Hundreds of thousands of taxpayers could benefit from a new ruling concerning HM Revenue & Customs’ approach to the ‘fiendishly complex’ High Income Child Benefit Tax Charge, according to lawyers involved in a landmark case.
This week the Upper Tribunal decided that HMRC cannot impose the HICBC via a ‘Discovery Assessment’ in circumstances where the person liable to the charge did not file a self-assessment tax return.
As a result of the Upper Tribunal case, Discovery Assessments issued in these circumstances could be open to challenge.
Floodgates open? Hundreds of thousands of taxpayers could benefit from a new ruling concerning HM Revenue & Customs’ approach to the High Income Benefit Tax Charge, lawyers claim
Affected taxpayers could now have greater grounds to appeal these charges and have them written off, lawyers have claimed.
‘As HMRC has lost its appeal, it means they were wrong to impose the HICBC by Discovery Assessments on hundreds of thousands of UK taxpayers subject to HICBC not not filing self-assessment tax returns’, lawyers at Collyer Bristow LLP said.
What happened in the case?
Jason Wilkes took HMRC to court after being slapped with a backdated HICBC bill for child benefit payments his household received in previous tax years.
Mr Wilkes’ wife, Samantha, claimed child benefit between 2014 and 2016, but Mr Wilkes ended up becoming liable for HICBC totalling over £4,000 for this period.
Like many parents who have complained to HMRC, Mr Wilkes was unaware of a change in the law in 2013.
The change in 2013, under former Chancellor George Osborne, meant if you earned over £50,100, you had to start paying some of the benefit back in the form of a tax return at the end of each tax year.
Key case: Jason Wilkes took HMRC to court after being slapped with a backdated HICBC bill for child benefit payments his household received
Mr Wilkes said he was unaware of any of these changes in law, but HMRC insisted it heavily promoted the changes at the time they were introduced.
HMRC wrote to Mr Wilkes in November 2018 informing him that he might be liable to pay the HICBC. Mr Wilkes wrote back to HMRC stating that he was indeed liable.
Later in the year, Mr Wilkes was sent a tax bill for over £4,000 in previously claimed support. HMRC had issued Mr Wilkes with ‘Discovery Assessments’ for underpaid tax going back previous years.
A ‘Discovery’ is a power held by HMRC that allows it to reopen closed tax periods and issue bills for previous years where it sees fit to do so.
Recognising that Mr Wilkes had a ‘reasonable excuse’ for not paying the HICBC at the time, HMRC did not seek to impose additional penalties on top of the payments.
Mr Wilkes argued that HMRC could not use their powers of ‘discovery’ to assess the earlier tax years as he was not required to file a self-assessment tax return and the child benefit charge is not income for these purposes.
Mr Wilkes appealed against the assessments via the First-tier tribunal.
This week HMRC lost an Upper Tribunal case on every point raised in respect of the case concerning Mr Wilkes. The Upper Tribunal confirmed the previous decision of the FTT.
Speaking to This is Money, a spokesperson for HMRC, said: ‘We are considering the Upper Tribunal’s decision.
‘All of the taxpayers who have been assessed are still liable to the HICBC, and nothing in the Tribunal’s judgement calls that into question.
‘It is for the taxpayer to notify HMRC when they are liable to HICBC, and we will continue to contact customers where we can to inform them they may be liable to pay HICBC to help them get their tax affairs right.’
Why is this case important?
Mr Wilkes’ Upper Tribunal case could have a number of implications for taxpayers slapped with bills for HICBC by HMRC via a Discovery Assessment when no self-assessment tax return has been filed.
James Austen, a partner and head of tax disputes at Collyer Bristow, acting for Mr Wilkes, said: ‘I have been delighted to support Jason and Sam Wilkes in this appeal, and the outcome is a wonderful vindication of their case.
‘The Upper Tribunal’s decision comprehensively overturns any argument that HMRC can issue Discovery Assessments in HICBC cases where taxpayers have not been filing self-assessment tax returns.
