Annual review

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Tax Credit Briefing 1

Annual review and renewal

Introduction

Her Majesty’s Revenue and Customs (HMRC) embarks on the mammoth task of reviewing and finalising all tax credits awards for 2005/2006 in April 2006. This is called the Annual Review and it is necessary because tax credits paid in a tax year are generally based on estimates of that year’s earnings until the final figures are known after the end of the tax year when the final decision on entitlement for the year is then made.

HMRC will write to everyone who claimed tax credits in the year 2005/2006 between April and July 2006, enclosing an annual review form. An annual declaration form will also be included except where the claimant/s have an ongoing award for the family element of Child Tax Credit or a nil award. These forms once completed and returned are the basis of the provisional claim for the new tax year 2006/2007. Until the renewal claim has been processed, tax credits should continue to be paid at the 2005/2006 rate.

This briefing aims to cover the law and procedure applicable to the annual review and renewal process and to conclude by raising awareness of potential problems and how to deal with them.

1. The law

Under Section 17 of the Tax Credits Act (2002) HMRC, must issue a final written notice to claimants. The notice will require a claimant to declare that the relevant circumstances set out in the notice are correct. In certain cases, the claimant will be informed that s/he will be treated as having made a declaration that the relevant circumstances were as specified unless the claimant declares otherwise. Where the information is not accurate, the claimant is obliged to set out any differences. In addition, the notice will also require claimants to provide details of their actual income for the tax year 2005/2006 (or to declare that the income was no more than £2,500 above the figure stated). In certain cases, the notice will inform the claimant that s/he will be treated as having made such a declaration in response to the notice except where the income fell outside of the specified range. This must be done by 31 August 2006 (see HMRC procedure and timetable section). The legislation allows HMRC discretion to treat a claimant as having made a declaration.

Under Section 18 of the Act, the information given or confirmed by a claimant is used by HMRC to make a final decision on entitlement for the last tax year (ie 2005/2006). Where a claimant’s entitlement is less than the amount s/he was paid, there will be an overpayment of tax credits. Where entitlement is greater than the amount paid, there will be an underpayment. Following an adjustment of entitlement, the claimant will be sent a final notice of entitlement for the previous tax year. Any underpayment will be repaid in a lump sum. For details of how overpayments are dealt with, see Briefing 2, Recovery of Overpayments.

The declaration (or deemed declaration) about a claimant’s circumstances and income made in connection with a final notice is also treated as a renewal claim for tax credits for 2006/2007. Under Section 14 of the Act, this is treated as an initial award which may be revised later in the year. If the declaration is made (or treated as made) by 31 August 2006, then the claim is automatically backdated to 6 April 2006, if there is entitlement. If a claimant fails to respond by 31 January 2007, s/he cannot renew the claim. Instead, a fresh claim will have to be made which can only be backdated a maximum of three months and any amount paid as a provisional award after April 2006 will be recovered as an overpayment.

2. HMRC procedure: annual review

From April to June 2006, HMRC will issue annual review packs. This should be an automatic process and claimants should not have to ask for the pack. A pack will be issued with the following details.

The annual review form (TC603R) contains details of personal circumstance on which entitlement to tax credit in 2005/2006 was based. This includes:

	the names and dates of birth of each claimant plus any qualifying children or young people;
	details of any employment, and childcare costs;
	details of any additional elements of Child Tax Credit and Working Tax Credit paid because of disability.

A claimant is expected to confirm the details are correct or to notify HMRC of any changes.

The annual declaration form (TC603D) seeks details on each claimant’s relevant income or an estimate of income for the tax year 2005/2006. The form also asks a claimant to confirm that the circumstances in the annual review form are correct or to set out any changes to the information supplied. The declaration must be signed alongside the notice that this constitutes a claim for tax year 2006/2007.

In automatic reply cases, only TC603R will be issued. This will tell a claimant 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 claimant is advised to contact HMRC if the details are wrong.

