Tax credits: child disability element fiasco

Issue 256 (February 2017)

Martin Williams discusses securing child disability elements for the 28,000 families who lost out due to the failure of the DWP to notify HMRC about awards of disability living allowance (DLA).

Introduction

Between November 2011 and July 2014, the claim form for DLA for children did not have a tick box to indicate that the child’s parents were in receipt of tax credits. For 28,000 families, it appears that the DWP procedure for notifying the Tax Credit Office (TCO) that DLA had been awarded to a child in respectof whom tax credits were being claimed did not operate. If such a family did not notify the TCO itself about the DLA award, then the disabled child element and, in some cases, the severely disabled child element were not added to the award.

In the Autumn Statement, the Chancellor set aside £100 million to pay these elements from April 2016 and the families affected are currently being sent notifications that the elements have been added from the start of the 2016/17 tax year. However, the TCO has refused to consider making awards of the elements from earlier years (ie, when they should have been added had the DWP error not occurred): stating that it does not have the legal power to do so.

The question for these families and their advisers is whether more arrears can be obtained?

Tax year 2015/16

In cases where the DLA was awarded prior to April 2016, the decision finalising entitlement for the tax year 2015/16 (a section 18 decision – see below) was wrong as the award should have included the disability element(s). These decisions can be challenged now by way of a late application for mandatory reconsideration.

In cases where the DLA was awarded for the first time in the previous tax year, this may not be possible. This is because regulation 20 of the Tax Credits (Claims and Notifications) Regulations 2002 No.2014 provides that where there is a change of circumstances within a tax year that increases the maximum rate of tax credits and this has not been notified to the TCO then the award cannot be increased in that year.

Official error?

For tax years before 2015/16, the only way to change decisions, to the advantage of claimants, is via an ‘official error’ revision. But there are difficulties. The Tax Credit (Official Error) Regulations 2003 (No.692 set out when a decision can be revised for official error.

  • ‘Official error’ is defined in regulation 1 to include an error made by the DWP, although there is a condition that the claimant must not have contributed to that error.
  • Regulation 3(1) gives the power to revise initial decisions on new claims and renewal claims (section 14 Tax Credits Act 2002 (‘TCA’) decisions), as well as to final end of year decisions (section18 TCA decisions), that are ‘incorrect by reason of official error’.

Clearly, the failure of the DWP to notify the TCO about a child’s award of DLA is an official error, and it is also clear that the claimant cannot have contributed to this failure by the DWP. However, the difficulty concerns whether the resultant decisions for previous years were ‘incorrect by reason’ of that error.

The difficulty comes from the structure of decision-making in tax credit cases.

  • An initial award is made under section 14 TCA when a claim is received, or a renewal claim is made (or treated as made).
  • At the end of a tax year, the claimant is sent a final notice (a section 17 notice) which sets out what has been awarded. The notice asks the claimant to check whether it is correct and inform the TCO about any changes of circumstances or inaccuracies.
  • Once a claimant has replied, or the time given for doing so has passed, a decision is made finalising the award (a section 18 decision). The section 18 decision replaces the previous preliminary awarding decision which is no longer of any effect.

During the year in which entitlement to DLA is first awarded, then assuming a tax credit award was already in place, the section 14 decision awarding that was not wrong on the basis of official error (as the DLA award commenced after the tax credits started). However, the information on the section 17 notice at the end of the year would have been wrong (as it should have stated a child has a disability) although, absent claimant notification of a change of circumstances, the award should still perhaps not have included the element. For subsequent years, both the provisional section 14 decision and the section 18 decision would be wrong.

Upper Tribunal cases

The Upper Tribunal has held that, in such situations, the section 18 decisions cannot be overturned because of official error. The cases hold that the decisions are not wrong because of the official error but because the claimants failed to comply with their duty to notify the TCO that the section 17 notice was wrong. The most recent case is AM v HMRC (TC) [2015] UKUT 345 (AAC) which largely follows JP v HMRC (TC) [2013] 519 (AAC).

There is little substantial reasoning on this particular point in either decision.

  • JP adopts the approach of R (Sier) v Cambridge CC HBRB [2001] EWCA Civ 1523 (about the test to see whether an official error caused an overpayment to resist recovery in HB cases) and holds that, where the substantial cause of the incorrect amount being paid is the claimant’s failure, the overpayment was not made in consequence of the official error.
  • AM also refers to Sier but adds that this approach should apply as the tax credit scheme places emphasis on claimants notifying correct information.

Upper Tribunal errors?

Arguably, the approach in these decisions is wrong as they have misunderstood Sier. That cases makes clear one needs to look at the legislative scheme in considering what, as a matter of common sense, caused the wrong payment. Contrary to AM, it could be argued that in applying Sier the common sense cause of the underpayment was the official error, and consequently HMRC is not entitled to rely on that mistake to go on insisting that this wrong amount cannot be changed.

What can advisers do?

Advisers can assist affected claimants to:

  • apply for late mandatory reconsiderations of the section 18 TCA decision for 2015/16;
  • apply for official error revisions of all previous section 18 decisions awarding them tax credits without the appropriate element;
  • challenge any refusal of revision at appeal on the grounds that AM and JP are wrongly decided.

CPAG is in the early stages of bringing a case against TCOs approach in these cases.


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