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Piggy bank | AccountingWEB | HICBC will the proposed changes be enough
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HICBC: Will the overhaul be enough?

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Amy Chin looks at whether the proposed overhaul to the high income child benefit charge (HICBC) will bring about change after another taxpayer was stung.

22nd Mar 2024
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Another taxpayer has been stung for failing to comply with the high income child benefit charge (HICBC). Does the overhaul to the regime promised in the Spring Budget have the potential to put these issues to bed?

The case

In what has become a tale as old as time, the taxpayer Mr Adrian Ward became liable for the HICBC because he was the person who filled in the forms and made the child benefit claim, despite the money being paid directly to his ex-wife, the mother of his children.

Ward first applied for child benefit in 2004. Some eight years later, he separated from his then wife and as part of their financial settlement, Ward arranged for the child benefit payments to be made directly into her bank account. When, in the tax year 2018-19, Ward's adjusted net income tipped over £60,000 he became liable to pay back the full amount of child benefit through the HICBC - £1,076.

As is all too often the case, a lack of understanding of the scheme meant that Ward did not believe himself to be liable to the charge, assuming that the person receiving the child benefit must surely be liable to pay it back. He tried to argue that as his wife had received the money, the fact that the claim had been made in his name should not make a difference.

He argued that "the difference was purely of form rather than substance".

Sadly for Mr Ward, the case ultimately hinged on the interpretation of the phrase "entitled to an amount in respect of child benefit" in Subsection (a) of Condition A in s 681B ITEPA. The FTT concluded: "The statutory wording is clear, the tax charge arises as a result of the taxpayer being entitled to particular amounts. It does not require the taxpayer to actually receive those amounts."

The taxpayer's appeal was dismissed.

The proposal

In the Budget last week, Jeremy Hunt announced that the wheels are in motion for an overhaul of the scheme which would apparently avoid this situation in the future, but bring with it a monumental shift in the way cohabiting individuals are treated for the HICBC.

As well as a welcome increase in the clawback thresholds, which the Government estimates will have a positive impact on 485,000 families, the Chancellor announced a longer term intention to radically reform the mechanism of the HICBC by "moving to a system based on household rather than individual incomes by April 2026".

This measure is designed to address the current inequality that exists between families with two working parents and families with only one earner. Because the clawback threshold applies to the higher earner, from April 2024 a family with two working parents can have adjusted net income (£59k + £59k = £118k (currently £98k)) and retain 100% of the child benefit, whereas a single working parent starts to see their child benefit withdrawn when their adjusted net income reaches £60k (currently £50k).

The danger

Applying the HICBC on a household level seems like a good solution in principle but is not without controversy. Speaking to AccountingWEB, Judith Freedman, Emeritus Professor of Tax Law at Oxford University, explained: "The HICBC already breaches the principle of independent taxation to some extent."

To go even further, HMRC will need the power to detect when couples, married or unmarried, who are cohabiting, breach the income levels. This, some have claimed, entirely reverses the concept of independent taxation introduced in 1990 by Nigel Lawson and would take with it vital protection from vulnerable individuals.

Freedman posted on X (formerly Twitter): "In the real world some partners need to be able to keep finances private in order to provide for themselves and their children and avoid abuse or pressure to work or not to work. It is often women who need that protection."

The precedent

The idea is not without precedent; many benefits and student grants are already predicated on the combined income of the household. There is a counter argument that says this HICBC reform could be a sensible move and the current noise is a storm in a teacup.

Tim Good, director of PTP Ltd, told AccountingWEB: "The HICBC is means tested on the higher earner, so there is already an element of disclosure between couples. Individuals need to be aware of each other's income to determine whose is higher. The household idea would remove the serious inequity that currently exists."

The complexity

In an already hideously complex tax system, with experts and taxpayers clamouring for simplification, this move would undoubtedly have the opposite effect. There are so many factors to consider alongside the logistical challenges of an overhaul this dramatic – data protection, confidentiality and legislative changes are likely only the tip of the iceberg.

Not to mention the timing - April 2026 should coincide with MTD ITSA coming into effect.

In a separate X post, Freedman explained: "A move to household taxation when households are becoming more diverse and complex seems to be a recipe for complexity and definitional problems and does not reflect the real world at all. It also ignores much sociological research."

The conclusion

We can wax lyrical about the ethical, logistical and political implications but there is a distinct possibility that this proposal will fade and disappear without trace. Two years is a long time in politics, and one week is long enough for HMRC to complete a full 360.

It's increasingly likely that by 2026, we'll have a new party in power with very different plans for the HICBC's future. So I'll keep my ear to the ground but focus on what is happening now, not what might – or might very well not – happen in two years' time.

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Replies (6)

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By Paul Crowley
22nd Mar 2024 12:08

You say another
This is probably the only case I have read that seems a bit unfair. But he originally claimed and kept the money. Why would that be, it always was normal for Mum to claim, not Dad.
He knew he had made the claim, and if he had taken any advice then he probably would not have got caught up in this.
Most cases are those where dad claims that he did not know.
I deal regularly with taxpayers that did not know..............add anything you like to finish the statement. But only HICBC is somehow special in being unfair.

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Tornado
By Tornado
22nd Mar 2024 13:24

It would be more logical to make the Child itself eligible to receive the Benefit but pay it to the Parent or Guardian to administer until they are 18, The Benefit could be restricted if the Child's income is over a certain limit.

This would eliminate the divisive and unfair situation we currently have.

Thanks (4)
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By FactChecker
22nd Mar 2024 22:38

Lots of possibilities exist, but to say that JH announced:
"the wheels are in motion for an overhaul of the scheme which would apparently avoid this situation in the future"?
I doubt he used the word 'apparently' although it's the one doing all the heavy lifting.

Given that we have no proposals as yet regarding exactly how any new regime would operate, and a Consultation behind which to shelter as we move towards pre-GE purdah, there is currently no more than a blank piece of paper awaiting ideas!

Thanks (2)
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By bigmuggsy
23rd Mar 2024 13:37

Simplest solution? Scrap it all together. People earning over £60k are plying fortunes into the system through tax and NI, a valid argument therefore being all should have entitlement.

Thanks (3)
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By wyoming
25th Mar 2024 11:16

What an ill-thought out and useless system HICBC is! I dealt with a couple who opted to carry on receiving CB despite both earning well over £60K, their logic being that it amounted to an interest-free loan - and if their circumstances changed that wouldn't have to remember to start claiming.
The charge was always paid by the husband, as he was the higher earner, despite the money going to the wife.
They ended up getting divorced, at which point they agreed to "keep things as they were" for the sake of convenience - i.e. she got the money and he paid the charge, and this was taken into account in their overall settlement.
Some time later, HMRC came along and insisted that she should pay the charge as they were no longer a couple. They said they would change things around moving forward, but HMRC insisted that she pay the charge right back to the date of separation, meaning that he had to claim 3 years' worth of refunds. Completely ludicrous, as the charge had been paid in full and the exchequer ended up not a penny better off!

Thanks (2)
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By petestar1969
26th Mar 2024 11:44

They should scrap the HICBC altogether and the current form of Child Benefit.

Instead, every parent should get an enhanced PA all the time they have at least one sprog under the age of 18.

If that doesn't help, because a parent isn't working, then that parent can claim the Child Benefit.

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