It is unusual for HMRC to admit that it has been too heavy-handed, so last week came as a welcome surprise to many parents who have been hit with fines in relation to child benefits.
If you are responsible for bringing up a child under 16 (or under 20 if they are in education), you can claim child benefits. Parents get £20.70 a week for the first child, and £13.70 for each additional child. Over a year, this amounts to more than £1,000 for the first child, and an extra £700 each for other children.
But the tax rules stipulate that if you or your partner earn more than £50,000 a year, you have to pay back some of your child benefit through tax. If just one partner has an annual salary of more than £60,000, the tax charge wipes out the value of the child benefit received altogether.
Change of heart
In 2013, HMRC tweaked the system by introducing the so-called High Income Child Benefit Charge. However, few people were aware of it, which Nimesh Shah from Blick Rothenberg blames on poor communication and publicity around the introduction of the charge.
High-earners were expected to notify HMRC that they had to pay the charge, but thousands didn’t, simply because they didn’t know about it.
It’s right and proper that HMRC has changed its mind and will be refunding unfair penalty fines
Becky O’Connor, personal finance specialist at Royal London, explains that the system is not well understood, meaning that tens of thousands of couples – especially those who do not routinely complete annual tax returns – have failed to declare to HMRC that they need to pay this tax charge.
In response, HMRC has issued swathes of “failure to notify” tax penalties against families. This has put many parents in a situation where they were ordered to pay back thousands of pounds in tax through self-assessment returns, and were also hit with late payment fines on top.
However, last Thursday, HMRC announced that it was going to refund some of the fines, provided that people have a “reasonable excuse for not meeting their tax obligation”.
It’s a move that is welcomed by Royal London, which has been campaigning for an overhaul of the system.
“It’s right and proper that HMRC has changed its mind and will be refunding unfair penalty fines,” says O’Connor. “These were paid by parents who were unknowingly dragged into a liability for a charge they were never properly told about.”
The personal finance specialist reckons that this move has probably been prompted by a mass of angry parents having their appeals upheld.
In most cases, she says that their “reasonable excuse” will be that they were claiming child benefit before the charge was introduced, were not told about the charge, and subsequently saw their incomes rise above £50,000 – only to find out that they were liable years later. “The backdated charges plus penalty fines can run into thousands of pounds, so the backlash is not surprising.”
This change of heart seems to suggest that HMRC admits it got things a bit wrong.
“My view is that HMRC is loosely acknowledging that the introduction of the child benefit charge was handled badly, and unknowingly caught out the majority of impacted taxpayers, who were simply not aware of the charge,” says Shah, suggesting the “strange” move to introduce the charge part way through a tax year caught a lot of people out.
However, the problems aren’t limited to poor communication – the child benefit tax system is riddled with complexity and arbitrary lines. For example, two earners in one household could both be on £49,000 salaries and not have to pay the tax charge, whereas a household with one stay-at-home parent and one partner on £50,000 a year would have to pay.
Another sticking point is that the child living with you doesn’t have to be yours to incur this tax charge.
As O’Connor explains: “If the child and wider household is dependent on you financially, HMRC deems that your income level is relevant to the amount of child benefit received for that child. This might be a fair assumption in some cases – less so in others, depending on how couples manage their shared finances. But it is exactly that – an assumption that you help with the living costs of that child.”
There are growing calls from various financial bodies to overhaul the clunky child benefit system.
O’Connor, who describes the system as “cack-handed”, says more people could be dragged into the liability as their incomes rise and then find out much later that they owe a big tax bill. “It’s fair to say that people aren’t checking the website all the time for changes to tax rules, and it’s unreasonable of the HMRC to apply the “ignorance is no defence” approach to such a niche charge.”
She also warns that there could be a knock-on effect if people start losing touch with the child benefit system by choosing not to fill out the claims forms, meaning that many stay-at-home parents will miss out on the National Insurance Credits (which protect their state pension entitlement).
It’s fair to say that people aren’t checking the website all the time for changes to tax rules
It’s clear that HMRC needs to be more proactive in contacting those who are likely to be hit with the charge – which is something that it claims to be doing by writing to customers who might be liable.
But Shah says the claw-back of child benefit should not go through the tax system, and a simpler alternative should have been taken forward.
He argues that the reforms shouldn’t be limited to just the child benefit charge either. “The personal tax system is littered with anomalies and spikes, and the child benefit charge is a classic example of that. I would go as far to say that we should have a complete re-write of the tax code.”
So, if you’ve paid a penalty and think you might be due a refund, what should you do?
HMRC is currently reviewing the cases, and says “decisions on what constitutes a reasonable excuse are based on an objective assessment of individual circumstances”.
The tax office also says that there is no need for people to ask for a refund, as they will be issued automatically over the next six months.
However, Shah says it would be sensible for those who believe they were wrongly issued a penalties to proactively follow-up with HMRC.
“People should not rely on HMRC or their systems getting this right, and if you believe you are owed money, you should follow up with the tax office directly.”