Tax Credits: Renewals
Each tax credit claim lasts for a maximum of one tax year. A new claim must be made each year, however it is not necessary to fill in a new TC600 claim form each year.
HMRC will normally send a set of papers (normally between April and June each year), and so long as the information requested is given within the time limits requested, the legislation treats the claim as having being made for the new tax year in most cases. The information below about the renewals process has been provided by the Low Incomes Tax Reform Group. Use the links below to navigate this section.
- An outline of the process
- The renewals process
- The renewal packs
- Auto-renewals - current
- Auto-renewals - historic
- Reply required
- Income checks
- Provisional payments
- Missing the deadline
- Withdrawing from the system
- Renewals and Universal Credit
For the majority of claimants the process aims to do two things: to reconcile entitlement for the year just gone (the current year) with what has been paid; and to renew the tax credit claim for the coming year.
Although the process is often referred to as the ‘renewals process’, not everyone will want or need to renew their claim. Some people, for example where a joint claim ended in the tax year just ended, will need to finalise the old claim but will not be making a new claim. In this case they are not renewing merely finalising the old claim.
HMRC has produced a help-sheet about renewals aimed at advisers. It outlines the renewals process and some of the issues that advisers may come across. They also have information about the process on their website aimed at claimants.
The claim for the year just ended (current year) was based initially on the claimant’s circumstances for that year, and income for the year before (the previous year). One of the functions of the renewal process is to establish their income for the current year, and to review any changes of personal circumstances during it, so that their final entitlement for that year can be ascertained.
Having established their income for the current year, it is used, together with their latest set of personal circumstances, to set the initial award for the coming year.
So we have a three-year rolling programme. The initial claim for 2012/13 was based on circumstances current in 2012/13 and income for 2011/12. The renewal process for 2012/13 compares the actual income of 2012/13 with that for 2011/12 to fix the final entitlement for 2012/13, and uses the income figure for 2012/13 to fix the initial award for 2012/14.
The comparison works like this for finalising 2012/2013 claims (concentrating only on income and leaving aside changes in entitlement which are due to changes in circumstances):
- If 2012/13 income is less than 2011/12 income by £2,500 or less, the final award is based on 2011/12 income and there is likely to be no change in finalised award.
- If 2012/13 income is less than 2011/2012 income by more than £2,500, the final award will be based on 2012/2013 income plus £2,500. There is likely to be an underpayment.
- If 2012/13 income greater than 2011/12 income by £10,000 or less, the final award ,like the initial award, is based on 2011/12 income and there is likely to be no change in the finalised award. Thus an increase in income of £10,000 or less is disregarded (hence the £10,000 is commonly known as 'the disregard').
- If 2012/13 income is greater than 2011/12 income by more than £10,000 the final award is based on 2012/13 income less £10,000 and there is likely to be an overpayment.
So an initial tax credits award is made in the year of payment, then revised at the end of the year to produce in many cases an underpayment or overpayment.
It should be noted that in 2006/2007 and earlier years, the disregard for rises in income was only £2,500 instead of £25,000. See our ‘understanding the disregards’ section for a fuller analysis of the consequences of this change from £2,500 to £25,000. From 6 April 2011 the disregard decreased to £10,000 and further decreased to £5,000 from 6 April 2013.
The decrease from £10,000 to £5,000 did not impact on the renewals cycle which finalises 2012-2013 claims, but will have an impact when HMRC calculate claims for 2013-14 and come to finalise claims for the 2013-2014 tax year in the Summer of 2014.
Most claimants receive renewal packs which consist of:
- Form TC603R (annual review) plus, in many cases,
- Form TC603D (annual declaration)
Previously if the claimant was in receipt of the full CTC family element only, or if they had a nil award because their income was too high to recieve any payments, HMRC sent them a TC603R only. If their personal circumstances had not changed and their income was within a prescribed range so that their award would remain the same, nothing further needed to be done. These are what HMRC describe as auto-renewal cases.
Due to changes to the system, particularly the removal of the second income threshold , there are only a handful of claimants whose awards will work out to be exactly the full amount of the family element of CTC (£545). This means that the number of people who will receive an auto-renewal notice for 2012-2013 will be significantly lower than in previous years.
