HMRC v AS

For an in-year finalisation of tax credits following a claim for universal credit, income is calculated under the modified statutory scheme. Employment income means earnings received in the relevant part tax year, rather than earnings attributable to that period. Those earnings are annualised to produce notional current year income. The resulting relevant income is then apportioned to the relevant period under the prescribed calculation. A purposive construction may be adopted where the modified formula is unclear, provided it is consistent with the legislative scheme. The Upper Tribunal allowed HMRC’s appeal and dismissed the claimant’s appeal.

The claimant received tax credits until her award ended on 22 April 2019 after she claimed universal credit. HMRC treated taxable pay of £1,244 received on 15 April 2019 as income received during the 17-day part tax year from 6 to 22 April 2019. It calculated notional current year income of £26,782 and finalised the award at £0 working tax credit and £36.74 child tax credit.

The First-tier Tribunal instead apportioned the monthly pay to the 17-day period and directed HMRC to use income of £693.43. HMRC appealed. The central issue was whether the modified tax credits legislation required consideration of earnings received in the part tax year or earnings attributable to it.

Appeal allowed. The First-tier Tribunal had erred in law by applying an apportionment approach unsupported by the modified statutory scheme. Its decision was set aside and the decision was re-made under section 12(2)(a) and (b)(ii) of the Tribunals, Courts and Enforcement Act 2007.

1. Where regulation 12A of the Universal Credit (Transitional Provisions) Regulations 2014 applies, entitlement is calculated under the Tax Credits Act 2002 and regulations made under it, as modified by Schedule 1 to the 2014 Transitional Regulations.
2. For a single claimant, section 7(4A)(b) of the modified Tax Credits Act 2002 defines notional current year income by taking income for the part tax year, dividing it by the number of days in that part tax year, multiplying by the number of days in the full tax year, and rounding down to pence.
3. Under the modified regulation 4(1)(a) of the Tax Credits (Definition and Calculation of Income) Regulations 2002, employment income includes earnings from employment received in the part tax year. It does not require calculation of earnings attributable to that period. The claimant’s £1,244 payment received on 15 April 2019 therefore had to be used.
4. The resulting notional current year income was £26,782. Under modified section 7(3)(b), relevant income was £24,282 after deducting the £2,500 threshold. The modified Step 3 calculation then required that annual or annualised figure to be converted to the relevant part-tax-year amount, producing £1,127.85. This interpretation was the only reasonable construction and gave practical effect to the legislative purpose.
5. The claimant’s final entitlement was £0.00 working tax credit and £36.74 child tax credit. Any recovery of overpaid tax credits was a discretionary matter for HMRC, outside the jurisdiction of either tribunal.

• Upper Tribunal (Administrative Appeals Chamber): HMRC’s appeal allowed. The First-tier Tribunal decision of 16 April 2021 was held to contain an error of law and was set aside.
• First-tier Tribunal (Social Entitlement Chamber): The claimant’s appeal had been allowed and HMRC had been directed to recalculate entitlement using income of £693.43.