What is the High Income Child Benefit Charge?
First introduced in 2013, a High Income Child Benefit Tax charge, known as HICBC, may have to be paid by anyone with an individual income over £50,000 who receives Child Benefit. It also applies if the taxpayer’s partner receives Child Benefit.
Additionally, it also applies if someone else gets Child Benefit for a child living with you and they contribute at least an equal amount towards the child’s upkeep.
It does not matter if the child living with you is not your own child.
To work out if your income is over the threshold, you will need to work out your ‘adjusted net income’.
If your individual income is over £50,000 and so is your partner’s, then whoever has the higher income is responsible for paying the tax charge.
If your income is over the threshold you can choose to get Child Benefit payments and pay the tax charge. Or, you can opt not to receive Child Benefit and not pay any HICBC tax charge.
‘Despite being termed a “high income” charge, since 6 April 2021 it has affected wholly basic-rate taxpayers’, lawyers at Collyer Bristow said.
The £50,000 threshold has not been changed since it came into fruition.
The Government collected has collected over £2.5billion in HICBC since its inception, figures obtained from a Freedom of Information request by financial advisers NFU Mutual showed in February.
Steve Webb, a former Pensions Minister who is now a partner at consultants LCP, previously summed up HICBC in a nutshell.
He said: ‘The High Income Child Benefit Charge is a fiendishly complex piece of legislation which catches many people who might not think it could apply to them.
‘It relies on people knowing about their partner’s finances as well as requiring people who have never needed to fill in a tax return to start to do so.’
‘Hundreds of thousands of taxpayers who have been anxiously awaiting this decision will be elated, and one hopes that HMRC will swiftly reimburse those who have been wrongly charged.
‘As in Jason’s case, HMRC has resorted to Discovery Assessments almost by default for far too long: this judgement will hopefully cause them to think more carefully about their proper use in future.’
Mr Austen told This is Money: Since the publication of the Wilkes decision, we have been inundated with requests for help by affected taxpayers and we have been struck by the extraordinary strength of feeling shown.’
Stefanie Tremain, a director at Blick Rothenberg, said: ‘HMRC could now see individuals making a claim to recover tax which was wrongly assessed – it’s uncertain how successful such claims would be and HMRC are likely to resist them on the basis that the position was accepted and agreed, but HMRC are now in a difficult position.’
She added: ‘The outcome of the Wilkes case is an important example where HMRC are not always right in their interpretation of the legislation, and taxpayers should be vigilant when receiving requests for information and tax payments, and take advice on whether HMRC do actually have the correct authority.’
What next? It remains to be seen if Rishi Sunak will announce changes to the High Income Benefit Tax Charge in his next Budget
Sean McCann, chartered financial planner at NFU Mutual, said: ‘Although the Child benefit tax charge has been with us since 2013, many are unaware of the need to pay it once their income exceeds £50,000. Even those who aren’t parents themselves can find themselves liable to pay if they move in with a lower earning partner who is claiming child benefit.’
He added: ‘The good news is that anything you pay into your pension is knocked off your income before the charge is assessed. If it reduces your income below £50,000 you won’t need to pay the charge.’
The HICBC is certainly not without its critics, and some experts think this latest case highlights the need for change in the system.
Kay Ingram, public policy director at national financial planning group LEB, said: ‘While the ruling may be welcome news for the many taxpayers who have paid the HICBC under Discovery Assessments, the threshold income of £50,100 at which this charge applies is far too low, not having been increased since it was introduced in 2013.
‘It hits single parent families particularly hard as it is based on one individual exceeding the threshold, not on total household income.
‘It would be timely for the Chancellor to remove this charge in his next Budget as it appears to be causing administrative problems for HMRC and taking money away from children.
‘Those affected in future will still have to pay the tax unless they reduce the income which counts towards the threshold.’