Consultation outcome

Tax credits: SSAC's questions to DWP and HMRC following its meeting on 20 June 2018, and responses

Updated 5 November 2018

Deprivation of capital

Question 1

The one year grace period for tax credit claimants with capital in excess of £16,000 raises the spectre of the rules about deprivation of capital. On migration would claimants in this position be advised of the capital rules? And would that include the deprivation rule? Ironically, by advising claimants about the rule, the department would be increasing the prospects of a claimant falling foul of it. What is the department’s assessment of this issue?

Response to question 1

We will be telling people with more than £16,000 capital that their Universal Credit (UC) will terminate after 12 months if their capital remains above that level. The department is considering about how best claimants who will manage migrate can be made aware of the deprivation of capital rules.

But whenever there is a reduction in any UC claimant’s capital it is right that that should be considered under the UC deprivation of capital provisions, which would be applied where appropriate.

Complex needs or vulnerability

Question 2

The process and the guidance whereby ‘agents will check for evidence of complex needs or vulnerability’ before an existing award is stopped raises some questions. This would look to be particularly difficult in tax credit cases where there is unlikely to be much personal information which could alert an agent to the fact that there might be an issue.

Response to question 2

The department recognises that this will not always be possible prior to the sending of a migration notification. But we will check the information held across the existing benefit systems and, where such a case is identified, act appropriately. The department is also looking to work with stakeholder groups and others to help identify potentially vulnerable claimants and support them on to UC.

The communications that will be sent to claimants on managed migration will, from the start, make it clear that claimants can identify to us any problems they foresee with them making their claim to UC when they will be provided with the support they need.

The draft regulations are specifically drafted in such a way to allow us to extend or withdraw a deadline date if the claimant, or a representative, advises us of any issues that would mean it would not be possible to make a claim by the deadline given.

Checks and adjustments

Question 3

How will tax credit calculations be checked and adjusted?

Response to question 3

The draft regulations provide for a ‘representative figure’ for the amount of tax credit entitlement to be used in the consideration of the amount of Transitional Protection that might be applicable. This representative figure will be representative of the daily rate of the tax credit award, as determined by HM Revenue and Customs (HMRC), at the point of the managed migration, i.e., a snapshot of entitlement based on the circumstances on that day. It will be converted to a monthly figure to reflect UC’s assessment period by multiplying it by 365 and dividing it by 12.

The draft regulations also permit the Secretary of State to revise or supersede a decision in relation to an award of UC where the information that was used to calculate transitional protection, was inaccurate or incomplete because of misrepresentation, a failure to report information or official error, or where there was an application for a revision or supersession or an appeal in relation to an existing benefit.

Tax credit debt

Question 4

How many people are in tax credit debt and how will this be managed?

Response to question 4

There are no figures published on this.

Claim deadlines

Question 5

Regulation 45 allows the claimant to ask for the deadline day for making a new UC claim to be extended if they have a good reason for doing so. Can financial reasons constitute a ‘good reason’? Take the following example – a person may have appealed a Personal Independence Payment (PIP) decision which, if successful result in the backdating of disability elements in Working Tax Credit (WTC) or Child Tax Credit (CTC). Under the current tax credit rules, as long as a person informs HMRC within one month of the appeal decision, the element will be backdated to when PIP started (as long as other qualifying conditions are met). So, if someone had a deadline date of 1 October and their tribunal hearing is 20 October, they would potentially gain a significant increase of WTC (and therefore transitional protection) if they waited. What advice would be given to claimants at this point? Would the Department for Work and Pensions (DWP) have the records of people in this situation so that they would defer sending the notification?

Response to question 5

Our current thinking is that those claimants who have appealed the outcome of a mandatory reconsideration will not be deferred from the managed migration process and will therefore be invited to migrate to UC.

The approach will mirror the principles for how those naturally migrating to UC are treated at the moment where they have a successful outstanding appeal but with the addition of a re-assessment of transitional protection to see if it is now payable or whether it needs to increase.

For information we’ve also answered the above question more generally than just focusing on the interaction between PIP and tax credits to give an overview of the process for all existing benefits.

As a result if a claimant is awaiting the outcome of an appeal on an existing benefit and they have migrated to UC the following will occur if the appeal is successful:

• the outcome of appeal will be applied to the existing benefits and arrears in these benefits paid up until the day before the day they made their UC claim
• the total legacy amount will then need to be re-calculated (which may include a revised representative figure for tax credits) and compared to the monthly UC indicative amount to see whether transitional protection is now appropriate or if transitional protection already in payment needs to increase

If transitional protection is awarded or does increase, arrears will need to be paid from the beginning of the UC award up until:

• the assessment period the UC claimant is currently in, or
• the assessment period where a change in circumstances occurred that caused transitional protection to end

If the result of the appeal affects other aspects of the UC award i.e. other than the transitional element these will also need to increase and be paid from the beginning of the UC claim to:

• the assessment period the UC claimant is currently in, or
• the assessment period where a change of circumstances meant the outcome of the appeal could no longer be applied.

