New Tax Credits: Q and A with Inland Revenue
Supplement to previous guidance issued on 17 March 2003 Further to our website, and April 2003 Tax Adviser, article on protective claims we have now received written confirmation from the Inland Revenue that they will not seek penalties from a taxpayer who makes a claim resulting in a nil award and then:
A. fails to make any mandatory notification of a change in circumstances, or
B. fails to advise a relevant change of circumstances following the issue of an end of year section 17(2)(b), (4)(b) or (6)(b) notice, and the nil award continues into the next tax year.
These are very welcome concessions and are explained in further detail below. However, members should be aware that once an award is in payment the concessions will no longer apply. Examples of the implications of this are given below.
It is also important to remember that the three-month rule cannot be totally ignored, even where nil protective awards are in place. Again examples are given below.
A Mandatory notification of changes in circumstance
Changes of circumstances which are mandatory - that is, which have to be notified to the Inland Revenue within three months - are:
1. A decrease in childcare costs of £10 a week or more.
2. A reduction in childcare costs to nil.
3. Entitlement to tax credits ceasing by virtue of section 3(4) Tax Credits Act (TCA) 2002. This occurs where there is a change in the make-up of the tax credit claiming unit e.g.:
a single person becomes part of a couple; a single person becomes part of a polygamous unit; a couple splits up; there is a change in the make-up of a polygamous unit; or, a couple becomes part of a polygamous unit.
Where a member of a tax credit claiming unit leaves the UK permanently, or goes abroad for more than 8 weeks (or 12 weeks if he or she goes or remains abroad because he or she is ill or because a member of the family is ill or has died) this also has to be notified as all members of the unit will no longer be ‚ in the UK‚ .
The normal penalty for failure to notify is a maximum of £300 (see section 32(3), TCA 2002).
The Revenue ruling means that no penalty will be sought where a nil award is in place and any of these three events occur but they are not notified to the Revenue within three months (or 6 July 2003 if later).
The Revenue have said that the above concessionary approach will not apply where a claim resulting in a nil award has subsequently been amended so that tax credits are payable and there is then a failure to make a mandatory notification of a change in circumstances. In other words, once a protective claim, with its associated nil award, is changed into a normal claim for tax credits with amounts payable, the penalty regime will be begin to bite. This is reasonable and offers the same treatment to all of those who are receiving tax credit payments.
The Revenue have clarified how the three-month time limit will operate in these circumstances.
An individual makes a protective claim in March 2003 showing childcare costs of £100 per week. Their income is too high so their initial award is nil. On 1 August 2003 their childcare costs drop to £80 per week, but, using the concession, they do not need to notify as they are still on a nil award. On 1 October 2003 their income falls and they report their new estimated income for 2003/04 to the Revenue. On 15 October tax credits start to be paid.
Ideally the claimant(s) should notify the Revenue of the change in childcare costs at the time they notify the change in income but they may not do so - perhaps not realising that the notification is important or perhaps having forgotten that the change occurred some two months earlier. In these circumstances the Revenue have said that they will operate the three month time limit from the time the award begins to be paid so in effect the claimant(s) have until 15 January 2004 to tell the Revenue their correct current childcare costs. If they fail to do so a penalty of up to £300 may be payable. The vires for extending the three-month time limit in this way is given under section 32(5)(a) TCA 2002.
How would the situation change if the income drop did not occur until 1 February 2004 and was notified with payment starting 15 February? The penalty would then bite if the change in childcare was not notified until after 15 May 2004. By this time the claimant(s) may well have received their section 17 final notice of award and it could be that they will respond to this instead with details of the correct childcare costs (see below for more detail on section 17 notices). As long as they do this on or before 15 May 2004 then no failure to notify penalty under s32(3) will be due.
The Revenue have said that it would be advisable for all claimants who have made protective claims to report all relevant changes when they report a drop in income. They will be issuing guidance to their own staff to encourage them to check for other changes when they deal with the drop in income.
B Section 17 final notices and changes in circumstances
Sections 17(2)(a), (4)(a) and (6)(a) TCA 2002 can require a ‚ return‚ (as it is being called by many commentators) for the purpose of finalising an award and for the purpose of renewing the award for the coming year. Failure to complete the ‚ return‚ can result in a penalty of initially £300, and £60 per day thereafter (see s32(1)(b) TCA 2002). Persons on nil awards may receive such a notice and would be liable to these penalties if they did not respond within the prescribed time.
