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Explanatory Notes to Tax Credits Act 2002
2002 Chapter 21 |
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© Crown Copyright 2002 Explanatory Notes to Acts of the UK Parliament are subject to Crown Copyright protection. They may be reproduced free of charge provided that they are reproduced accurately and that the source and copyright status of the material is made evident to users. It should be noted that the right to reproduce the text of these Explanatory Notes does not extend to the Queen's Printer imprints which should be removed from any copies of the Explanatory Notes which are issued or made available to the public. This includes reproduction of the Notes on the internet and on intranet sites. The Royal Arms may be reproduced only where they are an integral part of the original document. The text of this Internet version of the Explanatory Notes which is published by the Queen's Printer of Acts of Parliament has been prepared to reflect the text in printed form and as published by The Stationery Office Limited as the Explanatory Notes to theTax Credits Act 2002, ISBN 010 562 102 1. The print version may be purchased by clicking here. Braille copies of the Explanatory Notes can also be purchased at the same price as the print edition by contacting TSO Customer Services on 0870 600 5522 or e-mail:customer.services@tso.co.uk. Further information about the publication of legislation on this website can be found by referring to the Frequently Asked Questions.
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These notes refer to the Tax Credits Act 2002 which received Royal Assent on 8 July 2002 (c.21) TAX CREDITS ACT 2002__________________ EXPLANATORY NOTES INTRODUCTION 1. These explanatory notes relate to the Tax Credits Act 2002, which received Royal Assent on 8 July 2002. They have been prepared by the Inland Revenue in order to assist the reader in understanding the Act. They do not form part of the Act and have not been endorsed by Parliament. 2. The notes need to be read in conjunction with the Act. They are not, and are not meant to be, a comprehensive description of the Act. So where a section or part of a section does not seem to require any explanation or comment, none is given. SUMMARY 3. The Act makes provision for two tax credits - the child tax credit for families with children and the working tax credit for working households facing low income, including those in which a worker has a disability. The two tax credits together are intended to create a single income-related strand of support for families with children, complemented by a single strand of support for adults in work. The tax credits will be administered by the Inland Revenue. The Act establishes the administrative framework for the two tax credits and sets out the conditions of entitlement to, and the elements of, those credits. 4. The Act also provides for the transfer of responsibility for the administration of child benefit and guardian's allowance from the Department for Work and Pensions and, in Northern Ireland, the Department for Social Development to the Inland Revenue. 5. An overview of the Act is set out at paragraphs 22 to 39, below. BACKGROUND 6. The Act is concerned with support for families with children and working households facing disadvantage, including those which include a worker with a disability. 7. The Act replaces the following existing forms of support for families with children, low-income households and disabled workers:
8. Income support and income-based jobseeker's allowance are social security benefits which provide a minimum income to a claimant who is working fewer than sixteen hours a week and whose partner (if any) is working fewer than twenty-four hours a week. Entitlement is calculated on a weekly basis. The amount to which a person is entitled is the difference between their income and their applicable amount. Different applicable amounts are prescribed, depending on whether the claimant has a partner, any dependent children or is disabled. A person is not entitled to income support or income-based jobseeker's allowance if their capital exceeds a prescribed amount. 9. CDIs are included in the weekly rate of some non-means-tested benefits. The benefits in question are:
10. WFTC is a payable tax credit introduced in October 1999 by the Tax Credits Act 1999, replacing family credit. It is available to an individual or couple with dependent children, provided that the individual or at least one partner in the couple works sixteen or more hours a week. It includes help for child care costs which, for couples, is available where both partners work sixteen or more hours a week. WFTC is income-related and awards are fixed for six months. Payment is usually made through employers, although couples can arrange for payment to be made directly to a non-working partner by the Inland Revenue. 11. DPTC replaced disability working allowance at the same time as WFTC was introduced. It is administered in the same way as WFTC but is available to disabled people who work sixteen or more hours per week, irrespective of whether they have children. 12. The children's tax credit is an income tax relief introduced in April 2001. It is limited to the lower of the maximum amount of children's tax credit (set for each tax year) and amount of income tax which would be payable. It is available to individuals and couples with a child under 16 living with them for at least part of the tax year. The children's tax credit is gradually withdrawn where a claimant has income in the higher rate band for income tax. From April 2002, a higher rate of children's tax credit became available in respect of children born in the tax year. 13. New Deal 50plus is a voluntary programme which was launched nationally in April 2000. The programme aims to help people aged 50 or over to go back to work. People receiving jobseeker's allowance, incapacity benefit, severe disablement allowance or income support for six months or more are eligible for New Deal 50plus. Support is also available in respect of dependent partners of people receiving these benefits. Those who have received invalid care allowance or the bereavement and widowed parent's allowances for a period of six months have immediate access to the programme on successfully claiming one of the four qualifying benefits. New Deal 50plus offers jobseekers a tax-free employment credit for those going into full-time or part-time work, depending on the level of their income, and an in-work training grant. These are also available to those entering self-employment. 14. The Act transfers responsibility for child benefit and guardian's allowance to the Inland Revenue. Child benefit is a social security benefit paid universally to those who are responsible for children under 16 (or 19 if they are in full-time, non-advanced education). Guardian's allowance is a social security benefit paid to those who look after a child whose parents have died or one of whose parents has died and the other is in prison or their whereabouts are unknown. Neither benefit is means tested. CONSULTATION AND SCRUTINY 15. In his March 1999 Budget, the Chancellor of the Exchequer announced that the Government intended to create two new tax credits, one for families with children and the other for working households facing disadvantage. In his March 2000 Budget, the Chancellor announced that the new credits would be introduced from 2003. 16. In July 2001, the Inland Revenue published a consultative document, New Tax Credits: Supporting families, making work pay and tackling poverty which set out how the Government envisaged the new credits would work and sought views from interested parties. Over 170 responses to the consultative document were received by the end of October 2001. A summary of the responses and further details of the proposed new tax credits were published by the Treasury on 29 November 2001. 17. The Tax Credits Bill was introduced in the House of Commons on 28 November 2001 and given its second reading on 10 December 2001. The Bill was considered by Standing Committee A between 15 and 24 January 2002. Consideration and Third Reading were on 7 February 2002, and on the same day the Bill was brought from the House of Commons to the House of Lords. 18. In April 2002, the Treasury and the Inland Revenue jointly published a document, The child and working tax credits: the modernisation of Britain's tax and benefit system (number 10), which set out in detail the proposed value of the various elements of, and thresholds for, the two tax credits. 19. The Bill received its Second Reading in the Lords on 23 April 2003. It was considered in Grand Committee between 16 and 28 May 2002, and Report Stage was on 12 and 13 June 2002. The Bill received its Third Reading in the Lords on 20 June 2002 20. While the Bill was before the House of Lords, the Inland Revenue submitted a number of memoranda on the powers to make delegated legislation under the Bill to the Select Committee on Delegated Powers and Regulatory Reform. The Committee reported its view in two published reports. The relevant reports were the Sixteenth Report (20 March 2002) and the Twentieth Report (15 May 2002). The relevant Inland Revenue memoranda were annexed to those reports. 21. The Bill returned to the House of Commons for consideration of Lords amendments on 26 June 2002. It subsequently returned to the Lords for consideration of Commons reasons on 4 July 2002. This completed the Bill's Parliamentary passage. Royal Assent was given on 8 July 2002. OVERVIEW OF THE ACT 22. The main elements of the Act are:
Measures in the Act Tax Credits 23. The provisions about the new tax credits are contained in Part 1 (sections 1 to 48 and Schedules 1, 2 and 3). 24. Sections 1 to 7 set out the general framework for the new tax credits, in particular:
25. Sections 8 and 9 describe the conditions of entitlement to, and the structure of, the child tax credit. Broadly, the child tax credit will draw together all the existing income-related means of support for families with children - the child elements in income support, income-based jobseeker's allowance, WFTC and DPTC, in addition to the children's tax credit - into one payable credit. It will be available to households with at least one child under 16 (or under 19 if in full-time non-advanced education), irrespective of whether anyone in that household is working. It will consist of a basic family element and an element in respect of each child or young person (the second element will be higher in respect of any disabled or severely disabled children). 26. Sections 10 to 12 describe the conditions of entitlement to, and the structure of, the working tax credit. The working tax credit will provide support to working adults who face disadvantage because they have a disability or are in low-income households. It will draw together the adult elements in WFTC and DPTC and the employment credit for those returning to work under the current New Deal 50plus scheme. It will consist of several elements:
27. Section 13 provides for the mechanism under which the amounts payable will be reduced if the income of the claimant, or the joint income of the claimants, exceeds a threshold to be set by regulations. 28. Sections 14 to 23 describe the decision-making process in respect of awards of and entitlement to the new tax credits and the Inland Revenue's powers to ask for information and evidence and to make enquiries. 29. Sections 24 to 30 set out the arrangements for payment of the new tax credits. Many of the details of these arrangements will be prescribed in regulations. In general, however, payments of the child tax credit will be made directly to the main carer of the child or children, in arrears at weekly or four-weekly intervals as claimants choose. The working tax credit will be paid to employees by their employers with their wages, but it will be paid directly to the self-employed or to those employees whose employer does not operate a full Pay As You Earn (PAYE) scheme. The Inland Revenue will have the power to recover overpayments of the new tax credits. Section 27, which introduces Schedule 1, is intended to ensure that employees should not suffer unfair dismissal or other detriment because of their employer's obligation to pay working tax credit. 30. Sections 31 to 36 and Schedule 2 provide for sanctions to be imposed in certain cases and for information powers in cases of suspected fraud in relation to tax credits. These cases include:
31. Penalties may also be imposed on employers for failing to maintain and provide accurate information or documents and for failure to make payments of working tax credit. 32. Section 37 provides for interest to be charged on an overpayment of tax credits if that overpayment is attributable to fraud or neglect on the part of the claimant. Penalties imposed under sections 31 to 33 also carry interest. The rates of interest will be set by regulations. 33. Sections 38 and 39 set out the appeal mechanism. Section 38 describes claimants' rights of appeal against Inland Revenue decisions about whether and, if so, at what rate, an award should be made and whether an award should be amended or terminated, final decisions about entitlement and any revision of those decisions, and determinations of penalties. Section 39 specifies the appeal procedures, either to the General Commissioners or, if the appellant so chooses under the Taxes Management Act 1970, to the Special Commissioners. However, until a day appointed by the Treasury by order, the appeals procedures set out in section 39 are modified by section 63, so that appeals by claimants will be heard by an appeal tribunal constituted under Chapter 1 of Part 1 of the Social Security Act 1998 (in Northern Ireland, under Chapter 1 of Part 2 of the Social Security (Northern Ireland) Order 1998)) and any appeal against any decision made by such a tribunal will be to the Social Security Commissioner. 34. Sections 40 to 48 make supplementary provision. Section 40 requires the Board of Inland Revenue to make an annual report to the Treasury about certain matters concerning tax credits. Section 41 requires the Treasury to review certain prescribed monetary amounts each year in order to determine whether they have retained their value in relation to prices and to make a report of each review. Section 42 provide a powers to make regulations about how tax credits should apply in the case of persons subject to immigration control. Section 43 provides a similar power in relation to polygamous marriages. Section 44 makes clear, for the avoidance of doubt, that the Act is to apply to the Crown in its capacity as an employer. Section 45 provides for tax credits to be treated as inalienable. Section 46 enables the Inland Revenue to give notices in relation to tax credits in the