Stopping existing benefits

Question 6

Para 42 of the explanatory notes (page 13) says that before existing benefits are stopped, agents will check for evidence of complex needs or vulnerability to safeguard these claimants. Can officials confirm that all terminations will therefore be manual? Also, how long before the deadline do they expect to start those checks and for tax credits what information will they use?

Response to question 6

Processes are currently being developed but the assumption is that we will look to identify any complex needs the claimant might have throughout the managed migration journey and treat them accordingly, including safeguarding these claimants in advance of termination of legacy benefits.

Needs Enhanced Service (NES) team

Question 7

What role, if any, does HMRC envisage the Needs Enhanced Service (NES) team will have in supporting migration?

Response to question 7

DWP is responsible for the development and delivery of UC so HMRC will signpost claimants to the help they provide. However, DWP are looking at the role of the NES team in HMRC to see how they can share their learning for managed migration.

Unearned income

Question 8

Is unearned income also taken into account in calculating the indicative UC figure? If so, where will that income information be available for claimants?

Response to question 8

As the explanatory memorandum states:

The UC indicative amount will represent the amount of a UC award if that was calculated by reference to the claimant’s or joint claimants’ circumstances on their last day of entitlement to existing benefits (the day before their claim to UC starts).

As a result unearned income will need to be used to calculate the indicative UC figure. We are currently investigating what sources of information can be gathered from existing benefits and used in this calculation however, where information is not available from these sources we have provision to allow us to gather the information required from elsewhere, for example information gathered as part of the UC claim process.

Social Security Advisory Committee (SSAC) example

Iris works part time (20 hours) due to a health condition. She has a daughter aged 13 who lives with her. She was in receipt of PIP from 6 April 2018. DWP review her PIP and decide she is no longer entitled and her last day of PIP is 31 July 2018. Iris appeals the PIP decision. HMRC remove the disability element of WTC from 1 August 2018^{[footnote 1]}. Her 2017/18 income was £10,400.

In September 2018, Iris is invited to claim UC under managed migration rules. She makes a claim for UC on 1 October 2018. Her WTC and CTC is stopped from 30 September 2018. Prior to claiming UC, Iris’ latest tax credit award (issued after the PIP change) is calculated as follows (based on how the regulations are understood to work):

Relevant period 1: 6 April to 31 July 2018 – 117 days

WTC calculation under the Tax Credits (Income Thresholds and Determination of Rates) Regulations 2002 (SI 2008/2002)

Step 1: Find the daily rate of the applicable elements

• WTC basic element £5.37
• WTC disability element £8.47

Step 2: Find the maximum rate for the relevant period for each element other than childcare element

• £5.37 x 117 = £628.29
• £8.47 x 117 = £990.99

Total = £1,619.28

Step 3: Find the income for the relevant period

£10,400/365 x 117 = £3,333.69 (rounded down to nearest penny)

Step 4: Find the threshold for the relevant period

£6,420/365 x 117 = £2,057.92 (rounded up to nearest penny)

Step 5: Find the amount of the reduction

£3,333.69 - £2,057.92 = £1,275.77 excess x 41% = £523.07

Step 6 : Reduce the elements of tax credits

Maximum amount = £1,619.28 less £523.07 = £1,096.21

Steps 7 to 11 not applicable as no childcare.

Step 12: finding the rate for the relevant period

Rate of WTC for relevant period 1 = £1,096.21

CTC calculation under SI 2008/2002

Step 1: Find the daily rates of each element

• child element £7.62
• family element £1.50

Step 2: Maximum rate of each element for the relevant period

• £7.62 x 117 = £891.54
• £1.50 x 117 = £175.50

Total = £1,067.04

Step 3: Find the income for the relevant period

£10,400/365 x 117 = £3,333.69 (rounded down to nearest penny)

Step 4: Find the threshold for the relevant period

£16,105/365 x 117 = £5,162.43 (rounded up to nearest penny)

Step 5: Finding amount of reduction

No reduction as income is less than the threshold in relevant period.

