A father of two has won a battle to overturn hefty child benefit penalties after unwittingly breaking controversial tax rules.
He successfully appealed against fines, currently amounting to some £2,400 including interest, after representing himself against HMRC at a tax tribunal.
Ian Taylor (not his real name) argued that he didn’t know his wife was claiming child benefit because they kept finances separate, so he couldn’t have realised he needed to fill in a tax return or owed any repayments.
Tax battle: Father fought penalty because he didn’t know wife was claiming child benefit (Stock image)
The case highlights again the pitfalls couples face in navigating complicated child benefit rules – including an obscure trap that can lose you state pension in old age.
‘My experience has been absolutely dreadful,’ says Ian, who claims he got 50-60 letters from the taxman about his case in the past 18 months. ‘They are incompetent at HMRC. They show no empathy.’
HMRC says it is considering its response to Ian’s case and has suspended his penalty in the meantime. Read its full response below.
Ian and his wife, who separated in 2017, fell foul of a reform which reduces child benefit for those earning £50,000-plus a year or wipes it out entirely for those earning £60,000-plus.
When what is officially known as the ‘High Income Child Benefit Charge’ or HICBC was introduced in 2013, Ian’s wife asked him how much he earned and he told her ‘fortysomething thousand’, which he believed to be correct at the time.
The manager, who lives in the south of England and is aged in his 40s, had always paid tax via his employer and never filled in a tax return before.
How do you take HMRC to a tribunal?
If you disagree with a tax decision, you should complain to HMRC first.
If this goes nowhere, you can appeal to HMRC – it should give details on a letter it sends to you. HMRC might also offer you a review, or you can request one.
If the dispute remains unresolved, you can ask the tax tribunal to hear your appeal.
Details of when you can appeal an HMRC decision on tax and how to bring an appeal are here.
He did not know that company benefits like a car allowance or bonuses should be added to his basic income – an error that saw a mum of three fined £620 in a separate child benefit dispute.
Ian also didn’t realise his wife’s question about his earnings was connected to child benefit, or that she was claiming it because the payments for his children, now aged nine and four, went directly into her bank account.
When HMRC wrote to Ian about the issue in 2018, he didn’t dispute that he needed to repay £6,000 of child benefit, though he always refused to pay the fines.
He says he felt stressed and frustrated by demands for repayments he couldn’t afford immediately.
‘They wanted it in one year and asked me to borrow money from a bank or family which I feel was wrong. The whole experience was awful.’
HMRC denies that it told Ian to borrow money – see below.
Ian says it was eventually agreed he could make monthly payments, and the full £6,000 will be repaid by this September.
He argues that although he wasn’t aware he owed tax over child benefit since the rule changes in 2013, HMRC always knew this because it had his income records.
And he believes he ended up being landed with extra penalties and interest unnecessarily because of HMRC’s failure to notify him until 2018.
Ian says of the tribunal hearing he went to earlier this month: ‘I am an average Joe. I had no legal support. I expected to be bamboozled and kicked out. But it was soon apparent I was going to win.
‘All the HMRC guy could say was it was my duty to notify it about the tax I need to pay. How could I have done that if I didn’t know I owed tax?’
The tribunal judge found that neither Ian nor his wife had reason to believe the new child benefit rules were relevant to to them in light of his salary at that time and their decision to keep their finances separate.
What about ‘ignorance is no excuse’?
The judge looking at Ian’s case referred back to an earlier tribunal decision which looked at when the common saying ‘ignorance of the law is no excuse’ applies.
He quoted the following in his own decision: ‘Some requirements of the law are well-known, simple and straightforward but others are much less so.
‘It will be a matter of judgment for the First Tier Tribunal in each case whether it was objectively reasonable for the particular taxpayer, in the circumstances of the case, to have been ignorant of the requirement in question, and for how long.’
‘He and his ex-partner had elected to keep some of their financial affairs separate, which is perfectly reasonable by any objective standard,’ the judge said in his decision.
‘His lack of knowledge of his ex-partner’s receipt of child benefit did not arise from a wilful or reckless disregard of his obligations to HMRC.’
He concluded that Ian’s ignorance of the fact his wife was claiming child benefit was ‘an objectively reasonable excuse’ for his failure to notify his liability for tax to HMRC or to complete tax returns, and that he acted promptly to address the non-payment of HICBC when it was brought to his attention.
The judge noted that HMRC’s position in the appeal appeared to require taxpayers in a relationship to disclose information to each other about their income, but he decided not to address this issue in his decision.
The tribunal cancelled penalties for four tax years covering 2012-2016, but Ian’s fines and interest have now risen to £2,400 because they weren’t frozen during the run-up to the tribunal, and he wants HMRC to waive the whole amount.
The child benefit changes caused an outcry when introduced seven years ago, because they penalise families in which one parent earns just over £50,000, but those where both parents earn just under that amount still get child benefit paid in full.