These forms must be returned by 31 August 2006 otherwise any ongoing payments will be stopped and financial penalties may be imposed. The provisional award for 2006/2007 may be revised at a later date when details of actual income are supplied. However, if the claimant fails to respond by 31 January 2007, the claim cannot be renewed and instead a fresh claim must be made which can only be backdated up to a maximum of three months.

It is possible to provide HMRC with the requested information by:

	returning the forms in the envelope provided;
	registering to complete the forms online at the Revenue’s website (this service is temporarily closed); or
	phoning the Tax Credits Helpline.

3. Family element of Child Tax Credit and nil award

A claimant who is not receiving tax credits because s/he had a ‘nil award’ or who is only receiving the family element of Child Tax Credit will receive a special version of the annual review form with details of personal circumstances. S/he is asked to check that these are correct and to notify any changes. A claimant will also be asked to check that income for 2005/2006 is within the range stated in the form and, if not, to notify actual income. The form also confirms entitlement for 2005/2006 and sets out details of the award for 2006/2007, based on the details in the form and assuming there are no changes of circumstances to report. A claimant is not sent or required to complete a declaration form but is told that s/he will be treated as having declared that the information in the review form is correct and that s/he is claiming tax credits for 2006/2007 unless HMRC is contacted by 31 August 2006 with different information. A claimant is also warned that if it later transpires that the information on the form was incorrect, then s/he may have to repay any overpayment and may be liable to financial penalties.

4. HMRC procedure: renewal of awards

From the beginning of 2006/2007, provisional payments will be made by HMRC while a claimant renews her/his claim. The provisional payments have been calculated automatically, based on the current information the Revenue holds about the claimant’s circumstances and they do not take account of any overpayments. The Revenue cannot issue a notice about this until a claim is renewed or a change of circumstances processed.

‘Provisional payments’ of tax credits for 2006/2007 replace 2005/2006 awards from April 2006 (see above). Provisional payments will continue to be paid until the reconciliation and renewal process is completed. However, payments of tax credits will stop where a claimant fails to return the declaration forms by 31 August 2006.

From April to July 2006, HMRC will issue annual review and declaration forms. These will be sent to claimants receiving Child Tax Credit with Income Support, Jobseeker’s Allowance or Pension Credit first. Claimants receiving the child and family element of Child Tax Credit, Child Tax Credit family element only, Working Tax Credit only and those with finalised tax credits will receive their forms last.

31 August 2006 is the first deadline for returning declarations and notifying changes in circumstances. HMRC will issue a reminder about outstanding declarations.

	In automatic cases: the previous year will be finalised and the 2006/2007 year will be renewed automatically based on the details contained in the TC603R already issued unless there are changes.
	In reply required cases:

	if the declaration is returned by 31 August 2006, the claimant will receive a final notice of entitlement for 2005/2006 and a new award notice for 2006/2007. The claim and award for 2006/2007 will be backdated to 6 April 2006 and any arrears due will be paid to the claimant (including arrears due to provisional payments being paid at last year’s rates);
	if the declaration is not returned by 31 August 2006, provisional payments of tax credits will stop from that date and the claimant will be asked to repay payments made since 6 April 2006. A final previous year award notice will be issued based on the information held.

31 January 2007 is the second deadline for returning declarations and notifying actual (as opposed to estimated) income for 2005/2006. HMRC intends to issue a reminder in December 2006 to those who sent in an estimate of their income.

	If the declaration is returned by 31 January 2007, the reply required claimant will receive a final notice of entitlement for 2005/2006 and a new award notice for 2006/2007. The claim and award for 2006/2007 will be backdated to 6 April 2006 and any arrears due will be paid to the claimant (including arrears for the period from 31 August 2006).
	If the declaration is not returned by 31 January 2007, there will be no ‘deemed claim’ from 6 April 2006 and any new claim for tax credits will only be backdated for a maximum of three months under the normal rules.

5. Potential difficulties

Claimants and advisers face a number of potential problems with the proposed procedure, which include those set out below.

