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Child benefit tax ruling sparks widespread concern

Hundreds of high earners caught out by a controversial child benefit tax have sought advice from lawyers after HM Revenue & Customs lost a key case on how the charge is levied.

HMRC lost a case last month at the Upper Tribunal, an appeals panel, which could entitle tens of thousands of middle- and high-earning families to reclaim money paid under the so-called high-income child benefit charge (HICBC).

James Austen, partner and head of tax disputes at Collyer Bristow, the law firm which brought the case, said he had been “deluged by hundreds of emails and calls from people”. Many of them had fallen foul of the HICBC and wanted to know if they would be able to reclaim money paid to HMRC. Some had paid bills of about £10,000.

“People are so angry about it,” Austen said. “I’ve been in tax a long time and I’ve never encountered a reaction like this. It speaks to how much the HICBC is seen to be so unjust.”

The charge, which has been in place since 2013, limits the amount of child benefit if an individual or their partner earns more than £50,000 yearly. Affected people must declare the charge on their annual tax return or register to file a return if they do not normally do so.

However, the complicated tax has caught out many people who do not realise they have to pay, including, Jason Wilkes, and his wife Samantha Wilkes, who fought HMRC over the issue and won this month.

While it was Mrs Wilkes who claimed child benefit, it was Mr Wilkes who became liable to the HICBC for the tax years 2014-17. As he was unaware of his obligations, he did not report the charge. In late 2018 HMRC wrote to him to inform him it suspected he was liable for the HICBC. It then sought to charge Mr Wilkes more than £4,000 for three earlier tax years to 2016-17 using a power the tax office has known as a “discovery assessment”.

The Wilkes successfully argued that HMRC did not have the right to assess the child benefit charge for previous tax years using a discovery assessment as the power can only be used for making assessments about “income”. The HICBC is officially a freestanding “charge”, rather than income.

Mrs Wilkes, a part-time piano teacher with no legal training, developed the argument and successfully represented her husband at the First-Tier Tax Tribunal in 2020. HMRC appealed the case to the Upper Tribunal, where Mr Wilkes’ case was made by a legal team acting pro bono.

“This ruling has massive implications for taxpayers who have paid HICBC,” said Guy Sterling, a tax partner with Moore Kingston Smith. “As an admin shortcut, HMRC chose to issue a ‘discovery assessment’ to collect the HICBC. The tribunal decision means the law does not allow for the discovery rules to be used in this way — and the assessments are cancelled. If other taxpayers have paid the HICBC under a discovery assessment, they should be able to ask HMRC to repay it.”

Nevertheless, HMRC could use different assessment powers to make good some of the incorrectly assessed charges, Austen said. But these were subject to strict time limits.

If HMRC chose not to appeal the case and did not proactively contact taxpayers, his firm would consider bringing a case akin to a group action, with multiple people in a similar position, Austen added.

Data released under a Freedom of Information request in May revealed hundreds of thousands of people have not complied with the HICBC. A total of 354,000 people paid the charge in 2018-19.

However, HMRC checked the HICBC position of 61,881 people who had not registered for self-assessment in 2019-20 and a further 63,713 who had given an incorrect HICBC amount on their tax return. Overall, 96 per cent of those contacted agreed tax was owed, HMRC statistics showed. Meanwhile, between 2012-13 and 2018-19, 168,838 people were given penalties related to the HICBC.

“Those 160,000 [odd] people were presumably law-abiding taxpayers, typically in the PAYE system, who simply didn’t know they had to report and pay the charge and that’s why people are angry,” Austen said.

It is not known how many of those who have fallen foul of the HICBC had been sent discovery assessments and therefore might be able to appeal under the Wilkes case.

Dawn Register, head of tax dispute resolution at BDO, an accountancy firm, said she had had examples of clients who had been assessed for HICBC using other methods, rather than discovery assessments.

HMRC said it was considering the Upper Tribunal’s decision. “All of the taxpayers who have been assessed are still liable to the HICBC, and nothing in the tribunal’s judgement calls that into question.”

It added: “It is for the taxpayer to notify HMRC when they are liable to HICBC, and we will continue to contact customers where we can to inform them they may be liable to pay HICBC to help them get their tax affairs right.”

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