It is almost exactly ten years since the high income child benefit charge (HICBC) was introduced on 7 January 2013 – even the starting date was complicated. As I said on BBC News at the time, people were concerned not so much about the fairness of withdrawing child benefit from higher earners, but about the complexity of how the HICBC works.
The underlying issue is that the tax system applies to each individual, ever since the introduction of independent taxation in 1990. But the benefits system works by reference to a family unit – and HICBC combines the two. Child benefit (part of the benefits system) is withdrawn via the HICBC, which is part of the tax system. The benefit will be withdrawn in full if one earner in a couple earns more than £60,000, and will be partially withdrawn if earnings exceed £50,000. Those limits have not been increased since 2013, and with the general freezing of tax allowances until 2028, it seems likely that more and more people will fall within the scope of the HICBC.
There are two main problems with the HICBC. The first is the need for the person claiming the benefit (usually, but not always, the mother) to know the income of the higher earner in the couple (usually, but not always, the father). But even more fundamentally, those affected will often simply not realise that all or part of their child benefit may be clawed back at a later date. Unlike the readers of this magazine, the great majority of people pay very little attention to the tax system, and are often unaware of its more complex corners. A taxpayer earning the average wage of around £28,000 and claiming child benefit will generally simply pay tax under PAYE, and will almost certainly not be aware that if their partner’s earnings exceed £50,000 then they (the lower-earning taxpayer) need to tell HMRC and repay part of their child benefit.
Of course, this leads to arrears building up. Once HMRC becomes aware of the situation, it is likely to seek to issue discovery assessments – but the case of HMRC v Wilkes, which was heard in November 2022 in the Court of Appeal, shows that this may not have been as straightforward as HMRC had expected. HMRC issued discovery assessments to recover the HICBC, but the taxpayer won in the Upper Tribunal ([2021] UKUT 150 (TCC)). The problem which HMRC had was that the assessment machinery allowed HMRC to make an assessment where there had been an amount of income which had not been charged to tax, but here, as the Upper Tribunal put it, ‘Mr Wilkes had not paid insufficient tax on his income. Rather, he had paid insufficient income tax in the form of the HICBC.’ In other words, the HICBC is a mechanism to collect more income tax, but it does this by withdrawing an amount of child benefit, rather than by imposing tax on an amount of income.
The fact that HMRC has been shown (so far at least) to have failed to get the mechanism right for assessing HICBC illustrates rather neatly the cumbersome nature of the HICBC: it simply does not sit comfortably between the benefits and tax system. However, even if the taxpayer’s victory is confirmed at the Court of Appeal, HMRC have now amended the law to enable them to issue discovery assessments on other taxpayers. And this amendment has been made retrospectively, since (in HMRC’s view) it is merely re-establishing HMRC’s longstanding view of the way the law ought to work.
My understanding is that HMRC is indeed issuing discovery assessments on other taxpayers. For example, I have heard of one case (quoted by Rebecca Benneyworth) where a single mother, admittedly on a good salary but taxed wholly under PAYE, has been required to repay about £10,000 of child benefit – at a time when her youngest child has already started university. Clearly, those earning over £50,000 are not on low incomes, but the consequences of an unexpected large tax assessment can still be harsh.
There have been several articles in the press over the years about this; for example, about a year ago, The Times wrote about how families ‘would be treated like serious tax evaders’ (6 November 2021). A recurring theme is the lack of communication from HMRC, prior to an assessment being issued. Given that HMRC have full records of earnings (via employers or a self assessment return) and of child benefit claims, why can’t they reconcile the two, at least in the majority of cases? Or at least ask employers to do more to raise awareness among their employees?
Of course, more could be done at a structural level: for example, would it be better to make child benefit means-tested, or to change the amount and make it taxable? But the solutions are not straightforward, and the government does not appear keen to explore them. Instead, the continued freezing of rates and allowances means that as wages rise, a greater number of taxpayers could be dragged into the HICBC – and more people are going to find themselves in a mess.
