HICBC: How to remove the unfair tax barnacleby
The UK income tax system is incredibly complex, yet more baubles and barnacles are added every year. The barnacles provide little benefit to taxpayers or are actively harmful, and costly for HMRC to administer.
A prime example of a tax barnacle is the high income child benefit charge (HICBC). It was introduced in 2013 and has been criticised ever since for the extra compliance burden it adds for taxpayers and HMRC, and the unfair outcomes for parents who fail to jump through the legislative hoops in exactly the right order.
Father’s claim for child benefit
In a recent case: Meades v HMRC (TC08844) it was the father (Meades) who made the claim for child benefit in 2012, but the benefit was paid into the mother’s bank account at all times. Five years later the parents separated, then divorced on 4 April 2019. Throughout this time Meades paid maintenance for the child and did not alter the child benefit claim.
In 2019 Meades began a new relationship with S, and they lived together as a couple for the whole of 2019/20.
In 2021 HMRC amended Meades’ self-assessment for 2019/20 to increase his tax liability by £1076 on the basis that he was due to pay the HICBC for that year. The assessment was raised on Meades because his income was higher than that of S, although S had no relationship with the child for whom the child benefit claim was made.
The FTT criticised HMRC for misunderstanding the HICBC provisions. However, the tribunal found it could not overturn the assessment because Meades was entitled to the child benefit on the basis that:
- he had made the original claim; and
- he contributed £600 per month towards the costs of providing for the child, which exceeded the amount of the child benefit.
The child’s mother was also entitled to the benefit as she was living with the child, but as Meades had already been awarded the benefit his entitlement was deemed to have priority.
The FTT concluded that the HICBC for 2019/20 should be upheld.
Was this HICBC assessment fair?
Meades argued that it was unfair and unjust for HMRC to assess him for the HICBC, but the FTT has no jurisdiction to consider fairness.
If the mother had made the original claim for child benefit, or if the benefit claim had been cancelled on the couple’s separation and remade in the mother’s name, this problem would not have arisen.
Why does the HICBC exist?
During the debate: 'Where next for income tax?' held on 26 June by the Chartered Institute of Taxation and the Institute for Fiscal Studies, Nigel Mills- MP for Amber Valley, recalled that the HICBC was introduced as a political counterbalance to the government’s decision to reduce the top rate of tax from 50p to 45p.
Fran Bennett - Associate Fellow in the Department of Social Policy and Intervention at the University of Oxford, agreed with Mills saying the HICBC was implemented “largely for political reasons”, to show the better off were paying for austerity. However, she added: “the HICBC had made child benefit system harder and more complicated. Now, many people on high incomes choose not to claim child benefit altogether. This has implications for loss of National Insurance credits and pension entitlements in older age.”
Ten years later in 2023, the government recognised this problem and on 27 April 2023 it said it will “address this issue to enable affected parents to receive a National Insurance credit retrospectively.” However, to date, no details have been announced of how eligible parents will receive these retrospective NI credits.
The Resolution Foundation has examined the operation of the HICBC and concluded that “no rational policymaker would ever have drawn up the current system”, which can cause problems when couples with children separate and introduces an “additional tax on better-off families with children”, the number of which is increasing due to frozen tax thresholds.
Hard to reverse
In spite of the mountain of evidence against the HICBC successive governments have failed to remove this legislative thorn that causes so much pain to many families.
It appears that bad policy decisions such as the HICBC persist, as no government has the motivation or courage to remove such tax barnacles from the system.