In addition, from April 2011, those who have been in receipt of income-based jobseeker’s allowance, income support, pension credit or income-related employment and support allowance will also be auto-renewal cases. This will only apply if the claimant has been in receipt of one of those benefits for the whole of the 2012-2013 tax year. It is important that claimants still report any changes to HMRC, particularly if they have not been in receipt of one of those benefits for the whole year. Also, they may fall out of the auto-renewal system next year depending on their circumstances.
In summary only three groups will receive auto-renewal notices for 2012-2013 renewals cycle:
- People whose awards are exactly equal to the full family element of CTC
- People who are nil awards (entitlement but not receiving payments due to income)
- People who received income support, income-based jobseeker’s allowance, income related employment and support allowance or pension credit for the whole 2012-13 tax year.
All other claimants will be reply-required cases.
In December 2010, in an effort to reduce costs, HMRC introduced legislation which enables them not to automatically renew people on nil awards (or who will be on nil awards from the following 6 April) unless the claimant tells HMRC that they wish to renew their claim.
At the start of the 2011-2012 tax year, HMRC sent letters (TC1015) to anyone on a nil award at the time.
These letters were a ‘relevant notification’ that HMRC would no longer automatically renew their claim unless, within 30 days, the claimant makes a ‘relevant request’. If the claimant did not make a relevant request (ie write to or phone HMRC to say they wished to renew their claims for 2011/2012), their claim lapsed at the end of the 2010/2011 tax year.
HMRC considered the exercise a success and decided to run a similar exercise for people who were Nil award in 2011/2012 or who HMRC thought would be a Nil award from April 2012 due to the various budget changes. HMRC once again sent letters to claimants in February 2012 stating that if they did not contact HMRC by 31 March 2012, their claim for 2012-2013 would not be renewed. There were a number of issues with this letter.
We do occasionally speak to claimants who want to withdraw from the tax credit system (see further the section below on withdrawing from the system) and from that point of view these initiatives may have seemed welcome. However, it is very important that people are fully aware of the consequences of leaving the system and what they could lose by doing so as once the 30 day ‘relevant request’ window passes HMRC cannot renew the claim. Instead a fresh claim would need to be made.
In particular there are two groups of people who may lose out by not renewing:
- If their circumstances change for the worse, or their income falls, during the following tax year, they will have to make a new claim which in most cases they can backdate by only 31 days, whereas if they had made a relevant request and renewed their claim they may have been able to secure an increased award for the entire tax year (the ‘protective claim’ principle);
- A disabled claimant whose entitlement to the disability element of working tax credit rests on Case G in the WTC regulations (entitlement to the disability element for at least one day in the preceding 56 days) will no longer be so entitled if they allow their claim to lapse and do not make a new claim within 56 days.
Failure to respond to the letter by 31 March 2012 meant that HMRC, under the legislation, did not (and cannot after the 30 day period has expired) renew the claim automatically and a fresh claim will need to be submitted in the future. We understand that HMRC allowed some claimants slightly longer than 30 days to respond depending on when their letter was sent.
The other issue with the letter that HMRC sent out in March 2012 was the income limits stated in the letter were misleading. The letter stated that the income limit for CTC was £26,000 for 2012-2013, however this only applied if the claimant was part of a couple with one child. The limit for people with more than one child, qualification for any of the disability elements or who claim help with childcare costs was significantly higher. (See the income limits table in our ‘How much can your client get’ section).
Concerns were raised by various organisations, including Low Incomes Tax Reform Group, that claimants would allow their claim to lapse based on incorrect information and that they would not ask HMRC to renew their claim even though they may have known their circumstances would change during 2012-2013 (e.g due to the birth of a second child) or they thought it might change. This is because they believed their income to be over the £26,000 limit. More information can be found on our blog.
If advisers come across claimants during 2013-2014 who allowed their claim to lapse as a result of the letter and whose circumstances changed meaning they would receive payment for 2012-2013, they should submit a fresh claim as soon as possible and request the maximum 31 days backdating. A complaint letter should also be sent to HMRC with a request for compensation equal to any tax credits and passported benefits that have been lost as a result of HMRC’s misleading information.
