies, a person's entitlement to WTC will extend to all the elements the individual or couple were formerly entitled to (including the childcare element where the other conditions were met).

A person will still be eligible to claim Income Support, JSA and other income related benefits whilst in receipt of the WTC run-on. WTC run-on will count in full as income for these benefits.

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9. PAYMENTS

CTC will be paid directly to the main carer of a child or young person.  Payment will be made into her/his bank, building society or post office card account on a weekly or four weekly basis in arrears.

WTC will be paid to the person claiming.  Where both members of a couple work over sixteen hours a week, either can choose to be paid.  Where there is no agreement between a couple as to who should receive WTC or the couple are not resident at the same address, HMRC will decide who gets the payment. Where WTC includes a childcare element, this will be paid with CTC to the main carer through her/his bank or building society account.

A person will be paid WTC directly by credit transfers to her/his bank account or similar type account.

Tax credits can be paid by giro-cheque for up to eight weeks to allow the person claiming to set up a bank, building society or post office card account.   Arrangements have also been made to allow a person to open a basic account accessible through the post office. At the end of this eight week period, payment of tax credits will stop if HMRC has not received the account details.  No further payment will be issued unless the person claiming can show good reasons as to why more time is needed. Where payments cease and HMRC is later notified of the account details, entitlement is reinstated and can be backdated for three months.

If WTC and/or CTC is calculated to be less than £26 for the year, no payment is made.

If a payment is delayed or some other error occurs leading to a person incurring extra costs, HMRC may make a compensatory payment.  For more details, see HMRC Code of Practice number 26, What happens if we have paid you too much tax credit, available from www.hmrc.gov.uk/leaflets/cop26.pdf and Law Centre (NI) Tax Credit Briefing 2 Recovery of Overpayments.

9.1 Overpayments

Where the amount of tax credit paid for a tax year exceeds actual entitlement, HMRC may raise an overpayment.

Liability for repayment rests with the person(s) awarded the tax credit.  In joint claims, both persons are jointly and severally liable.

The liable person(s) must receive written notification of the amount of overpayments and the required method of recovery.  Overpayments will normally be recovered from future awards of tax credits. HMRC may also recover by direct payment within 30 days.

Where an overpayment is likely to arise in an existing claim, HMRC can alter an existing award of tax credit to prevent or reduce this possibility.

There is no provision to allow for an appeal against recovery of overpayment. However, the decision that gave rise to the overpayment can be appealed, ie if the person disputes that there has been any overpayment or disputes the actual amount of the overpayment. Overpayments can be written off. See HMRC Code of Practice 26 ‘What happens if we have paid you too much Tax Credit?’ and also Law Centre (NI) Tax Credit Briefing 2 Recovery of Overpayments. 

The Code of Practice sets out the claimant’s and HMRC’s responsibilities in relation to the claim. It then sets out what overpayments will be written off in whole or part or recovered in full. The Revenue has power to give more time for repayment in cases of financial hardship. 

If HMRC does not follow its Code of Practice, it is worth pursuing the issue through HMRC’s complaints procedure and on to the independent adjudicator. For more information see HMRC Code of Practice number 26, What happens if we have paid you too much tax credit, available from www.hmrc.gov.uk/leaflets/cop26.pdf and Law Centre (NI) Tax Credit Briefing 2 Recovery of Overpayments or contact Law Centre (NI).

9.2 Underpayments

An underpayment can arise:

HMRC must repay the amount of underpayment.  It may do so by means of a lump sum at the end of the year.  If a person claiming is aware that an underpayment is occurring, s/he should notify HMRC and the award can be adjusted immediately.

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10. OFFENCES AND PENALTIES

The Board of HMRC has the power to determine and impose penalties where a person has been fraudulent, has provided incorrect statements or has failed to comply in the provision of evidence and information.

10.1 Determination of penalties

Determinations on penalties will be made by the Board of HMRC.  On making a determination to apply the penalty, HMRC must notify the person of the penalty, stating the date of issue and detailing the right to appeal. Once HMRC has made a determination and decided the amount of the penalty, the penalty can only be altered on appeal. The person will have 30 days in which to pay the penalty or lodge the appeal. An appeal must be lodged in writing.