Step 8: Finding the rate for the relevant period

Rate of CTC for relevant period 1 = £1,067.04

Relevant period 2: 1 August to 5 April 2018 – 248 days

WTC calculation under SI 2008/2002

Step 1: Find the daily rate of the applicable elements

WTC basic element £5.37

Step 2: Find the maximum rate for the relevant period for each element other than childcare element

£5.37 x 248 = £1,331.76

Total: £1,331.76

Step 3: Find the income for the relevant period

£10,400/365 x 248 = £7,066.30 (rounded down to nearest penny)

Step 4: Find the threshold for the relevant period

£6,420/365 x 248 = £4,362.09 (rounded up to nearest penny)

Step 5: Find the amount of the reduction

£7,066.30 - £4,362.09 = £2,704.21 excess x 41% = £1,108.72

Step 6: Reduce the elements of tax credits

Maximum amount = £1,331.76 less £1,108.72 = £233.04

Steps 7 to 11 not applicable as no childcare.

Step 12: finding the rate for the relevant period

Rate of WTC for relevant period = £233.04

CTC calculation under SI 2008/2002

Step 1: Find the daily rates of each element

• child element £7.62
• family element £1.50

Step 2: Maximum rate of each element for the relevant period

• £7.62 x 248 = £1,889.76
• £1.50 x 248 = £372.00

Total = £2,261.76

Step 3: Find the income for the relevant period

£10,400/365 x 248 = £7,066.30 (rounded down to nearest penny)

Step 4: Find the threshold for the relevant period

£16,105/365 x 248 = £10,942.58 (rounded up to nearest penny)

Step 5: Finding amount of reduction

No reduction as income is less than the threshold in relevant period.

Step 8: Finding the rate for the relevant period

Rate of CTC for relevant period 2 = £2,261.76

Total tax credit award for 2018/19 before claim for UC made:

WTC relevant period 1 = £1,096.21

WTC relevant period 2 = £233.04

CTC relevant period 1 = £1,067.04

CTC relevant period 2 = £2,261.76

Total: £4,658.05

Question 9

What will be the daily rate used in this case for the purposes of calculating the total legacy amount under Reg 53(2)(a)?

Response to question 9

£10.06 which is the daily rate of award for period 2. (£233.04 (WTC) + £2,261.76 (CTC) = £2494.80 divided by 248 = £10.059 (rounded up to £10.06)).

Period 1 is not relevant to the representative figure but will be considered when the ‘in year finalisation’ decision on tax credits entitlement for the part-year is made.

HMRC is providing a snapshot of circumstances on the information it holds on the day before the UC claim is made. HMRC is not undertaking a new or revised calculation as a result of the UC claim.

Question 10

Since April, Iris has been working 29 hours a week (9 hours overtime at a higher hourly rate) covering for a colleague on maternity leave. This overtime lasted 6 months. Iris expects her 2018/19 income to be £13,400. If Iris reported her estimated income for 2018/19 as 13,400 in April 2018 – how would that change the daily rate calculated under Reg 53(2)(a)? If Iris didn’t report the rise in income^{[footnote 2]} until her claim is finalised under in-year finalisation^{[footnote 3]} – would that change the daily rate calculated under Reg 53(2)(a) when calculating any potential transitional protection?

Response to question 10

No.

If Iris reports a rise in income in advance of the UC claim the representative figure will be lower (reflective of the lower tax credits award following the reported change) so the amount of transitional protection is also likely to be lower as a consequence if all other circumstances remain the same.

Conversely, if Iris does not report her change in income the representative figure will be based on the previous year’s earnings (£10,400) and although transitional protection may be higher, the part year entitlement decision may result in an overpayment of tax credits following in year finalisation. Although not a statutory requirement to report changes in income throughout the year, claimants are encouraged to do so to avoid the risk of overpayments at the end of the year or part year if a UC claim is made.

Question 11

What income figure will be used under Reg 54 for earned income for Iris?

Response to question 11

In line with the snapshot approach for the representative figure above, HMRC will send the annual amount of any employment or trading income held on the day before the UC claim was made. If Iris does not report her income change the figure will be £10,400. If she does report the change of income the figure used will be £13,400.

Question 12

Again, would this differ based on whether she reported her estimated 18/19 income in April or at the in-year finalisation stage?

Response to question 12

The finalised figure may only alter the amount of transitional protection if any of the circumstances in draft regulation 62 are satisfied.

1. The assumption is she qualifies only under Case C disability element rules. ↩

2. There is no requirement to report a change of circumstances. ↩

3. Iris is likely to have an overpayment due to the way in year finalisation rules differ from normal income rules because it will be assumed that her overtime continues for the whole year making her income just over £16,000 rather than the £13,400. ↩