Tax credits and mandatory reconsideration

The court decision

In HMRC v Arrbab, the Court of Appeal has held that the requirement for a review of a tax credits decision before having the right to appeal to a tribunal (‘mandatory reconsideration’) is unlawful. It found that the amending regulation went beyond the power in the enabling legislation (‘ultra vires’).1 This judgment is specific to tax credits only and does not affect mandatory reconsideration for DWP benefits or child benefit. HMRC has confirmed it will not appeal further – it will implement this judgment and update its information and decision notices to comply with the law.2

The outcome

The mandatory reconsideration in tax credits is struck out. The outcome has implications for thousands of claimants in the remaining months that tax credits are with us. Tax credit claimants who have not already migrated to universal credit (UC) will soon receive a final decision for 2023/24, and an initial decision for 2024/25. When their tax credits end under managed migration, they will also receive an in-year final decision. Those who have already moved onto UC will have had final decisions on their tax credits entitlement within the past year. Each decision has a right of appeal, and there is no longer a legal requirement to first go through the review process.

Reviews

Reviews in tax credits still exist. The judgment does not directly change the review process for tax credits, which came into effect under amendments to the Tax Credits Act 2002 from 6 April 2014. Section 21A (review) and section 21B (late application for a review) require HMRC to carry out a review if it receives a written application for one within 30 days of the decision, or up to 13 months later if it is satisfied the extension of time is reasonable due to special circumstances.

This review process remains in place but is no longer mandatory. However, note that section 21C (late review: disability benefits) was introduced from 15 January 2021, requiring HMRC to carry out a review if it is notified of the award of a relevant disability benefit within one month. HMRC refers (or used to refer) to this process as ‘automatic mandatory reconsideration’. This process is unaffected and is still the first route to getting a decision changed following the award of a disability benefit.

The judgment in Arrbab only strikes out subsection (1A) of section 38, which read: ‘An appeal may not be brought by virtue of subsection (1) against a decision unless a review of the decision has been carried out under section 21A or section 21C and notice of the conclusion on the review has been given under section 21A(3) or 21C(6) (as the case may be).’

The effect of the removal of this sub-section is that claimants now have a choice if they disagree with a tax credits decision – they can request a review by HMRC under section 21, or they can appeal directly to the First-tier Tribunal under section 38.

Review or appeal?

In most cases, claimants may still wish to ask HMRC to review its decision, on Form WTC/AP, within one month of the decision, as this was intended to be a quicker, simpler and more informal process than appeal. At the time of writing, the WTC/AP form still refers to the requirement for ‘mandatory reconsideration’ and has not been updated to reflect the judgment. HMRC must carry out the review as soon a reasonably practical – its target for dealing with reviews is 42 working days. Following the outcome of the review, there is a right of appeal within one month, or up to 13 months later with good reason.

Alternatively, in some cases, claimants may wish to go straight to appeal to the First-tier Tribunal by submitting Form SSCS5 to HM Courts and Tribunals Service (HMCTS), usually within one month of the decision – a late appeal can be accepted within 13 months of the decision with good reason. The form and notes have recently been updated to state: ‘A mandatory reconsideration notice is not required for tax credit appeals.’ The direct appeal route might be advisable if a review would already be late. It is notoriously difficult to satisfy HMRC that there were special circumstances and that it is reasonable to grant the extension (hence why this case ended up before Court of Appeal judges, who commented: ‘It is highly unfortunate, and of real concern, that it took two tribunal decisions and the immediate prospect of a hearing in this court for the facts of Mr Arrbab’s case to be properly considered by HMRC.’). There may be more likelihood of success by asking the First-tier Tribunal to use its power to extend the one-month time limit to appeal, considering its overriding objective to deal with cases fairly and justly. Going straight to HMCTS may also be the best tactic where it is known that HMRC does not accept that the claimant has a right to challenge its decision, but caselaw has established that there is a right of appeal, such as against a refusal of good cause for a late annual declaration, or a refusal to revise an earlier decision on official error grounds.

The judgment opens up past decisions made within the last 13 months – so final decisions for 2022/23 (usually made April to July 2023) will currently be in scope. This includes where HMRC has previously refused to carry out a review because the request was late, as claimants will still be within the absolute time limit to appeal. The position for decisions made more than 13 months ago is more difficult, as they are outside the ‘absolute’ time limit for appeal. Claimants who were refused a request for a late review by HMRC may feel aggrieved that they were told that they had no right of appeal, and it is now too late do so. The ‘absolute’ 13-month time limit to appeal can only be extended in very exceptional circumstances, where this is necessary to protect the right to a fair hearing under human rights law, and is unlikely to apply unless the claimant did all that they could to appeal in time.3