10.2 Fraud

A person will have committed the criminal offence of fraud if s/he knowingly undertakes any fraudulent activity with a view to obtaining payment of tax credits for her/himself or any other person.

HMRC has a wide range of powers to obtain evidence in cases of suspected tax credit fraud. It can obtain orders requiring the production of documents and warrants to enter, search and remove information from premises if there is reasonable grounds for suspecting fraudulent activity.

The penalties for fraud are:

If an overpayment has arisen due to fraud, and it is not repaid within the specified time period, interest may be applied to all or part of the overpayment.

10.3 Incorrect statements

A penalty of up to £3,000 may be imposed on a person who fraudulently or negligently:

A person will be given 30 days in which to appeal or pay the penalty. Failure to do so may result in interest being applied to the penalties.

In respect of joint claims, a penalty of up to £3,000 may be imposed on the partner unless s/he was not, and could not, have been aware that her/his partner had made an incorrect statement or declaration or given incorrect information or evidence. However, the aggregate of the two penalties must not exceed £3,000.

Penalties may also be imposed on a person who has acted for another person in relation to a claim, notification or notice, where s/he has acted fraudulently or negligently.

HMRC must determine any penalty in respect of incorrect statements within one year of the latest of:

10.4 Failure to comply

Where a person fails to provide relevant information or evidence in relation to a claim or fails to notify a change of circumstances that may affect entitlement to tax credits, a penalty of up to £300 may be imposed. See section 7 for a list of changes or circumstances that must be notified.

Continued failure to provide information or evidence may result in a further penalty of up to £60 for each day that the failure to comply continues. The additional penalty will cease once the evidence or information has been provided.

In respect of joint claims, the penalties can be imposed on both people claiming but the aggregate amount of the initial penalty must not exceed £300 and the aggregate of the continuing fine must not exceed £60 per day.

Failure to pay the penalties by the due date may result in interest being applied.

A person will be exempt from these penalties where:

HMRC must determine any penalty in respect of any failure to comply within one year of the latest of:

10.5 Recovery of penalties

Outstanding penalties will be treated as outstanding tax payments and will be recovered through tax codes.

10.6 Interest

If an overpayment has occurred as a result of fraud or neglect, interest will be charged on the whole or part of the overpayment being recovered.

Where HMRC has revised a decision in the reasonable belief that a person is not entitled to tax credits and as a result the claim is terminated, any overpayment will have interest charged from 30 days after the date of the decision to terminate the award.  In most other cases, the interest will be charged from 60 days following the decision that an overpayment has occurred.  Interest will also be charged on penalties and will be applied from the date the penalty becomes due.

The method for calculating the percentage interest to be applied is quite complex. It is 6.5 percent per year or, if that is different from the average of the lending rate of six main banks, their lending rate plus 2.5 per cent.

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11. APPEALS

Initially, tax credit appeals will be heard by the Appeals Service, with further right to appeal to the Social Security Commissioner.  After what is currently an unspecified period, tax credit appeals will be heard by Tax Appeal Commissioners with a further right to appeal to the High Court.

An appeal can be made against:

There is not a right of appeal against a decision to recover an overpayment as opposed to a dispute as to whether an overpayment has actually occurred.

A person has 30 days in which to lodge an appeal. The appeal must be lodged in writing and must specify the grounds for appeal.

The tribunal is only obliged to consider the grounds stated in the letter of appeal. However, the tribunal may allow a person to put forward grounds not previously specified where it is satisfied that the omission was not wilful or unreasonable.

An appeal must:

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12. TRANSITIONAL ARRANGEMENTS

Tax credits replace child dependant additions for certain benefits and personal allowances and premiums for children.  This is being introduced in stages.

12.1 Child dependency increases

From 6 April 2004, the child dependant addition included in existing claims for Incapacity Benefit, CA, Retirement Pension and bereavement benefits was abolished.

12.2 Personal allowances and premiums for dependent children

From 6 April 2004, claims for Income Support and JSA(IB) no longer include personal allowances and premiums for dependent children. People with existing claims will continue to have personal allowances for children included in their benefit until the premiums are replaced by CTC. From the point that CTC is awarded, it ceases to count as income for Income Support, JSA(IB) and PC.

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13. FURTHER INFORMATION

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