Section 17 (called the ‚ final notice‚ section in the Act) is necessary because, unlike WFTC, DPTC or old children‚ s tax credit, new tax credits are initially awarded on a provisional basis. For 2003/04 this means that they are initially awarded on the basis of the 2001/02 income and the circumstances at the time of claim. For 2004/05 they will be initially awarded on the basis of the 2003/04 income and the circumstances at the time of renewal (around April to July 2004). Since there is only a statutory requirement to notify certain changes in circumstances (see above) the Revenue will have to know what was the real income and circumstances before an award is finalised.
Once the year of award has ended, therefore, the section 17 notice will be issued. This starts the process of finalising the award by either requesting a ‚ return‚ of income and circumstances for the year just ended as above, or, under ss 17(2)(b), 17(4)(b) and 17(6)(b), by informing the claimant that that they will be treated as having declared that their circumstances/income are as specified, unless they state otherwise.
These sub-paragraph (b) sections do not carry the £300 or £60 per day penalty because they merely say that the claimant will be ‚ treated as‚ if he has made a declaration. There is no requirement to return any bits of paper under these three subsections if there has been no material change.
These provisions are included so that those:
whose tax credits are not going to change even if their income changes (for example, they are only entitled to the family element of Child Tax Credit (CTC) which is available across a broad range of income); or
∑ whose income/circumstances have not changed at all since the time of claim (perhaps a little unlikely), or
∑ who have notified all their income and circumstance changes as they occurred during the year of claim
do not need to complete further ‚ return‚ /claim forms at the end of the year. The Revenue refer to this as an automatic renewal.
Automatic renewal could easily apply to those who have made protective claims and are still on nil awards at 5 April 2004 as the Revenue will only be wanting the claimants to confirm that their situation has not changed.
∑ their income has changed by more than the figures given to them by the Revenue (which, as above, could be within a range - see section 17(4)(b) and (6)(b)); or
∑ their circumstances have changed from those shown on the section 17(2)(b) part of the notice (which are likely still to be those pertaining at the time they made their protective claim)
then they do need to notify the Revenue, by responding to the s17 renewal notice within the specified time. If they do not respond it appears that, potentially, they will be liable to a penalty under s 31 (max £3,000) ‚Äì for effectively making an incorrect declaration. The Revenue have confirmed that they will not seek a penalty in this situation, providing there continues to be another nil award in the next tax year. By not responding the claimant will just be renewing his or her protective claim.
However, the Revenue have said that they would wish all claimants to respond to a s17 notice whether or not they are a nil award as it avoids potential difficulties where a future change leads to a successful claim. See the examples below under ‚ Situations where claimants should still be aware of the three-month rule‚ .
In summary, on the matter of penalties generally, members may like to note that there are four sets of penalties under TCA 2002 affecting claimants. They are:
∑ fraudulently or negligently making incorrect statements (s31), max £3,000,
∑ failure to provide any information or evidence as required by various sections of TCA 2002 (s32(1)(a)), max £300 initially and £60 per day thereafter;
∑ failure to comply with a requirement imposed by a notice under s17(2)(a) (4)(a) or (6)(a), TCA 2002 (s32(1)(b)), max £300 initially and £60 per day thereafter;
∑ failure to notify mandatory changes of circumstance (s32(3)), max £300.
Situations where claimants should still be aware of the three-month rule
There are a number of situations where those making protective claims still need to be aware of the three-month rule for backdating awards. These are as follows:
Where changes of circumstance occur that could increase the rate of an award
As our original guidance indicated making a tax credit protective claim is not the end of the story. Claimants have joined the tax credits ‚ club‚ , and they should make sure they continue to participate.
If, for instance, a family with one child put in a protective claim in March 2003 they should not assume that their next obligation will only arise on receipt of their section 17 notice in April 2004.
If they become responsible for a second child they need to tell the Revenue within three months. Otherwise, if their award changes (on a lowering of their 2003/04 income) the element for the second child will only be paid from three months prior to the notification. If the second child is a newborn this will also mean the loss of some of the additional higher family element, due because there is a child under one year old.
All changes in circumstance that increase the rate of tax credit must be notified within three months to be fully effective (see Reg 25 of the Tax Credits (Claims and Notifications) Regulations SI 2014/2002).
Changes in circumstances which decrease the rate of tax credit, by contrast, are automatically backdated to the date of change. There is no three-month rule.
Changes in income are not changes in circumstances so there is no rule that says income changes have to be reported within three months. Likewise there is no penalty where a claimant only reports their income change at the year-end.
Where a protective claim comes to an end
Although we now know that the Revenue will not charge a penalty for failing to notify that the protective claim has ceased, a new protective claim would be necessary for those remaining responsible for a child, or for those now on an income which could fall to low levels during 2003/04. For the new claimants the three-month time limit is still relevant.
This information has been provided for you by the Technical Department of the CIOT. Please address any queries to Bianca Marsden on tel 020 7235 9381.