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Has HMRC done enough to solve the botched implementation of child benefit charges?

6 November 2018

11:56 AM

6 November 2018

11:56 AM

You’ve just had a baby. Life is upside down, but in a good way. A couple of months in, you are talking to your antenatal group and someone mentions child benefit.

It’s not something you’d have thought you’d be eligible for, as you and your partner earn too much to get any benefits, as a rule. You go to the HMRC website, fill out the form and get a letter back. ‘I am writing to tell you that you are entitled to child benefit at £20.70 a week’, it begins. ‘Brill, that will pay for the nappies’, you think.

So you take it and you are £1,076.40 a year to the good, at current rates. That’s just for child one. You could receive a bit more benefit if you have a second child, but at a lower amount, and you note there’s a two child limit. You note something about a tax charge for households receiving child benefit but where one partner is earning more than £50,000. That doesn’t affect you (yet). So like most new parents with rather a lot else on, you forget about it, but are grateful for the monthly payments as they enter your bank account.

That’s a fair representation of the typical first interaction with the child benefit system for many new parents. Simple, at first, but potentially a lot more complicated later on for those whose incomes rise above £50,000.

That’s all thanks to a change made in January 2013 by then Chancellor George Osborne, when he introduced something called the High Income Child Benefit Charge. It means that households where one parent claims child benefit and someone in the household (it doesn’t have to be the other parent) earns more than £50,999, the higher earner will have to pay a tax charge to HMRC, via a self-assessment tax return.

The tax charge increases in line with income between £50,000 and £60,000 and at that point, is equal to the child benefit received, so this is effectively cancelled out. Where the higher earner’s income is more than £50,000 but less than £60,000, the charge is equal to 10% of the child benefit they have received for every £1,000 earned over £50,000. So someone earning £51,000 can claim the child benefit, but has to pay 10%, of what they have received (so just £107 a year in the above example) to the Revenue. Someone earning £59,000 would still be quids-in taking the benefit and paying the tax charge, but barely – they’d have to pay back £968, leaving them just £108 better off over the year from continuing to receive the child benefit.

Let’s leave aside the apparent arbitrariness of the income level here and also the unfairness of a system that allows two earners who earn £49,999 each, so just under £100,000, to receive the benefit without being charged a penny in extra tax, but not those households where there is one parent not earning and the other is earning £51,000.

Instead, let’s focus on the implementation and communication of the charge when it came into force.

Lots of people receiving child benefit before 2013 didn’t know it had been introduced. Their salaries either rose to more than £50,000 subsequently or were already above this level. They didn’t realise they now faced an additional tax bill, because, despite ‘ignorance not being a defence’ and all that, it’s a fairly niche charge and unless you are aware of it and looking for information about it, all too easy to miss. Especially as HMRC did not proactively inform everyone already in receipt of the benefit that they could be liable for a new charge if their income rose above £50,000 – they relied on them finding out through the Revenue’s marketing campaign; through visiting the website or just randomly, through a chance visit to the website or call to the tax office.

As a result, in some cases, the charge has landed some parents with a bill for tax backdated to 2013 for thousands of pounds, plus penalty fines for years of ‘failure to notify’.

Last week, the Revenue saw fit to announce that it will proactively repay late payment fines in cases where parents had ‘a reasonable excuse’, including where a claim was made before the charge was introduced and where one partner’s income subsequently rose to more than £50,000 in or after the 2013/14 tax year. No one has to apply for a refund – if you were affected, you’ll just get it. Of course, given the above, many do have a great excuse: they hadn’t a clue about this new charge.

The Revenue says it is now writing to people who might be liable to the charge in 2016 to 2017 and 2017 to 2018, but this posthumous effort may not pick up everyone and does not cover previous tax years.

The issue of refunding late payment fines is arguably the tip of an iceberg, with the fairness of the charge itself – not just the late payment fines – still under scrutiny.

Introducing a new tax charge that must be paid back via self-assessment has led to the bizarre situation where some parents have been forced to start the laborious process of self-assessment in order to pay a tax charge for a benefit they had received, but probably wouldn’t have wanted at all if they had known they had to effectively pay it all back. The Revenue is taking people back to square one via a lot of stress, hassle, time wasted and thousands of pounds. Surely there’s a better way of arranging the payments?

Then there’s the issue of sending people into debt. You might think the Revenue would go a bit easier on the demands for repayment, recognising that a many-thousand pound additional tax bill might be tough for working families to manage. But the chat forum threads suggest that demands for full repayment are normal, with monthly repayments extended over the long term not routinely being offered in the first instance, but on a case-by-case basis if someone appeals. Some parents on the forums say they are taking out personal loans to repay their charges.

So will the Revenue, keen to avoid a wholesale mutiny among affected parents, go easier on repayment terms, allowing them to repay monthly over longer terms rather than in a lump sum? Given the criteria that the Revenue has set, will it only be a tiny minority of parents who receive a refund in the end? Or could it be that parents might challenge the Revenue altogether on their liability for the tax charge, winning the legal right to refuse to pay something they were not told about, for something they were offered, apparently no strings attached, years ago?

If the latter, it will be the Revenue’s turn to face the stomach-sinking shock of an unexpected refund request… for a bit more than a few thousand pounds. Last week’s u-turn on fines was a big piece of humble pie in itself, but might have been more about damage limitation than making full amends. It will be interesting to watch this saga play out.

Rebecca O’Connor is a personal finance specialist at Royal London.

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