Tens of thousands of middle-income families face being investigated by the taxman after the government changed the law to go after people who had “unwittingly” overclaimed child benefit.
HM Revenue & Customs has been given powers to examine the financial records of 170,000 families who it believes wrongly claimed the benefit.
The law was passed by MPs last week to enable the taxman to recoup cash given to people who were not eligible. But observers claim that the system is so complicated many did not know they had overclaimed. The powers being used are normally reserved investigate the most grievous tax offences.
This week HMRC was given the legal authority to issue “discovery assessments” to employed workers it believes should pay back child benefit.
A discovery assessment can be issued if officials find “careless or deliberate” behaviour. If the error is caused by carelessness, HMRC is entitled to trawl through six years of financial records; if someone has acted deliberately it can investigate 20 years of records.
Under changes introduced in 2013 by George Osborne when he was chancellor, the full benefit is reduced for households where one earner makes more than £50,000, and tapers until the point where households with an earner on £60,000 get nothing.
However, the benefit keeps getting paid to families regardless of their income unless they notify HMRC in a tax return then repay it. Many families say they did not repay it because they were unaware they had to and they would never normally have had to fill out a tax return in the first place.
Some kept claiming the benefit — £21 a week for a first child and £14 a week for additional children — for years before HMRC caught up with them and demanded thousands of pounds be repaid.
HMRC this week gave itself the retrospective power to pursue these families back to 2013 because it fears it could lose a test case on the matter, which could cost it hundreds of millions of pounds. Lawyers representing 400 claimants say issuing discovery assessments for employees paid through PAYE is unlawful because HMRC has already assessed the claimants’ earnings and tax liabilities in their tax code.
In June the Upper Tax Tribunal found in favour of the taxpayers. HMRC is contesting the decision in the Court of Appeal. If it loses it will have to pay back £2 million. It could then face claims from the 168,838 other claimants to whom it has issued discovery assessments for overclaiming child benefit between 2013 and 2019.
Sir Steve Webb, a former pensions minister, said: “Someone in government needs to recognise that this whole tax charge was badly conceived and needs a fundamental rethink.”
James Austen, a barrister at Collyer Bristow, which is bringing the legal case against HMRC, said: “In this case there was no tax avoidance and the taxpayers being penalised by this retrospective move were typically oblivious of their responsibilities.”
HMRC said: “The measure will ensure those liable for these tax charges are treated in a fair and consistent way, and that individuals who do not notify and report their liability to these charges cannot gain an unfair advantage over the majority who follow the rules.
“The measure does not create new liabilities or obligations for taxpayers, and confirms the longstanding and widely accepted legal position in place before recent tribunal decisions.”