It is almost exactly ten years since the high income child benefit charge (HICBC) was introduced on 7 January 2013 – even the starting date was complicated. As I said on BBC News at the time, people were concerned not so much about the fairness of withdrawing child benefit from higher earners, but about the complexity of how the HICBC works.
The underlying issue is that the tax system applies to each individual, ever since the introduction of independent taxation in 1990. But the benefits system works by reference to a family unit – and HICBC combines the two. Child benefit (part of the benefits system) is withdrawn via the HICBC, which is part of the tax system. The benefit will be withdrawn in full if one earner in a couple earns more than £60,000, and will be partially withdrawn if earnings exceed £50,000. Those limits have not been increased since 2013, and with the general freezing of tax allowances until 2028, it seems likely that more and more people will fall within the scope of the HICBC.
There are two main problems with the HICBC. The first is the need for the person claiming the benefit (usually, but not always, the mother) to know the income of the higher earner in the couple (usually, but not always, the father). But even more fundamentally, those affected will often simply not realise that all or part of their child benefit may be clawed back at a later date. Unlike the readers of this magazine, the great majority of people pay very little attention to the tax system, and are often unaware of its more complex corners. A taxpayer earning the average wage of around £28,000 and claiming child benefit will generally simply pay tax under PAYE, and will almost certainly not be aware that if their partner’s earnings exceed £50,000 then they (the lower-earning taxpayer) need to tell HMRC and repay part of their child benefit.
Of course, this leads to arrears building up. Once HMRC becomes aware of the situation, it is likely to seek to issue discovery assessments – but the case of HMRC v Wilkes, which was heard in November 2022 in the Court of Appeal, shows that this may not have been as straightforward as HMRC had expected. HMRC issued discovery assessments to recover the HICBC, but the taxpayer won in the Upper Tribunal ([2021] UKUT 150 (TCC)). The problem which HMRC had was that the assessment machinery allowed HMRC to make an assessment where there had been an amount of income which had not been charged to tax, but here, as the Upper Tribunal put it, ‘Mr Wilkes had not paid insufficient tax on his income. Rather, he had paid insufficient income tax in the form of the HICBC.’ In other words, the HICBC is a mechanism to collect more income tax, but it does this by withdrawing an amount of child benefit, rather than by imposing tax on an amount of income.
The fact that HMRC has been shown (so far at least) to have failed to get the mechanism right for assessing HICBC illustrates rather neatly the cumbersome nature of the HICBC: it simply does not sit comfortably between the benefits and tax system. However, even if the taxpayer’s victory is confirmed at the Court of Appeal, HMRC have now amended the law to enable them to issue discovery assessments on other taxpayers. And this amendment has been made retrospectively, since (in HMRC’s view) it is merely re-establishing HMRC’s longstanding view of the way the law ought to work.
My understanding is that HMRC is indeed issuing discovery assessments on other taxpayers. For example, I have heard of one case (quoted by Rebecca Benneyworth) where a single mother, admittedly on a good salary but taxed wholly under PAYE, has been required to repay about £10,000 of child benefit – at a time when her youngest child has already started university. Clearly, those earning over £50,000 are not on low incomes, but the consequences of an unexpected large tax assessment can still be harsh.
There have been several articles in the press over the years about this; for example, about a year ago, The Times wrote about how families ‘would be treated like serious tax evaders’ (6 November 2021). A recurring theme is the lack of communication from HMRC, prior to an assessment being issued. Given that HMRC have full records of earnings (via employers or a self assessment return) and of child benefit claims, why can’t they reconcile the two, at least in the majority of cases? Or at least ask employers to do more to raise awareness among their employees?
Of course, more could be done at a structural level: for example, would it be better to make child benefit means-tested, or to change the amount and make it taxable? But the solutions are not straightforward, and the government does not appear keen to explore them. Instead, the continued freezing of rates and allowances means that as wages rise, a greater number of taxpayers could be dragged into the HICBC – and more people are going to find themselves in a mess.
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