HICBC reaches its tenth anniversary
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
25 January 2023
As the High Income Child Benefit Charge reaches its tenth anniversary, Chris Campbell reviews the operation of the charge and some recent tax cases
What is the High Income Child Benefit Charge?
In its 2010 spending review, as part of tackling the fiscal deficit, the then coalition government announced that it would restrict Child Benefit received by higher earners. It decided to achieve this via the tax system, and introduced the High Income Child Benefit Charge (HICBC) to take effect from 7 January 2013 as a means of restricting Child Benefit for higher income households.
Section 681B ITEPA 2003 provides for HICBC to apply where a taxpayer has an adjusted net income of more than £50,000 and either they or their partner receive Child Benefit for at least a week in the tax year, with the charge applying to the partner with the highest adjusted net income. HICBC applies a percentage charge based on the adjusted net income above £50,000 of the higher earning partner, with the Child Benefit being withdrawn in full where adjusted net income reaches £60,000.
Section 681G ITEPA 2003 defines “partner” for this purpose as a person who the taxpayer is married to or in a civil partnership with (unless separated under a court order or separated in circumstances likely to be permanent), or someone who lives with the taxpayer as if they were a married couple or civil partners. When a HICBC liability has not already arisen, the scope of HICBC can also be extended by Section 681D ITEPA 2003 for circumstances where the taxpayer has a child living with them but someone else receives the Child Benefit for that child.
Section 681F gives the Treasury the power to alter the £50,000 threshold, however this has never been used to date. As taxpayer earnings have increased over time but the £50,000 threshold has not, this means more taxpayers will be brought into HICBC. Although the Scottish higher rate threshold has been lower than £50,000 for some time, the fact that the higher rate threshold in the rest of the UK is now £50,270 means that there will be taxpayers who are basic rate taxpayers but will still find themselves exposed to HICBC. Given the freezing of the tax allowances and thresholds announced in the 2022 Autumn Statement, the HICBC threshold seems very unlikely to change in the foreseeable future.
What practical challenges can arise?
An important component of ICAS Tax Policy positions is the need for there to be greater simplification in the operation of the tax system in the UK. HICBC in its very nature adds complications and in an article in November 2019, ICAS noted that the Office of Tax Simplification felt there was a need to simplify the arrangements surrounding Child Benefit and HICBC and improve the related guidance.
From the outset of HICBC, there has been a perceived unfairness in that a household where only one partner is earning (albeit with adjusted net income above £50,000) is subject to HICBC, but another household where both partners earn just under £50,000 can receive Child Benefit in full despite a total income of almost double the HICBC threshold. The government was fully aware of this when HICBC was introduced, but was keen to collect the charge via the Income Tax system rather than looking at the household position (as it has done for Universal Credit and predecessor tax credit systems).
Changes in household circumstances can have an impact on the exposure to HICBC and, in some cases, will also impact on which partner in a household is liable to pay HICBC (if both partners have adjusted net income over £50,000). Alongside this, a taxpayer with adjusted net income above £50,000 could find themselves liable for HICBC when they move in with a partner who is receiving Child Benefit in respect of children from a previous relationship. Whilst HICBC has been part of the tax system for ten years, many taxpayers may not realise that HICBC still applies even where it is not their children (but their partner’s children) for whom the Child Benefit is being claimed. Conversely, where a relationship has broken down, there may be instances where a taxpayer is unable to obtain details of the Child Benefit received by their former partner and it may be possible to obtain limited information by writing to HMRC.
In higher income households, it may be preferable to not receive Child Benefit rather than pay back HICBC and this can be achieved by electing not to receive Child Benefit. There may however be households who instead do not claim Child Benefit (a small but important difference) and this may result in the Child Benefit claimant not receiving valuable National Insurance credits for entitlement to state benefits. This would be important if the Child Benefit claimant does not already receive such credits from their employment or self employment.
Not claiming Child Benefit could potentially make it difficult for the child, who may not necessarily receive their National Insurance number automatically when they reach the age of 16. Given that HICBC has reached its tenth anniversary, this is an issue that HMRC will need to resolve in the next few years to avoid unintended consequences down the line.
ICAS has ongoing dialogue with HMRC on a range of matters and has recently provided feedback to HMRC about the current operation of HICBC, both in terms of raising awareness (given that the £50,000 threshold remaining unchanged will increase the number of taxpayers affected) and to make it easier for taxpayers to navigate the system when there are changes to family circumstances.
What issues have arisen in tax cases involving HICBC?
ICAS published articles in November 2021 regarding the need to re-write the Taxes Management Act 1970 to reflect tax charges, such as HICBC.
More recently, the Jason Wilkes case (HMRC v Wilkes, CA [2022] EWCA Civ 1612) was heard in the Court of Appeal in December 2022. This concerned a taxpayer who did not realise he was liable to HICBC until he received a HMRC nudge letter and received discovery assessments from HMRC. In this case, the taxpayer was successful in both the First Tier tribunal and the Upper Tribunal. HMRC then appealed the decision.
The issues being considered in the appeal included whether “income which ought to be assessed to Income Tax” in Section 29(1)(a) TMA 1970 should be taken to read any amount liable to Income Tax. The Court of Appeal held that “income” could not be taken to read “amount”. Furthermore, it was held that HICBC was not an amount assessed to Income Tax but an additional Income Tax charge, a slight but important distinction.
In this case, HMRC was unsuccessful in its appeal, although the scope for future claims will be somewhat diminished by Section 97 Finance Act 2022. Section 29(1) TMA 1970 now reads “an amount of Income Tax or Capital Gains Tax ought to have been assessed but has not been assessed” for the 2021/22 tax year, for future years, and for earlier tax years where a discovery assessment is a ‘relevant protected assessment’.
Section 97 sets a date of 30 June 2021 for appeals to be submitted to HMRC to avoid being a ‘relevant protected assessment’, something that the case of Kensall v Revenue and Customs Commissioners ([2023] UKFTT 11 (TC)) considered. The Kensall case sought to rely on the Wilkes case, however whilst the tribunal considered a reasonable excuse applied in respect of penalties, it ruled that HMRC could indeed make a discovery assessment for the HICBC itself as the appeal was submitted after 30 June 2021.
Whilst it will be interesting to see future case law, the ability to rely upon the Wilkes case ruling will be limited by the change in Finance Act 2022.
Let us know your views
We welcome Members’ input to inform our work on consultations or other tax-related matters – email tax@icas.com to share your insights and feedback. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by Members.
