When Tax Credits were first introduced, there was some debate as to whether everyone should make a claim, even if their income was apparently too high for them to have any entitlement, on the basis that income was to be averaged over the (tax) year, so that a future fall in earnings might retrospectively reduce the weekly average. As claims can only be backdated for a maximum of three months, accessing the benefit for earlier weeks would depend on a protective claim having been made.
Hitherto, the general view has probably been that a protective claim is simply not worth the trouble. However, now that it is becoming more likely that earnings will fall sharply, perhaps the balance between the trouble of filling in the forms and the potential benefit needs to be reconsidered.
HMRC do not object to protective claims – to the contrary, they have posted a webpage positively encouraging the public to ‘Protect your right to Tax Credits by claiming early’ (www.hmrc.gov.uk/taxcredits/claiming-early.htm). Essentially, this recommends that anyone who thinks his income may fall, or who is waiting to hear whether he will qualify for disability benefits, should claim by 5 July in the tax year.
Because of the recession, it is quite likely that some people will find that their income falls sharply during the 2009/10 tax year. Also, some self-employed people may find that their taxable income is lower because of the availability of 100% first-year allowances for purchases of vans and equipment for their businesses. In some cases, they will find that they are, for the first time, entitled to claim Tax Credits.
There is a potential trap here, because of the interaction of two Tax Credit rules. The first is that income, for Tax Credit purposes, is averaged over the tax year (or, for self-employed people, is taken as being the income of the accounts year ending in the tax year). The second is that claims can only be backdated for a maximum of three months.
For example, suppose that an individual, who has not previously claimed Tax Credits, realises on 1 December that his income for 2009/10 is likely to be much lower than for 2008/09. If he submits a claim immediately, he will be entitled to Tax Credits for September onwards, but will lose the Credits he could have claimed for April to August.
If the same individual had submitted a protective claim, estimating a higher income, by 5 July 2009 (three months into the new tax year), he would in the first instance have been sent a ‘nil award’ notice. However, if his income falls, that award can be adjusted retrospectively, and he will be paid Tax Credits backdated to 6 April 2009.
We would therefore strongly advise any clients not already claiming Tax Credits carefully to consider whether they should make a protective claim. Further information on how to do this is posted on HM Revenue & Customs’ website at www.hmrc.gov.uk/taxcredits/claiming-early.htm.
Of course, many higher-income families with children will already have claimed Tax Credits for 2009/10, in order to obtain the basic £545 ‘family element’ payment (which replaced the old tax allowance). But it is probably not wise to assume that everyone entitled to the ‘family element’ will have claimed it, as some may have considered it was not worth filling in all the forms, or simply ‘never got around’ to doing so.
Another point to watch is that if an individual claims Child Tax Credit, his claim to both Child and Working Tax Credit will be backdated automatically. However if he claims only Working Tax Credit, his claim will not be backdated unless he specifically requests this. Backdating can be requested by telephoning the Tax Credit Helpline.
The above paragraph is based on the Minutes of the Tax Credits Consultation Group meeting of 4 December 2008 (www.hmrc.gov.uk/taxcredits/minutes041208.htm). It was further explained that the Helpline should ‘refer claims to the backdating team’, though it was noted that some callers had incorrectly been told they would have to write in. Presumably, following the Consultation Group meeting, Helpline staff have now been reminded of the correct procedure. HMRC are also considering ways of making backdating claims easier, perhaps by including a tick box on the standard Tax Credits claim form.
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