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HMRC internal manual

Claimant Compliance Manual

Penalties and interest: protective claims, nil awards and penalties

WTC and CTC are annual awards that are based provisionally by reference to the previous year’s income and this is then revised at the year end. At the end of the year the award is set by reference to the actual income for the whole of the year.

Note: From 6 April 2012

  • backdating will be restricted to 31 days for new claims. Requests prior to the 6 April 2012 will still be entitled to 93 days backdating
  • Change of Circumstances (CoCs) which result in an increase in entitlement will be backdated to a maximum of 1 calendar month only.
  • CoCs which do not result in an increase in the maximum rate of tax credits the customer is entitled to will continue to be backdated to the date of change.

Example 1

  • Bibi and Carly are single mothers and each applies for tax credits in March 2011. Bibi earns £800 per month and Carly earns £900 per month but all other factors are the same. Bibi receives a larger award because she earns less. Bibi’s income remains the same throughout the year but Carly has a pay cut at the end of the sixth month and her pay goes down to £700. At the year end their final tax awards will be identical because their annual income is identical.
  • Bibi - £800 x 12 = £9,600
  • Carly - (£900 x 6) + (£700 x 6) = £9,600

If a claim has not been made by 31 July it can only be backdated for up to 93 days, assuming the circumstances applied during that period. A single person or a couple with no children and with income over the threshold for WTC might decide not to apply for WTC. The same could happen with someone or a couple with children if their income is over the threshold for CTC. However, if their circumstances change throughout the year they can only backdate a claim for up to 3 months.

Some people have therefore decided to submit a claim even though they will receive a nil award. This is known as a ‘protective’ claim. By doing this they protect their right to 52 weeks worth of credits if their income changes during the year.

Example 2

Mandy and Jay live together with their 5 year old son. They each earn £30,000 per year so they exceed the threshold for CTC but they decide to lodge a ‘protective’ claim for 2010/2011 and receive a nil award. On 6 October 2010 Jay decides to take unpaid leave for a year to help care for his elderly mother. His income for 2010/2011 is therefore £15,000 bringing their total income to £45,000. They have made a ‘protective’ claim so they are now entitled to 52 weeks worth of CTC which is £10.48 x 52 = £545. Had they not made a ’protective’ claim they could only have backdated the claim from 6 October 2010 to 5 July 2010 and received £10.48 per week from that date, but they would have lost 93 days worth of CTC.

Once someone makes a ‘protective’ claim to tax credits they are then required to notify certain changes of circumstance and complete end of year declarations. This would mean that someone who fails to notify a change of circumstances even though it might still result in a nil award would be liable for a penalty of up to £300 if they had not notified the change of circumstances within 1 month.

It has been agreed we will not charge penalties where a nil award is made and an un-notified change of circumstances has occurred as long as there is no change to the award. The reason for this is we consider customers to have a reasonable excuse for not notifying such changes of circumstance where the award remains at nil but they should notify them on any end of year declaration.

There will be some cases where a nil award is made and there is then an un-notified change of circumstances which would still have left the award at nil. However, at a later point the customer gets in touch to notify a reduction in their income which now gives them an award of WTC or CTC or both. It is better for us to learn of any previously un-notified change of circumstances at the time at which they notify us about their change of income but if they do not give this information or are not asked for it then we will allow them 1 calendar month from the date of the new award to tell us about the previous change of circumstances. If they have not notified us after this period, then penalties apply as normal.