RF v HMRC

A decision terminating or amending a tax-credit award under Tax Credits Act 2002 section 16 does not automatically lapse merely because a later, conclusive section 18 decision has been made for the same tax year. In the absence of a statutory lapsing provision, the section 16 appeal should continue where it may still have practical value, including by supporting a later revision of the section 18 decision, unless and until an effective section 18 appeal supersedes it.

For working tax credit, whether work is done in expectation of payment is a fact-sensitive question assessed when the work is undertaken. Work spent establishing a business may be preparatory and speculative rather than remunerative. The tribunal must consider whether the business was sufficiently established for payment to be made or realistically expected.

The claimant and his wife claimed working tax credit for 2012–2013. HMRC terminated the award during the tax year under section 16 of the Tax Credits Act 2002. The First-tier Tribunal dismissed his appeal, finding that his research and development work in his own business was not remunerative because the business could not pay him.

On appeal, HMRC accepted that the First-tier Tribunal may have proceeded on a mistaken understanding of the decision and the burden of proof. A later section 18 decision on entitlement for the same tax year had been made but had not been placed before the First-tier Tribunal. The Upper Tribunal had to decide both how the fresh tribunal should assess work undertaken in expectation of payment and whether the pending section 16 appeal had been displaced by the later section 18 decision.

1. Appeal allowed. The First-tier Tribunal made a probable error of law. HMRC's submission below was seriously defective and may have led the tribunal to misunderstand the nature of the decision before it. Its decision was set aside and remitted to a differently constituted First-tier Tribunal for an oral rehearing.

2. To qualify for working tax credit, the claimant had to satisfy regulation 4(1) of the Working Tax Credit (Entitlement and Maximum Rate) Regulations 2002. The relevant issue was whether his work in his business was done for payment or in expectation of payment. That is a fact-sensitive inquiry assessed when the work was done. The tribunal should consider the evidence, including accounts where useful, with a common-sense approach.

3. Work undertaken solely to establish a business, obtain customers or build goodwill may be speculative and not performed in expectation of payment. The relevant question is whether the business had reached the point at which the work, including ancillary work, was done for payment or with a realistic expectation of payment. The period of assessment need not be weekly for tax credits; a monthly assessment may be appropriate.

4. The later section 18 decision did not automatically terminate the pending section 16 appeal. Section 18(11) makes the later entitlement decision conclusive, but the Act contains no statutory lapsing mechanism. A section 16 appeal can retain practical value where there is no effective section 18 appeal, including because a favourable factual determination may support an official-error revision of the later decision.

5. A section 18 appeal is the preferred course and may supersede the section 16 appeal. However, until such an appeal is lodged, it is premature to treat the section 16 appeal as lapsed or to strike it out. HMRC could not simply deem the existing appeal to be a mandatory-reconsideration request; whether the claimant's separate letter required a review was for HMRC to determine.

• Upper Tribunal (Administrative Appeals Chamber): allowed the claimant's appeal, set aside the First-tier Tribunal's decision, and remitted the case to a differently constituted tribunal.
• First-tier Tribunal (Social Entitlement Chamber), Colchester: on 11 February 2015 dismissed the claimant's appeal against HMRC's in-year termination of working tax credit.