HMRC refunds £1.8m child benefit tax penalties

HMRC has made £1.8m in refunds to nearly 5,000 taxpayers as a result of cancelling ‘failure to notify’ penalties in high income child benefit charge (HICBC) cases, on the grounds they had a reasonable excuse

The raft of cases related to higher rate taxpayers who had not informed the tax authority that they would opt out of child benefits as they earned over £50,000 after complicated changes to child benefit payments introduced by former Chancellor George Osborne from 2013.

The lack of awareness about the complexities of HICBC was also highlighted in the latest research into the rollout of the changes to child benefit with criticisms about the poor communications from HMRC and the tone of penalty demands.

Last year HMRC was forced to review thousands of cases where a ‘failure to notify’ penalty was issued for the tax years 2013/14, 2014/15, and 2015/16, to taxpayers who had not registered for the HICBC. It also reassessed its interpretation of what constituted a ‘reasonable excuse’.

It looked at 35,000 cases and cancelled the penalties of over 6,000 taxpayers who had a reasonable excuse for not notifying their liability for those tax years.

Refunds have been sent to families that claimed child benefit before HICBC was introduced, and where one partner’s income subsequently increased to over £50,000, and to families where the liability to HICBC arose in the 2013/14, 2014/15, or 2015/16 tax years as a result of the formation of a new partnership.

In total, £1.8m of refunds were made in 4,885 cases. Payments have already gone out and HMRC says there is no need for taxpayers to contact them.

HMRC is also improving child benefit forms, guidance and communications, setting out options to pay the charge or to claim child benefit but elect not to receive payments. In this way the claiming parent can continue to receive non-monetary benefits, such as National Insurance credits, that may preserve entitlement to the state pension, without having to pay HICBC.

Limited awareness of HICBC

The announcement about the refunds came as HMRC has published findings from independent research on awareness about the introduction of the HICBC. Interviews with 45 families found that they had little knowledge about HICBC and very limited awareness of the other benefits of claiming beyond receipt of payments; that is, a claimant’s eligibility to receive National Insurance credits which count towards the state pension and the automatic notification of the child’s National Insurance number when they reach 16.

Although there was generally a good understanding of the basics of child benefit, they criticised HMRC’s quality of communications and limited publicity about HICBC when it was first introduced. The poor messaging meant that many people thought that they were no longer entitled to claim child benefit.

The language and terminology used in communication materials was also confusing. There was a general misunderstanding about HMRC’s definition of ‘claiming’, nor the distinction between ‘opting out’ and ‘stopping’ a claim. Furthermore, the use of the word ‘charge’ had negative connotations, with concerns that being liable for the charge was evidence that they should not have been receiving child benefit payments.

Awareness was lowest among those who became parents after the introduction of the charge, and those who had a child prior to 2013 but whose income increased above the £50,000 threshold after 2013.

Among some of these respondents who paid HICBC via self-assessment tax returns, a minority were not aware that they were liable for the charge. Some respondents said that it was HMRC’s responsibility to inform them of their liability for the charge, as and when their income fell within the threshold, as opposed to the individual knowing the requirement and actively volunteering this information.

The group who opted-out of receiving payments tended to do so to avoid the administrative burden of completing a tax return. Low awareness of the other benefits of claiming meant that this aspect rarely played a part in decisions to opt out.

The most common misconception was that individuals were not eligible to claim child benefit if their income was over the £50,000 HICBC threshold, as ‘claiming’ was perceived to be synonymous with receiving payments. Some respondents also thought that child benefit as a whole was a ‘means-tested’ benefit and therefore no longer viewed it as a universal benefit.

Many respondents were not aware of the possibility of claiming and then opting-out of receiving payment, assuming that this was the same as not claiming. This was even the case amongst those respondents who had opted out; they tended to see themselves as non-claimants.

High Income Child Benefit Charge: awareness, understanding and decision making processes