By statute, the Commissioners for HMRC are responsible for the payment and management of tax credits. To carry out their responsibility, the Commissioners have a wide range of powers to conduct checks into claims, and notifications by claimants of changes of their circumstances, both during the year to which they relate, and afterwards.

Checks made during the year are known as examinations.

Checks made after the end of the year, following finalisation of an award, are known as enquiries.

Also in this section is information on penalties and interest.

Examinations

• Checks made during the year to which the claim relates are referred to as examinations. These can be conducted:
  • before making an award;
  • on a claimant notifying a change in their circumstances; or
  • at any time if the Board have 'reasonable grounds for believing' that the claimant has been awarded credit at the wrong rate, or that they are no longer, or have never been, entitled to the credit.


• Examinations can cover a wide range. At one end of the spectrum are simple questions about a person's circumstances - or income if HMRC has noticed a discrepancy between the information given by the claimant and data held elsewhere on the department's systems. At the other end is the full-scale investigation, during which HMRC have power to require the claimant to certify that they have disclosed everything, and on that basis to negotiate financial settlements with the claimant.




• Examinations can start with a simple letter of enquiry, or a formal notice seeking information. There is no right of appeal against the issue of a notice seeking information, and therefore little recourse if HMRC decide to question the claimant about things which do not strictly relate to their tax credit entitlement (known as 'fishing expeditions'). However, instructions to compliance staff discourage such actions. Also, by statute the purpose of an examination is:

  'to provide any information or evidence which [the Board] consider they may need for making their decision',

  Therefore examinations may not, by law, be conducted at random.



• There are penalties for failure to comply with an information notice (see penalties).



• HMRC practice in conducting examinations is set out in their Claimant Compliance Manual CCM4000ff . Official leaflets are the factsheets FS2, FS3 and FS4 (Tax credits examinations; Tax credits formal request for information; and Tax credits meetings respectively). The former code of practice COP23 is obsolete. This is unfortunate, as - for all its deficiencies - it was far more informative than the factsheets which have taken its place. To call these documents 'factsheets' is a misnomer, as they are singularly devoid of facts.

Enquiries

Tax credit enquiries are analogous to self-assessment enquiries in mainstream tax. They are furnished with more statutory safeguards than the in-year examinations. Nevertheless tax credit enquiries, unlike examinations but like self-assessment enquiries, may be conducted at random.

The 'enquiry window'

The statute defines the period during which HMRC is allowed to open an enquiry, and any enquiry begun before the start of that period, or after its end, is invalid. That period is known as the enquiry window.

The earliest time for starting an enquiry

• An enquiry may not be started before the date of HMRC's formal decision on the claimant's final entitlement for the tax year. This is usually given after the claimant has returned all their renewal papers. Renewal papers should be returned by 31 July in the following tax year (so the renewal papers for 2007/08 should be sent in by 31 July 2008).



• Where the claimant is not at that stage ready to state what their income was for the year, and shows an estimated income figure in their renewal papers, no enquiry may be started before the estimate has been confirmed, or the actual amount substituted. This should be done by 31 January in the following tax year.



• See the commentary on renewing a claim for more details about this process.

The latest time for starting an enquiry

• The latest time for starting an enquiry depends on whether the claimant has also filed a self-assessment (SA) return for ordinary tax. Where they have, and the return is not subject to a SA enquiry, a tax credit enquiry may not be started later than the date on which the SA return becomes final. This is usually 12 months after the filing date of 31 January following the tax year to which the return relates, but there are important exceptions; see here for the detailed rules.



• In the case of a joint claim where both claimants are SA taxpayers, and there are different final dates for each partner, the later of the two dates is taken for the couple.



• Where the return is subject to a SA enquiry, the latest date for starting a tax credit enquiry is the date on which the SA enquiry is brought to an end (or the later date in the case of joint claimants). This is of course much later than the normal SA enquiry window.



• Where the claimant has not filed a SA return, a tax credit enquiry must be begun within one year of the date shown on the end-of-year notice as the date by which income details must be returned. In practice this date is 31 July, or the following 31 January if an estimate is returned.

Closing the enquiry

• A tax credit enquiry ends when HMRC issues a 'closure notice'. But the claimant may apply to the Appeal Tribunal at any time for a direction that the Board must give a closure notice; in which case the Tribunal must do so unless the Board can show that they have reasonable grounds for continuing the enquiry.



• This can be a useful tool in the claimant's hands if HMRC are dragging their feet, or refusing to be forthcoming about the nature and purpose of their enquiry.

Link with self-assessment - mainly for advisers

• We have already said quite a lot about the links between the time-limits for opening and closing self-assessment and tax credit enquiries. Where the claimant is also a self-assessment taxpayer, the one may give rise to the other and it is important for the adviser to bear in mind the implications of both when negotiating with HMRC.



