Jennie Hammond, tax and benefits adviser at Advice NI, provides an update on HMRC investigations on the legitimacy of single tax credit claims, often based on data supplied by credit reference agencies.
One of the key issues that Advice NI has dealt with over the past 12 months is the tax credit compliance issue of ‘undisclosed partners’ – where HMRC investigates the legitimacy of a single claim, based on other data indicating that another adult is living at the address.
A social policy report, Tax Credits: Undisclosed Partner Interventions, which highlights some of the problems being experienced by claimants, was produced by Advice NI and launched at Stormont Parliament Buildings – the home of the Northern Ireland Assembly – on 11 March 2013. The launch was well attended by Members of the Legislative Assembly, advisers and other key stakeholders.1">www.adviceni.net/Publications The report outlines some of the problems that claimants and advice workers have experienced, including communication difficulties with HMRC compliance officers.
Single claims v joint claims
The tax credit system requires a claimant to make a joint claim to tax credits if s/he is married, a civil partner, or living with a partner. If this does not apply, then – and only then – should the claimant make a single claim for tax credits.
Claiming incorrectly – in particular, claiming as a single person rather than as a couple – is a common cause of tax credit problems and overpayments. This is because tax credits are a means-tested benefit and a single claim will only takes the claimant’s income into account and not that of her/his partner. So if the ‘undisclosed’ partner has income, an overpayment of tax credits is likely. Furthermore, if HMRC decides that an incorrect claim was made, the whole award will usually be considered an overpayment – even where there would have been entitlement as a couple.
In recognition of the fact that many such overpayments were the result of an innocent error by claimant, and the fact that in many cases there is in fact no real overpayment (because the partner has no income), HMRC introduced (after extensive lobbying by charities including CPAG) a provision to ‘offset’ any overpayment by the claimants ‘notional entitlement’. In essence, how much they would have been paid anyway had they correctly declared their circumstances.2
However, this pragmatic approach is now seriously undermined. In October 2010, HMRC and DWP released a joint error and fraud strategy. As a result, HMRC increased its compliance activity across the tax credits system and introduced the use of data from credit reference agencies to inform compliance decisions. Through this process, single claims were identified where there was an indication that there may be a second adult living with the claimant – an ‘undisclosed partner’.
In cases of fraud, such information is very useful to HMRC and enables it to investigate and terminate fraudulent claims and recoup any monies claimed fraudulently. However, what has been identified within the Advice NI report is that the credit reference agency data cannot always be relied upon as evidence that a partner is living at an address.
Burden of proof
Often, couples who have separated may not fully sever financial links for some time after their separation. This can be for many genuine reasons, including:
- the economy and in particular the housing market;
- poor mental health of one or both of the former couple;
- an attempt to keep an amicable arrangement for the sake of the children;
- reluctance or refusal by the partner who has left the family home to remove her/his name from bills and accounts.
In the report, Advice NI raises concerns that tax credit awards are being unfairly terminated. HMRC guidance manual CCM3025 states:
‘Post award HMRC have already accepted the customer’s information and made a decision on the claim or entitlement for the year. If we now doubt that information, the burden of proof lies with HMRC to satisfy that doubt... We must be satisfied that our doubts are based on good reason.’
Despite this guidance, advisers’ experiences are that some compliance officers appear to be placing the burden of proof onto the claimant, expecting the claimant to be able to prove her/his single status.
Claimants are being asked to supply their former partner’s address, and in many cases to provide evidence such as the former partner’s bank statements, insurance documents or utility bills. This is can be very problematic in many cases, for example, where an amicable relationship does not exist between the former partners or, of more concern, where there have been issues of domestic violence within the relationship.
In addition, claimants are not normally informed about what information is held by HMRC, other than that there are ‘financial links’ at the address. In practice, this means that claimants are not being afforded the opportunity to provide an explanation for any existing links. The Advice NI report recommends that in the interest of fairness, details of the evidence held and the corresponding time period should be disclosed in full to the claimant.
Furthermore, compliance officers often refer to the fact that a former partner remains listed on the electoral register, despite the fact that there is no legal requirement for a person to remove themselves from the register upon leaving an address. Indeed, in Northern Ireland annual canvasses are no longer carried out, making the use of this piece of evidence in Northern Ireland cases even more unfair.
Child maintenance paid by a non-resident parent has no effect on tax credit entitlement. However, where a non-resident parent pays towards household bills and expenses in lieu of direct child maintenance payments, this is likely to result in ‘financial links’ being identified by credit reference agencies and a claim being selected for investigation. It can be extremely difficult for the parent with care to prove that this is the reason that the non-resident parent is contributing towards household bills, unless there is a written agreement in place.