HMRC have confirmed that they will not be running this exercise again for the 2013-2014 tax year.
If the claimant is not an auto-renewal case, - ie if they are on maximum credits, or on the 41% taper – they will receive both forms. They must reply to the TC603R and complete and return TC603D with details of their income for the 'current year' (the tax year just ended). This can be done by returning the form or contacting the tax credits helpline.
If they have made more than one claim during the current year, eg because they started the year as a single claimant then became a joint claimant with a new partner, they must complete a set of forms for each claim, even if they each show the same information.
Prior to 6 April 2010, if a couple separated during the renewals period, and one member of the couple did not complete their forms an overpayment would occur of payments between 6 April and the date they separated. This was the case even if one partner completed their renewal forms.
But legislation, effective from 6 April 2010, allows one member of a couple to finalise the previous year’s claim and renew the claim for the period following 6April – separation. If only one member responds, the award will be based on the information provided which may not be accurate. HMRC have advised that, where possible, it is still recommended that both members send back their forms, although failure to do so will no longer result in an overpayment providing one partner has done so.
It is vital to complete and return renewal papers when required to do so. Dissatisfaction with the system has led some people to deliberately refrain from renewing, with the result that payments made to them from the start of the new tax year are treated as overpayments. It is important that the claimant checks the personal circumstances listed and inform HMRC if any of them have changed.
Claimants who renew their claims via the helpline may be subject to additional income checks for the 2012-13 renewals cycle if they have an element of employed income. During the call, helpline staff will check the claimants reported income against details held on the PAYE tax system. If the figures do not match, the claimant will need to explain why and unless adequate explanation can be given, HMRC will finalise the claim using the PAYE tax system figure. Claimants who renew by paper may also be subject to similar income checks.
There are a number of reasons why the figure held by the PAYE system will differ from the figure given by the claimant because the definition of income for tax credits is different to that of the tax system. The following are the most common reasons why figures may be different as they are allowable deductions from the PAYE income figure:
- £100 ‘disregard’ for weeks where statutory maternity, paternity or adoption pay was received (see HMRC TCTM manual)
- Gift aid payments (see HMRC TCTM manual)
- Pension contributions made to a HMRC registered pension scheme (see HMRC TCTM manual)
- Amount of any banking charge or commission payable in converting to sterling a payment made in another currency (see HMRC TCTM manual)
- Self-employed losses of claimant or potentially their partner (see HMRC TC825 form)
- Expenses which the employee is obliged to incur and pay as holder of their employment and those expenses are incurred wholly, exclusively and necessarily in the performance of the duties of the employment (see HMRC website)
- Other deductions allowed under Regulation 4(5) (Tax Credits definition and calculation of income Regulations 2002) SI 2002/2006 for example charitable giving under the payroll deduction scheme, certain travel expenses, mileage allowance relief, professional fees and subscriptions.
- Benefits in Kind that have been payrolled by the employer (These should be deducted from employment income and included under benefits in kind otherwise there is a risk of double counting – see instructions in TC600 notes). Benefits in kind that have been payrolled (as they are taxable) but not counted as income for tax credits purposes. (See HMRC TCTM manual)
- Certain losses incurred in relation to a UK or overseas property business where relief allowed under tax provisions exceeds the amount of property or foreign income for tax credits purposes (see HMRC TCTM manual)
If helpline staff refuse to accept a specific deduction, then claimants will need to wait for their final award notice and lodge an appeal against the decision.
So long as renewal papers are returned by the deadlines shown below, claims are treated as made for the new tax year and are backdated to 6 April.
While the renewal process is going on, HMRC will continue pay on the basis of the last known income and circumstances for the tax year just ended. These run-on payments are known technically as provisional payments.
So provisional payments for 2013/14 reflect the income and circumstances last reported in 2012/13. It is important to complete the renewal forms quickly so as to re-establish the award for 2013/14 on the basis of the latest information and to get the rates and thresholds for that year.
When the renewal process is complete, provisional payments are replaced by payments under an initial award for the new tax year. See the information in the claims starting section.
The deadline for return of renewal papers for 2012/13 is the date specified on the renewal papers (in most cases this will be 31 July 2013). This is referred to by HMRC as the ‘first specified date’.