Families complained of being hounded by the taxman for thousands of pounds in fines and demands for repayment. HMRC was slammed for its heavy-handed treatment of otherwise law-abiding taxpayers who made mistakes.
It eventually cancelled penalties issued to 6,000 families for failing to notify it of income changes that meant they weren’t entitled to receive child benefit, when it decided they may have a reasonable excuse.
What does HMRC say about this case?
An HMRC spokesperson said: ‘The High Income Child Benefit Charge applies to anyone with an income over £50,000, who claims child benefit or whose partner claims it.
‘If you don’t know if your partner is the higher earner or if they claim child benefit, you can write to HMRC to find out.
‘We will reply ‘yes’ or ‘no’, but we cannot give out any specific financial information due to taxpayer confidentiality.
‘We note the findings of the First Tier Tribunal and are considering our response. We have suspended [Mr Taylor’s] Failure to Notify penalty in the meantime.’
You can only ask for information about a partner’s income if you either live together or separated within the relevant tax year, and more details are here.
HMRC says the first contact it had with Ian which mentioned the possibility of being liable for HICBC was in August 2013 when he was sent an ‘SA252 letter’.
It says this is a ‘call to action’ which, among other things, asks people to check if they are liable to the High Income Child Benefit Charge.
HMRC says it did not tell Ian he should borrow money from a bank or his family to pay back the money he owed, and that it asks if people have sought a loan as it needs to know their overall financial position.
HMRC has information on how to pay a tax debt here.
The taxman says it writes to parents each year reminding them that they may need to pay the HICBC and to register for self-assessment, but does not routinely collect information on whether they are married or have partners, or have details of the circumstances of individuals in a household.
It says there is therefore a limit to how far it can target letters to individual customers tailored to their specific situation, and it is up to them to tell HMRC when they are liable to pay the tax charge.
More details on HICBC are here and the helpline is 0300 200 3100.
Could other couples benefit from decision on ‘fiendishly complex’ law?
Steve Webb, a former Pensions Minister who is now a partner at consultants LCP, says: ‘The High Income Child Benefit Charge is a fiendishly complex piece of legislation which catches many people who might not think it could apply to them.
‘It relies on people knowing about their partner’s finances as well as requiring people who have never needed to fill in a tax return to start to do so.
‘There are features of this case – the fact that the couple kept their finances separate, that he didn’t normally fill in a return and that his core income was under £50,000 when the rules came in – which together seem to mean that it is unreasonable to levy a penalty charge.
‘Also, HMRC could in principle have spotted this problem several years earlier from data they had access to, but failed to do so.
‘It is encouraging to see the Tribunal decide that in this case HMRC were wrong to levy a charge. Whilst Tribunal judgments only apply to the specific case before them, it seems likely that many more people may have had a similar set of circumstances.
‘If so they should consider whether they also should challenge a penalty charge by HMRC.’
HMRC: ‘The High Income Child Benefit Charge applies to anyone with an income over £50,000, who claims child benefit or whose partner claims it’
Gary Smith, chartered financial planner at Tilney, says ignorance of a personal tax liability is no excuse, but Ian won his appeal because he couldn’t be expected to know his wife was receiving child benefit and that he therefore owed tax.
He says that this case could have implications for other people who want to challenge child benefit penalties, because many couples keep their finances separate and there is no legal requirement to disclose your tax affairs or benefits to a spouse.
‘The rules are very complex,’ he says. ‘You have got to be careful. It’s good that he’s won his case.’
Smith says liability for the HICBC would end if you were legally separated from a partner.
Meanwhile, if your income is above £50,000 and you move in with someone who has a child and is claiming child benefit, you could face a tax charge even though a child is not related to you.
He adds that ‘income’ includes employer benefits, and also investment income, interest on savings, and rental income.
Meanwhile, your gross personal pension contributions are deducted before your income is calculated for child benefit, but not employer pension contributions or those made via salary sacrifice.
Smith suggests checking the rules on HMRC’s website or getting help from an accountant or financial planner if your income is close to £50,000 and you might be affected by the HICBC.
Child benefit and the state pension
This is Money is campaigning against the unfairness of parents – mostly mums – ending up tens of thousands of pounds worse off in retirement due to innocent child benefit errors.
Parents who earn too much to qualify for child benefit still have to apply for it, or permanently lose credits towards the state pension worth tens of thousands of pounds in old age, because HMRC will only backdate them for three months.
People who earn less and do qualify for child benefit can also lose out if the ‘wrong’ partner signs up for child benefit, because they are working so the credits are worthless to them.
HMRC now says that parents in this situation can disregard official time restrictions on applications to correct the record, provided they make a strong enough case.
Have you lost state pension by not signing up for child benefits or filling form in wrong? If this has happened to you, contact [email protected] and tell us your story.
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