ME v HMRC

Under section 16(1) of the Tax Credits Act 2002, an in-year amendment or termination of a tax-credit award depends on reasonable grounds for the specified belief at the date of the decision. It does not require, or empower, a final determination that the claimant was in fact entitled or not entitled for the tax year.

On an appeal, the First-tier Tribunal stands in HMRC’s shoes. It must decide for itself whether such grounds existed on the decision date and, if they did, whether the award should be amended or terminated. HMRC bears the evidential burden. Later information cannot found the belief, but may show that reliance on incomplete information made it unreasonable.

ME v HMRC concerned an award of working tax credit for 2013/2014. HMRC terminated the award from the beginning of the year under section 16 of the Tax Credits Act 2002, on the basis that the claimant’s stated earnings were inconsistent with working 30 hours each week.

The First-tier Tribunal, sitting at Liverpool on 21 August 2014, dismissed the claimant’s appeal on the papers. It decided that the PAYE income evidence made the claimed hours improbable. The claimant appealed on the basis that the tribunal had applied the wrong legal test and that HMRC may previously have received evidence of her low-paid 30-hour work.

The central issue was the legal operation of the section 16(1) requirement that HMRC have reasonable grounds for believing that entitlement had ceased or never existed.

1. Appeal allowed. The First-tier Tribunal erred by deciding whether the claimant was in fact entitled to working tax credit rather than whether, on 4 November 2013, there were reasonable grounds for believing that she had never been entitled to it for 2013/2014.

2. Section 16(1) of the Tax Credits Act 2002 regulates intervention in an existing award during the tax year. The statutory threshold is reasonable grounds for the relevant belief. If it is met, HMRC or the tribunal may amend or terminate the award. The provision does not authorise a final annual entitlement decision; that decision is made through sections 17 and 18.

3. The First-tier Tribunal determines the appeal afresh while standing in HMRC’s shoes. It must decide for itself whether the reasonable grounds existed at the date of the section 16(1) decision, rather than merely review HMRC’s view. HMRC must establish the evidential basis of the belief.

4. Information acquired after that date could not itself have formed the belief. It could nevertheless bear on whether the belief was reasonable, including by showing that HMRC acted on incomplete information which it could have sought or already possessed. A section 16(2) information notice is not a precondition to action under section 16(1), but it cannot be used for an unsupported fishing exercise.

5. The tribunal had also relied on PAYE material which, on the available evidence, post-dated the decision and could not have supported it. Possible earlier evidence that the claimant worked 30 hours weekly for below the national minimum wage was capable of affecting the reasonableness of HMRC’s belief. Low-paid work is not excluded by the statutory conditions for qualifying remunerative work.

6. The First-tier Tribunal’s decision was set aside. The appeal was remitted for a wholly fresh oral hearing before a differently constituted First-tier Tribunal, subject to any effect of HMRC’s later section 18 decision.

• Upper Tribunal (Administrative Appeals Chamber): allowed the appeal, set aside the First-tier Tribunal’s decision for material legal error, and remitted the case for a fresh hearing: [2017] UKUT 227 (AAC).
• First-tier Tribunal (Social Entitlement Chamber), Liverpool: on 21 August 2014 dismissed the claimant’s appeal against HMRC’s section 16 decision. That decision was set aside by the Upper Tribunal.