HICBC controversy continues with another tribunalby
With every high-income child benefit charge case brought to court costing more than what was at stake, Ray McCann thinks HMRC needs to find a more sensible approach.
One of the more controversial pieces of legislation introduced in the past decade has been the high-income child benefit charge (HICBC). Since its introduction in 2013, during the coalition government’s austerity period, it has resulted in more and more individuals being dragged into the self assessment tax return system solely to pay any HICBC due. At the last estimate this was close to 200,000 people, forcing HMRC to find new ways to enable those liable to the charge to settle what they owe without the need to complete a self assessment tax return.
The HICBC divides opinion in numerous areas, not least between those who believe in universal unrestricted benefits and those who believe that benefits should be restricted to those on low income. The policy is to recover child benefit from those on higher income, currently set at a starting point of £50,000. One obvious problem is that high income depends on where you live and your particular circumstances. In the light of objections, the government went no further than tweaking the income limits so that the charge tapers until income of £60,000 at which point the child benefit is fully taxed.
Reasonable people can disagree over the policy, but it is difficult to find anyone who is content with what we have in terms of how HICBC was implemented. There have been far too many traps for the unwary and hundreds have fallen foul of HMRC penalties due to their failure to register for self assessment and pay the charge. We have seen tribunal decision after decision often involving trivial amounts (one recent case involved a penalty of under £200) and typically HMRC has been the loser.
Even the choice to avoid the charge by not claiming child benefit carried unannounced risks with damaging consequences to state pension entitlement due to the loss of national insurance contribution (NIC) credits for periods where the individual was not working, an issue the government is now having to correct.
Two-income data fail
HICBC has also been heavily criticised for the way two-income families, where both earn less than £50,000, are treated compared to a single parent earning more than £50,000. As has been well publicised, two earners on £50,000 a year, so a combined income of £100,000, lose no child benefit whereas a single earner on £60,000 loses the entire child benefit paid. At the time HMRC claimed that this was unavoidable since they had no right under data protection to check the income position of a partner of someone in receipt of child benefit. Many tax advisers were surprised by this given the efforts HMRC had made and continues to make to gain access to data in almost every other context.
The poor policy design did not just affect taxpayers – HMRC’s efforts to recoup unpaid HICBC came unstuck when the tribunal concluded that HMRC could not use its discovery assessment powers in S29 TMA 1970 to recover unpaid HICBC from individuals who had failed to pay the charge for earlier years (see the decision in Jason Wilkes  UKUT 150 (TCC)). In contrast to the years of inaction on the part of the Treasury to address the criticisms of the HICBC, S29 was quickly amended with retrospective effect to ensure that HMRC could pursue the unpaid HICBC. This created an unprecedented situation whereby taxpayers would only be protected from the retrospective amendment of S29 where they had appealed a discovery assessment on or before 30 June 2021.
The recent case of James Fera (TC08985) is a good example of what taxpayers in this situation faced. HMRC should never have taken the case to the tribunal since it was quite clear that the taxpayer had appealed. HMRC’s objection was that he had not specifically referenced the invalidity of the discovery assessment in his appeal despite Wilkes being widely publicised. It was a very poor position for HMRC to take, which the tribunal rightly rejected.
So how do we move forward? There has been some suggestion that the Chancellor will address the single-parent family position in the March Budget. But other changes are required. The income limits should be increased and some payments that are currently treated as income should be excluded. Consider the single parent who is paid a £50,000 salary and who is transferred to another office. If the employer pays excess travel costs the individual will be economically worse off since the earnings will then exceed £50,000 and the HICBC applies.
But HMRC also needs to adopt a new compliance strategy, every HICBC case brought before the tribunal has cost more than what was at stake. HMRC needs to take a broader approach to when taxpayers have a reasonable excuse and stop attempting to include within the statutory provisions requirements that are not there, as was the case in Fera.
It is not unreasonable for HMRC to consider that public awareness of HICBC is now sufficiently high that ignorance of the law is not an excuse. However, those who fail to pay the charge should receive help to get it right with penalties reserved for habitual failure. And since HMRC can now recover HICBC right back to when the charge was introduced, without change we will not have seen the last of the expensive tribunal cases.
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Ray McCann is a consultant to Joseph Hage Aaronson LLP and Charter Tax Consulting Ltd. He is a fellow of the CIOT and a member of the ATT and was CIOT president between 2018 and 2019 and a member of the CIOT Council until this year. He is a former HMRC inspector.