HMRC’s announcement that they would review certain cases where penalties were charged on taxpayers who had failed to register for the high income child benefit charge (HICBC), and refund them where there was a reasonable excuse for the failure, is unusual in that the taxpayer normally has to take the initiative in pleading reasonable excuse. And in any case, the very narrowly drawn parameters of HMRC’s review might identify only a fraction of those who could potentially succeed in a reasonable excuse claim before the tribunal.
The HICBC applies for a tax year to an individual (‘the taxpayer’) with an annual adjusted net income of more than £50,000, who or whose partner is entitled to child benefit for a week in the tax year. If both partners have income of more than £50,000, the higher earner is liable for the charge. It also applies where someone else is entitled to child benefit because they contribute at least the amount of the child benefit towards the upkeep of a child living with the taxpayer. The charge claws back the child benefit in stages as income rises above £50,000 per annum, and in its entirety when income reaches £60,000.
HMRC’s review will include taxpayers who were charged a penalty for failing to register for HICBC in any year from 2012/13 to 2015/16. Refunds will be issued over the next six months where a taxpayer claimed child benefit before the HICBC was introduced in 2012/13 but their or their partner’s income increased to more than £50,000 per annum during or after 2013/14. Anyone who received communications from HMRC about the HICBC or who claimed child benefit after the charge was introduced will not be included in the review. HMRC are also writing to people who might be liable to HICBC in 2016/17 and 2017/18, ‘to help them to meet their tax obligations in time to avoid paying a penalty’.
Complex and obscure
The hybrid nature of the charge, straddling as it does the tax and benefit systems, has had some anomalous - even unfair - results. For example, it will affect a single-earner household where the individual in work earns (say) £51,000 per annum, but not a two-earner household where each partner earns £49,000 per annum. Because it is based on adjusted net income, it can be reduced or avoided by making or increasing pension contributions or gift aid donations. A cruel trap which many have fallen into is that receipt of child benefit entitles the recipient to national insurance credits, but if you stop claiming the benefit because your partner is being charged HICBC you lose those credits, but you retain them if you claim child benefit but opt not to receive it. If you do not know whether your partner receives child benefit or has a higher income than you, then you can write to HMRC who will respond with either ‘yes’ or ‘no’ but give no further details.
Already riddled with complexity, as the above demonstrates, the HICBC is also obscure in that few know or understand what they are obliged to do if they come within its scope. In fact there is an obligation under Section 7 of the Taxes Management Act 1970 to register for self-assessment by the 5 October following the end of the tax year in which the liability arises. However, as this is not at all obvious and is rarely publicised, it is often – understandably – missed.
Not registering when required to do so attracts a penalty for failure to notify chargeability under FA 2008, Sch 41. The penalty is tax-geared, amounting to a percentage of the ‘potential lost revenue’ – normally 30% so long as the failure is not deliberate or concealed, with the possibility of staged reductions for disclosure down to 0% for an unprompted disclosure within 12 months of when the tax became due. Otherwise, they might qualify for reasonable excuse under paragraph 20 of Sch 41, or a special reduction under paragraph 14.
So there it is: a complicated and obscure tax charge replete with traps and anomalies, and a means of notifying chargeability that is not at all intuitive or indeed well publicised. To my way of thinking, HICBC is so lacking in transparency that HMRC’s current review seems unduly narrow in its scope. Fortunately, even if HMRC refuse a reasonable excuse plea, the ultimate arbiter is not HMRC but the tribunal. Therefore anyone who missed notifying HMRC about their liability to HICBC, and feels strongly that they have a reasonable excuse, should not be put off appealing against any penalty despite being turned down by HMRC.
Robin Williamson MBE CTA (Fellow) is an author and commentator on tax, welfare and public policy, and a part-time senior policy adviser at the Office of Tax Simplification. He was technical director of the CIOT’s Low Incomes Tax Reform Group from 2003 to 2018.
See also: Guide to Taxpayers’ Rights and HMRC Powers (6th edition) by Robert Maas.