In 2004/05 the deadline was 30 September following the end of the year; in 2005/06 it was brought forward to 31 August 2006; it was then brought forward a further month in 2006/07 to 31 July. The bringing forward of the renewal deadline was part of a series of measures intended to reduce the volume of overpayment in the system.
If the claimant cannot supply firm details of their 2012/13 income by the deadline stated on the renewal papers (in most cases 31 July 2013), for example if they are self-employed and are still waiting for their accounts to be finalised, an estimate is acceptable.
The important thing is to return an estimate by that date. If an estimate is given, it must be confirmed, or actual figures supplied, by 31 January 2014 (which is also the online filing deadline for self-assessment).
If the claimant does not renew (either by sending the papers to HMRC or renewing via the telephone) by 31st July 2013 (or the date on their renewal papers if different) then the award may be terminated.
Failure to renew means that no new claim is made for 2013/14, consequently any provisional payments received from April 2013 will become overpaid and HMRC will seek to recover them via direct recovery.
In addition any other overpayments that were being recovered from their ongoing award will switch to direct recovery when their award is terminated for non-renewal.
If HMRC terminate the award for failing to renew (and consequently stop all payments) regulations allow the claim to be restored providing the claimant renews within 30 days from the date on the notice telling them that their payments are to be stopped (technically called the Statement of Account). Note that for the renewals cycle relating to 2009/10, 2010/11 and 2011/12, HMRC extended the 30 days to 60 days due to problems that claimants had using the tax credits helpline to renew.
Outside of this 30 day period, the claim can only be restored if there was 'good cause' for failing to renew, so long as the renewal papers are returned by the later deadline of 31 January 2013.
In both cases, restoration means that HMRC treat the claim as being made from 6 April 2013.
If the claim cannot be restored (because there was no good cause or if good cause was present the renewal was not done before the 31st January), all provisional payments paid from 6 April 2013 will be treated as overpaid, and the claimant will have to make a fresh claim which can only be backdated a maximum of 31 days.
As mentioned above, it is vital to return renewal papers when required to do so. Claimants should particularly beware of using non-renewal as a tool to pull out of the tax credits system. The consequence of doing so is that their entitlement will cease as from the start of the tax year 2013/14, and therefore any payments received in that year to the date of termination will become overpaid. In addition you will no longer be able to repay any overpayment by reduction of your ongoing award, as there will be no ongoing award to reduce. Instead recovery will be commenced directly.
- Provisional payments are made at the start of 2013/14 while renewal papers are being sent out and dealt with. These are based on last known income and circumstances.
- When papers are returned, claimants get an initial award and payments are brought up to date.
- Papers must be returned by 31 July 2013 (or the date as specified by HMRC on the renewaals form if different) with either a statement of actual income for 2012/13 or an estimate.
- If an estimate is given, this must be confirmed - or actual figures returned - by 31 January 2014.
As noted above, dissatisfaction with the system has led some claimants to refrain from completing their renewal papers. This has also happened where people have had a change in circumstances and thought they were no longer entitled to tax credits. The consequence of not returning the forms is set out above, and generally means that all payments between April and the date HMRC terminate the claim (for failure to complete the renewals process) become overpaid.
In April 2010, HMRC introduced rules to allow claimants to withdraw from the system by only finalising their previous year claim and not renewing their claim for the current tax year. But be aware that these rules need to be followed carefully as the timing of the notification to withdraw will determine whether there is a consequential overpayment.
In addition to the claw back of all provisional payments made to date, there may be financial penalties for not responding to a renewal notice, or for giving the wrong information in response to it. More information about penalties can be found in our 'penalties and interest' section.
Universal Credit, when fully implemented, will replace working tax credit and child tax credit. Claimants will be transitioned from tax credits to UC over the next few years. In readiness for the pathfinder exercises that begin in April 2013 and for the early stages of transition, amendments have been made to Section 17 Tax Credits Act 2002 which governs the renewals process. This means that some claimants will follow a new in-year finalisation process rather than the renewals process outlined above where they are moving to Universal Credit. You can find out more information about this in our dedicated transition to UC section.
Updated 3 August 2012