HMRC have written to around one million tax credit claimants after omitting important income figures from their renewal notices.1 LITRG advises all tax credit claimants to check their paperwork carefully and are urging HMRC to use the full extent of their powers to correct any issues that may arise later due to this glitch.
If claimants do not let HMRC know by 31 July that the figure they hold is wrong or just an estimate at this stage, they risk either receiving less tax credits than they are entitled to, or receiving too much, which will be clawed back, perhaps, unexpectedly, from any ongoing tax credit payments.
This follows a decision by HMRC to automatically renew most tax credit claims this year in light of the COVID-19 pandemic.2 This is a departure from the usual process for many claimants. Automatic renewal means that HMRC state the claimant’s circumstances on a renewal notice and the claimant only needs to contact HMRC if the income shown or circumstances detailed are wrong. Otherwise, HMRC will finalise entitlement for 2019/20 and put in place a claim for 2020/21 on 31 July (or shortly after).
Victoria Todd, Head of LITRG, said:
“HMRC’s glitch, along with the fact that the renewals process looks different for many people this year, means that it is crucial that claimants check their renewals paperwork very carefully.
“Auto-renewal can be helpful for claimants with more straightforward circumstances where HMRC have earnings or pension information from the tax system.3 Although we understand why HMRC tried to move more claimants into the auto-renewals process this year, in many cases HMRC do not have enough up to date information about a household’s income to finalise their entitlement accurately. In normal times, that would have been regarded as an unsuitable approach. That is why those people must usually fill in a declaration form (either on paper or online) to confirm their income for the year just ended.
“Claimants who receive an auto-renewal notice are told to check the income figure that HMRC say they will use to finalise entitlement for 2019/20 and set the claim for 2020/21. Unfortunately, HMRC now understand that in around one million cases, the notices do not actually include the income figure that HMRC have used in calculating the award that the claimant can check.”
LITRG’s understanding is that this issue affects claimants who have income that HMRC do not know about such as self-employed claimants, those who receive taxable social security benefits, and those with other types of income such as rental income from property. To auto-renew these cases, HMRC have used the last income figure they have on record4 in their calculations, but these figures do not appear on the actual notice. In any event, this historic figure may not be accurate in some cases.
Victoria Todd continued:
“We advise all tax credit claimants to carefully check their renewal notices and the income used. Even if HMRC have data from employers and pension providers, claimants should check to see if they make any deductions from those income figures for things such as pension contributions,5 certain work expenses and some statutory payments. This may lead to an increased tax credits award.
“Those who have received an incorrect renewals notice will receive a letter from HMRC which should set out the total household income that HMRC will use to finalise their entitlement for 2019/20 and set their claim for 2020/21.6 If claimants want a breakdown of this total household income figure, they will need to contact HMRC via webchat or phone.7 Claimants will then need to check carefully both the earlier renewal notice and the details in the letter and tell HMRC if anything is wrong, missing or incomplete before 31 July. This can be done online or by phone. If no contact is made by 31 July, HMRC will finalise the entitlement for 2019/20 shortly after.
“It is particularly important for self-employed claimants, and anyone else who usually gives HMRC an estimated income, (typically because they do not know their actual income figure for 2019/20 yet), to contact HMRC when they receive the additional letter to ensure HMRC know that it is an estimate. This is the case even if the amount looks correct. They will then have until 31 January 2021 to provide HMRC with their actual income figure for 2019/20.8
“Given that this issue is likely to lead to some confusion for claimants - especially as many are not used to the auto-renewals process and the notices are difficult to follow - we urge HMRC to use the full extent of their powers to ensure that no claimant affected by this glitch is disadvantaged at a later date if they do not contact HMRC before 31 July.”
Notes for editors
1. Tax credit awards last for a maximum of one tax year and are paid on a provisional basis. Once the tax year ends, HMRC begin a ‘renewals process’ to finalise entitlement for the tax year just ended. In most cases, this also acts as a claim for the new tax year. The most recent tax credit statistics, from December 2019, show around 2.48 million households in receipt of tax credits.
2. Usually, only those who fall into certain categories are auto-renewed. That is, those who get the full family element of child tax credit; those who have entitlement but receive no payments due to the level of their income; those who receive certain means-tested benefits for the whole tax year; and those who, according to HMRC data only have employment or pension income and do not fall into an exception group. Otherwise, claimants are required to declare their income by 31 July. This year, HMRC will auto-renew the majority of claims.
3. Usually when employers pay their employees, they must send information about the pay to HMRC on or before the payment date. This is the same for pension providers. This is called Real Time Information (RTI). This RTI data is used by HMRC to help finalise tax credit entitlement. However, even if accurate it may not be the correct amount to take into account for tax credit purposes as certain deductions can be made.
4. Our understanding is that the figure used will either be the income used to finalise the 2018/19 tax credit entitlement or the latest estimate for 2019/20 provided by the claimant. Both figures may be slightly adjusted upwards for the new tax year.
5. Deductions for pension contributions should only be made where the contributions have been paid into a relief at source scheme. This means that contributions are deducted after tax and national insurance has been calculated. Where someone has contributions deducted under a net pay arrangement, these are already taken into account in the taxable pay figure on their P60 and no further deduction is needed.
6. LITRG has produced a Q&A guide to help claimants understand more about this problem and the differences to the renewals process this year due to coronavirus. https://www.litrg.org.uk/latest-news/news/200630-have-you-received-additional-letter-about-your-tax-credit-renewal-hmrc
7. Full contact details for HMRC can be found on GOV.UK: https://www.gov.uk/government/organisations/hm-revenue-customs/contact/tax-credits-enquiries
8. Some people will not know their actual income for 2019/20 yet. This is common for self-employed claimants as the tax return deadline for 2019/20 is not until 31 January 2021. The tax credit rules allow them to provide an estimated income by 31 July 2020 and confirm their actual income by 31 January 2021. Usually, self-employed claimants declare their income to HMRC as part of the renewals process and can indicate it is an estimate. However, as many have been moved to the auto-renewal process this year, HMRC will not know that the figures they are using are estimates and so claimants must contact HMRC to ensure it is recorded as an estimate, otherwise it will be treated as final and the opportunity to provide a final figure before 31 January 2020 will, according to HMRC, be lost.
9. Low Incomes Tax Reform Group
The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. The CIOT’s 19,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.More Articles by Chartered Institute of Taxation (CIOT) ...