High Income Child Benefit Charge (HICBC): An update

Contributed by Jo Lawless FCA, CTA, Senior Technical Writer, Croner-i Ltd

The HICBC was introduced in January 2013 as a measure to clawback child benefit where one parent’s ‘adjusted net income’ (ANI) was greater than £50,000. It has often been described as overly complex and inherently unfair; changes to the thresholds were announced at the Spring Budget 2024.

Scope of the charge

A person (P) is liable to the HICBC in a tax year if they have an ANI for that year which exceeds the HICBC threshold and either or both of two conditions (Condition A and Condition B) is or are met.

Condition A is that P is entitled to child benefit for a week in the tax year and there is no other person who is a partner of P throughout that week and who has an ANI for that year exceeding P’s ANI.

Condition B is that a person other than P but who is a partner of P is entitled to child benefit for a week in the tax year and has an ANI less than P’s.

Simply put, either P or P’s partner has an ANI exceeding the threshold and one or both of them is or are entitled to child benefit for one week or more in the tax year in question.

ANI for a tax year means the person’s ANI for that tax year as determined under  ITA 2007, s. 58 .

‘A week’ means a period of seven days beginning with a Monday, falling within a tax year only if that Monday is within the tax year.

‘Partner’ is defined as either a member of a married couple (or those living together as if they were husband and wife) or a civil partner (or those living together as if they were civil partners) provided they are not separated under a court order or in circumstances in which the separation is likely to be permanent.

If both partners’ ANI exceeds the threshold, the charge applies to the partner with the higher income. Whilst the threshold applies to a tax year, the issues of entitlement to child benefit and the existence of a partner are decided on a weekly basis, reflecting the weekly nature of child benefit. The charge is thus based on entitlement to child benefit for weeks within a tax year.

New rules from 6 April 2024

Changes brought in by  Finance (No. 2) Act 2024, s. 5  increased the thresholds at which the charge commences, and at which all child benefit is effectively ‘clawed back’ to £60,000 and £80,000 respectively from 6 April 2024. This means that the charge is now 1% of the amount of child benefit received for every £200 above the £60,000 threshold.

Whilst this clearly gives the opportunity for some families to now reclaim child benefit, having previously ‘opted out’ of receiving it, it does not address the often talked about unfairness in the system, whereby a family with two individuals earning £60,000 will suffer no charge, but a family with one individual earning £80,000 will be charged 100% of their child benefit.

Potential future developments

Announced in the Spring Budget 2024 was that from April 2026, the HICBC will be administered on a household rather than an individual basis to address the unfairness in the rules.

Further details have now been announced by the Conservative Party in their 2024 manifesto. Under their plans, the threshold at which families (i.e. households) begin to pay the HICBC will rise to £120,000 per household, with the higher threshold increasing to £160,000 per household.

This will be subject to a consultation initially to resolve any key issues, and there is also the general election on 4 July 2024 which may mean these planned changes will not take place at all.

If implemented, there will need to be a major overhaul of how the charge is currently administered, given that these changes will challenge the system of independent taxation that the UK currently has.

Case law – ‘reasonable excuse’

There have now been many First-tier Tribunal (FTT) cases in relation to the HICBC. Many of these cases have been around the subject of whether the taxpayer has a ‘reasonable excuse’ for not notifying HMRC of their liability to the charge. Those individuals who are PAYE taxpayers and have never filed a self-assessment tax return seem particularly susceptible to falling foul of the rules.

Judge Nigel Popplewell has determined a number of cases in favour of the taxpayer. In each of the judgments, Judge Popplewell has concluded that a taxpayer is likely to have a reasonable excuse where they:

(1)were not under an obligation to complete a tax return up to the tax years prior to that in which the HICBC applied because, primarily, they were paid through PAYE and had no other income justifying a need to notify;

(2)were in receipt of child benefit payments prior to the introduction of HICBC with the consequence that the application itself made no reference to HICBC (the child benefit claim form after the introduction of the HICBC clearly sets out when the charge applies);

(3)had not received notification from HMRC directly at any point prior to the contact which led to the isues of the tax assessment; but

(4)acted promptly in ceasing to claim child benefit and engaged actively with resolving the historic tax liabilities as soon as HMRC did make contact.

Whilst FTT decisions do not set a legal precedent, the above set of ‘rules’ could be a good starting point to ascertain whether an individual may have a reasonable excuse for not notifying HMRC of their liability to the charge.

Fera [2023] TC 08985 – appeal pending

HMRC are appealing the decision in Fera  [2023] TC 08985 , where the FTT allowed the taxpayer’s appeals against assessments regarding the HICBC. It found that the discovery assessments were not ‘protected assessments’ because the conditions of  FA 2022, s. 97(5)  were met.

In this case HMRC relied on their retrospective powers introduced into  TMA 1970, s. 29(1)(a)  by  FA 2022, s. 97  following the Upper Tribunal’s decision in R & C Commrs v Wilkes  [2021] BTC 530  ( Wilkes), enabling them to assess an amount of income tax that ought to have been assessed, rather than as was previously the case, to assess income which ought to have been assessed to income tax.

This amendment had retrospective effect if the discovery assessment is a ‘relevant protected assessment’ as defined in  FA 2022, s. 97 . A discovery assessment will not be ‘protected’ if it was appealed on or before 30 June 2021 and the issue of its invalidity (because it did not meet the conditions of  TMA 1970, s. 29(1)(a)  as previously drafted) was raised on or before that date.

HMRC argued that Mr Fera had not in fact challenged the validity of the assessment on or before 30 June 2021 but the FTT disagreed. They took the view that it was not necessary for Mr Fera to be specific in the way he worded his challenge, as he was unrepresented and had no specialist tax knowledge. They accepted that although his challenge was generic (i.e. he did not directly mention the decision in Wilkes, nor the fact that the HICBC was not income), it must by inference have challenged the validity of the discovery assessments, as opposed to accepting the principle behind the assessment but challenging the computation.

This was in contrast to the finding in Hextall  [2023] TC 08804  where the FTT’s view was that for the issue to be ‘raised’ it was not necessary for Mr Hextall to mention the Wilkes decision specifically, but it had to be clear that the appeal was on the basis that the HICBC was not income.

There is currently no date set for the appeal, but it will be interesting to see which way the Upper Tribunal goes in this case.

Conclusion

The HICBC remains a rather complex and confusing tax charge, especially for the unrepresented taxpayer. Whilst the new thresholds will allow more families to benefit from claiming child benefit, they do not address the complexities of the system.

We will need to wait until after the results of the general election to see what the future holds for the HICBC.

Useful links

For commentary on the HICBC, see Direct Tax In-Depth at ¶148-530.

For commentary on reasonable excuse defence, see Direct Tax In-Depth at ¶192-830.