• When a self-assessment enquiry is opened and the taxpayer is also a tax credit claimant, a tax credit enquiry may also be opened and HMRC will usually work the two together. Needless to say, if a self-assessment enquiry results in an increased profit figure, the trading income figure for tax credits may similarly be increased. It follows that no self-assessment enquiry should be concluded without considering its effect on the tax credits claim, and seeking simultaneous closure of any related tax credit enquiry.



• Similarly, where the self assessment enquiry covers more than one year and it is sought to apportion the adjusted income figure between the years, care should be taken in agreeing any such apportionment to maximise the potential for the annual disregard for increases in tax credit income.

Income discrepancy enquiries: gift aid and pension contributions

• One of the grounds for starting an enquiry is that the income details supplied for tax credits do not match those held for income tax purposes. This can affect both SA and PAYE taxpayers.



• As we have seen, gross gift aid payments made in the current year and gross pension contributions are deducted from tax credits income. Because such deductions are not separately identified on the claim form TC600, it is not unknown for TCO to start a tax credit discrepancy enquiry when the income declared for income tax and for tax credit purposes differs by the amount of the gross deduction.



• Advisers should look out for such risk assessment-based enquiries which ought to be subject to a 'sanity check' by a human before being started, but have in the past appeared not to be.

Potential conflict of interest where a SA enquiry gives rise to a tax credit enquiry and the tax credit claim is a joint one

• Where a tax adviser is acting for a taxpayer facing a SA enquiry, the result of which is likely to impact on the tax credit claim which the taxpayer has made jointly with his or her partner, a conflict of interest may well arise. There is an obvious conflict between the demands of taxpayer confidentiality, in respect of the SA enquiry, and joint and several responsibility of both members of the couple for the accuracy of the tax credit claim. In some cases it may be necessary for the practitioner not to act, or to cease acting, for both parties, and to arrange for the non-SA client to be independently advised on the tax credits enquiry.

Revenue guidance on enquiries

Discovery

• Can HMRC get a second bite of the cherry after the period allowed for opening an enquiry has expired?



• Unsurprisingly the answer is yes, but only in limited circumstances. HMRC may re-open a tax credit award if the claimant's income tax liability is 'revised', but must do so within one year of the income tax revision, and can only do so if the enquiry window has passed. This process is known as 'discovery'.



• An income tax decision is revised if a SA return is amended, whether by the taxpayer or by HMRC, and whether during or following an enquiry or independently of any enquiry; or if HMRC raises an assessment to make good a loss of tax; or vacates an assessment or return; or grants error or mistake relief; or an appeal is settled following any of the above.



• Alternatively, if HMRC have grounds for believing that a tax credits decision is wrong owing to fraud or negligence by the claimant or any person acting for the claimant, they can re-open an award within five years after the end of the year to which it relates.

Information from third parties

• HMRC has the right to require information or evidence to substantiate a claim from a claimant's employer or childcare provider. For this reason any change of employer or childcare provider should always be reported to Tax Credits Office.

Penalties

• It is worth having a quick look at the HMRC guide on this - WTC 7 Tax Credit Penalties.




• HMRC has power to seek or impose financial penalties for various types of default. The penalties and their maximum amounts are:

  • for fraudulent or negligent misstatement, £3,000;
  • for failure to report a change of circumstances which it is obligatory to report within one month/three months - (have a look at the section on Notifying information), £300;
  • for failure to supply or delay in supplying information when required to do so in an examination, enquiry, or in response to an end-of-year notice, or in accordance with regulations which apply specifically to employers, £300;
  • a daily penalty for each day that a failure or delay continues, £60 per day;
  
  
• In addition, when WTC was paid through the payroll, a penalty of up to £3,000 could be imposed on an employer for refusal or repeated failure to pay WTC, or fraudulently or negligently paying the wrong amount of credit.



• Failure or delay penalties can only be exacted from the person directed to supply the information, ie the claimant or the employer, but penalties for fraudulent and negligent mis-statement can be levied on any person who makes an incorrect statement or declaration in or in connection with a claim for a tax credit, a notification of a change of circumstances, or in response to an end-of-year notice. This can in particular include an agent.



• Initial penalties for failure to supply or delay in supplying information can only be imposed by the Appeal Tribunal, to which HMRC must apply, and against whose decision a right of appeal lies to the Social Security Commissioners. All other penalties can be determined - ie directly imposed - by the Board of HMRC.



• The maximum penalty for fraudulent or negligent mis-statement by a couple in a joint claim may be imposed on both partners provided that in aggregate the penalty does not exceed £3,000. In other words, they cannot between them be required to find more than £3,000. But by statute if one of them was not, and could not reasonably have been expected to be, aware of the default by the other, that one is not liable to a penalty.

Interest

Under the tax credit regime interest can only be charged in two circumstances.

• HMRC can at their discretion charge interest on overpayments, but only if fraud or neglect are involved; and
• Interest is chargeable on overdue penalties, but HMRC has powers to mitigate.

In practice overpaid tax credit, any appropriate penalty, and interest, are contained in negotiated settlements (see examinations).

Other useful information on this site