The high income child benefit charge (HICBC) is the mechanism, to clawback child benefit. In brief, a high earner has to pay more tax to compensate for child benefit received by his family, but not necessarily by the high earner himself, as the benefit is normally claimed by the lower earner in the family.
So person A is taxed on money received by person B, which doesn’t fit within the rules for independent taxation which apply in the UK. What’s more the money received by person B is not taxable income, as child benefit is non-taxable state benefit (ITEPA 2003 s 677(1) table B – part 1).
This crazy set-up was recently tested at the first-tier tax tribunal by James Robertson.
He was taxed under PAYE and was not required to submit a tax a return. His wife received child benefit for all the relevant years 2012 to 2015, and she was also taxed entirely under PAYE. Robertson wasn’t aware of the need to register for self-assessment in order to repay that child benefit through the HICBC.
In 2017 HMRC demanded payment of the HICBC by way of a discovery assessment under TMA 1970 s 29(1). HMRC also applied a 20% penalty for Robertson’s failure to notify HMRC of his liability to the charge. Robertson paid the HICBC but appealed against the penalty.
The tax tribunal agreed that Robertson was required to notify HMRC of his chargeability to HICBC, and thus the penalty was potentially due. However, the penalty is charged as a percentage of the potential lost revenue (PLR).
The FTT decided the PLR had to be the income specified in the section 29 assessment, which was only valid if HMRC had discovered taxable income which had not been assessed. There’s the problem – the child benefit was not his income, and it was also not taxable income. There was thus no PLR to base the penalty on, so it had to be cancelled.