	The system relies on a claimant being able to confirm or provide relevant information about income and personal circumstances. HMRC guidance suggests that this will include where appropriate a P60 tax form, final pay slip or self employed tax return for 2005/2006 when completing the forms. Details of taxable social security income for 2005/2006 may be provided by the Social Security Agency. In some cases, a claimant will not have this information and will find it difficult to estimate income. In such cases, it is better to send in the form with estimated figures rather than delaying a response. Staff at local HMRC offices should be able to provide some guidance on issues relating to income. Likewise, Social Security Agency staff should be able to provide any necessary information about social security benefits.
	There will also be the problem of lost forms and declarations. It is wise to advise a claimant to take a copy of all forms being returned and proof of postage.
	A claimant will be sent a separate set of forms for each claim made in 2005/2006. This will affect separating and divorcing couples, single people who became part of a couple during the year and same-sex couples who are treated as a couple following the introduction of civil partnership legislation on 5 December 2005. Where a couple on tax credits separate during the year and then make further claims for tax credits either as individuals or as members of new couples, they will receive a set of forms to complete for each claim. When an award ceases mid-year, the claimant is still required to complete an end of year declaration to finalise the award for that year.
	There are different rules for backdating the renewal claims and backdating when there are changes of circumstances. Any change of circumstances resulting in increased entitlement to tax credits (eg birth of a child) which occurs prior to the claimant returning the declaration, must be reported within three months to secure full backdating. If a claimant only notifies the change when returning the declaration, s/he will only receive up to three months arrears from the date of notification. If the claimant notifies the change before the declaration has been returned, HMRC will alter the provisional award. Arrears will be paid for the adjustment to the 2006/2007 award after the declaration is returned. Where there is a break in entitlement prior to returning the declaration, the claimant will have to make a fresh claim within three months of requalifying in order to secure maximum arrears.
	Before the annual review is concluded, payments will continue as provisional payments but at 2005/2006 tax credit rates. For most claimants, the amount received will be unchanged but additional payments will cease and the deductions from benefit to recover likely overpayments will stop, so these claimants will see a change to the level of the award. The provisional payment will continue until 31 August 2006 or until the claimant returns the declaration so that the previous year’s award can be finalised. When a claimant receives a new award notice for 2006/2007, the award will change again to reflect uprating to 2006/2007 rates and income in 2005/2006. There may also be deductions to recover an overpayment (see Briefing 2, Recovery of Overpayments).
	Claimants need to be aware that many may see a decrease in the award for 2006/2007 as compared with the previous tax year. This will apply where people have seen their income rise in 2005/2006 by more than £2,500. This means the initial tax credit award for 2005/2006 will have been based on their estimated income in 2004/2005. However, the final award for 2005/2006 will be based on their actual income in 2005/2006 and this may lead to an overpayment being raised. If claimants’ incomes have decreased they can of course expect to see an increase in their tax credit award.
	On 5 December 2005, the Civil Partnership Act came into force and from that date two people of the same sex can form civil partnerships with the same rights and responsibilities as different sex couples. To reflect this, the tax credit system changed on 5 December 2005 so that same sex couples, who are living together as partners, must claim tax credits as a couple whether or not they have formed a civil partnership. Before 5 December 2005, same sex couples claimed as single people. Same sex couples were required to notify HMRC of their status and to make a fresh claim as a couple within three months of 5 December 2005. Many claimants in this situation may have been unaware of this change in the law and the issue will be addressed in the Annual Review.

6. Conclusion

The Annual review and renewal is an enormous and complex administrative task. The potential problems with claimants obtaining all the information required of them demonstrates how difficult the process will be even if everything runs relatively smoothly. Keeping up-to-date with the way the process is going will be vital for advisers who are likely to face a significant number of tax credit inquiries in the months ahead. Advisers and claimants are urged to work with HMRC to provide all the necessary information as promptly as possible and to check all correspondence with care to avoid later disputes.

© Law Centre (NI) April 2006

Published with support from Her Majesty's Revenue and Customs

All rights reserved. No part of this publication may be reproduced, stored on any retrieval system or transmitted in any form by any means, including photocopying and recording, without the prior written permission of Law Centre (NI).

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Last Modified: 16 July 2008