Termination of claims
Advice NI has identified claimants whose awards have been terminated as a result of this type of compliance activity. This has resulted in claimants experiencing severe financial hardship and emotional distress. It can also have a direct effect on the claimants’ children in respect of childcare costs no longer being paid and the claimants’ resulting inability to pay for childcare. In some cases, claimants have been left with no other option but to give up work – an outcome which is perverse as the claimant then receives income support as a lone parent.
In addition, housing benefit awards may also be terminated as a direct result of tax credit awards ending and claimants can find they also lose any entitlement to free school meals and other related benefits.
If the claimant subsequently submits a new single claim for tax credits, the claim will likely be blocked by a compliance marker on the system and then be subject to another compliance investigation which will usually reach the same decision as the previous investigation.
Often in such cases, claimants feel that they must submit a joint claim in order to access any tax credit payments. However, significant difficulties may arise if they do this. Firstly, they do not consider themselves to be part of a couple. The former partner would have to supply her/his details and consent for the joint claim to go ahead. It seems inappropriate and inadvisable to proceed with a joint claim where the claimants are not part of a couple. However, for many claimants who find themselves in this position and are experiencing financial hardship, this is the quickest, easiest and in some cases the only prospect of payment. Secondly, if they did submit a joint claim and then successfully appealed the original decision against their single claim, the amount that was claimed jointly would then become an overpayment.
Claimants whose awards have been terminated and who are unable to proceed with a new claim for the reasons above are without payment while they appeal the decision to terminate their single claim. Typically, it takes several months for a decision to be reached on an appeal. Claimants may therefore find themselves with little or no income for an extended period of time.
In the report, Advice NI raised concerns that vulnerable groups of people (lone parents and/or migrants) are being targeted through this type of compliance activity. These groups of claimants often rely heavily on tax credits to supplement their income and the suspension or termination of their awards can have a huge effect on their finances and their ability to provide for their families. Moreover, due to recent and forthcoming changes to housing benefit and wider welfare reform, more people may be forced into shared accommodation, thus widening the scope of those being selected for this type of compliance activity.
What advisers can do
Advisers faced with clients affected by this issue need to present as much factual evidence, including claimant written evidence, to contradict HMRC’s decision. Presenting this information to HMRC as quickly as possible after the decision (or indeed during the initial investigation) is the quickest way of ensuring that tax credits remain or are put back into payment.
It appears clear that HMRC makes many decisions relying on the financial information obtained from credit reference agencies, which it expects claimants to disprove – usually without even telling them what the evidence is. Advisers can and should remind HMRC of where its own guidance says the burned of proof lies.
More importantly advisers can stress that HMRC needs to consider what evidence it has in the light of the correct legal test. The factors that determine whether or not a couple are co-habiting are well established in caselaw:3
- whether they occupy the same household;
- the existence or not of a sexual relationship;
- the financial arrangements;
- the stability of any relationship;
- the existence of children.
Often the documentary evidence of an ex-partner’s financial links to the claimant are correct, it is the interpretation of the evidence, and its importance, that is in issue. What the law is clear about is that the financial arrangements between two people are only one factor to be considered, and no single factor on its own can be conclusive as to the nature of the relationship. For more details see pages 210-15 of CPAG’s Welfare Benefits and Tax Credits Handbook 2013-14.
Advice NI report recommendations
The Advice NI report outlined some of the problems with HMRC’s reliance on credit reference agency data, and the issues identified with compliance investigations into single claims and undisclosed partners.
The report makes a number of recommendations to HMRC, and HMRC’s responses are also included in the report. The recommendations include:
- HMRC should make explicit in its guidance the practical steps a claimant should take after relationship breakdown to lessen the likelihood of being identified unnecessarily as a ‘high risk’ case.
- Compliance procedures and attitudes should be refocused to reflect the fact that for Section 16 investigations the burden of proof lies firmly with HMRC to prove that the claim is incorrect. The evidence provided by credit reference agencies should not be considered in isolation.
- HMRC must recognise the distress that such investigations can cause to claimants, and compliance officers should not issue letters unless there is capacity to see the investigation through within a reasonable time period.
Promoting better relationships
As a direct result of the report, Advice NI was invited to meet with HMRC officials in Liverpool to discuss the issues raised.
The visit provided opportunities to gain detailed knowledge of the processes used by HMRC in administering this part of its error and fraud strategy. This included an understanding of how and why HMRC gathers certain types of information and evidence; how a case may be built in respect of a claimant’s circumstances and how decision making is informed. The outcome of the visit is that HMRC has indicated that it will now seek to work more closely with advice agencies for the continuous improvement and development of its services. We will continue to engage and monitor progress.
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