manner and form they consider appropriate. Section 47 introduces Schedule 3, which makes consequential amendments to other legislation. Finally, section 48 sets out definitions relevant to Part 1 of the Act. Child benefit and guardian's allowance 35. The transfer of functions in relation to child benefit and guardian's allowance is contained in Part 2 (sections 49 to 57 and Schedule 4). Broadly, both benefits will remain payable on the same basis as now. 36. Sections 49 and 50 set out those functions which will be transferred from the Secretary of State for Work and Pensions (and, in the case of Northern Ireland, from DSD) to the Treasury and the Inland Revenue. Functions to be transferred include the power to set the rates of benefit and conditions of entitlement, procedures for claims, payments and the recovery of overpayments, powers of enquiry and investigation, and the decision making and appeals process. Schedule 4, introduced by section 51, makes consequential amendments to other legislation in the light of the transfer of functions. 37. Section 52 provides for the Treasury or the Inland Revenue to take over all property, leases, service agreements, staff contracts and legal liabilities in respect of the responsibilities of DWP (and DSD in Northern Ireland) in relation to the functions transferred. Section 53 makes provision about the functions of the Inland Revenue in respect of child benefit and guardian's allowance. Section 54 makes transitional provisions. 38. Sections 55 to 57 make minor changes to the entitlement rules for child benefit and guardian's allowance to align them more closely with those for child tax credit. In particular, section 55 provides that these benefits may remain available for a certain period (to be set by regulations) after the death of a child. Section 56 removes the 182 day period during which child benefit is not available following the entry of a child or parent into the United Kingdom. Section 57 removes the existing bar to child benefit if a member of the family has tax-exempt income. Supplementary provisions 39. Part 3 (sections 58 to 70 and Schedules 5 and 6) make supplementary provisions, principally:
COMMENTARY ON SECTIONS PART 1: TAX CREDITS Section 1: Introductory 40. This is an introductory section, which creates two new tax credits known as child tax credit and working tax credit (subsection (1)). It also sets out those elements of existing systems of support which are to be abolished and replaced by the new tax credits (subsection (3)). They are:
Section 2: Functions of Board 41. Subsection (1) of section 2 brings the new tax credits under the care and management of the Commissioners of Inland Revenue ("the Board"), which confers the same management discretion on the Board in relation to tax credits as they have in relation to the other matters for which they are responsible. Subsection (2) provides that tax credits are to be paid from tax receipts, as is the case under the Tax Credits Act 1999. Subsections (3) to (5) amplify the provisions of the Inland Revenue Regulation Act 1890 to bring tax credits within the scope of that Act, allowing the Board to appoint persons to pay and manage tax credits, and requiring the Board to account separately for tax credits. Under the Inland Revenue Regulation Act 1890, most functions of the Board may, in practice, be exercised by Inland Revenue staff. Section 6 of the Taxes Management Act 1970 requires members of Inland Revenue staff and the General and Special Commissioners to make a declaration of secrecy. The declaration of secrecy imposes a general duty of non-disclosure. However, information may be disclosed for certain purposes, including for the purposes of any prosecution of an offence relating to "inland revenue". Subsection (6) provides that such offences include offences relating to tax credits. Section 3: Claims 42. Section 3 contains the main provisions about claims to tax credits. Entitlement to a tax credit will depend on making a claim for it, and where the Board decide not to make an award or to terminate an award any entitlement or subsequent entitlement for the same year is dependent on the making of a new claim (subsections (1) and (2)). Claimants must be aged at least 16 and be in the United Kingdom (subsection (3)). Regulations may set out the circumstances in which someone is to be treated as being, or not being, in the United Kingdom, for example, to allow for temporary absences on holiday (subsection (7)). 43. Claims may be made jointly by married or unmarried couples, or by individuals who would not be entitled to make a claim as part of a couple (subsection (3)). Entitlement to a tax credit comes to an end if a couple who have made a joint claim stop being entitled to make such a claim (that is, they separate) or an individual who has made a single claim becomes part of a couple and stops being entitled to make a single claim (subsection (4)). For the purposes of this Part, the definition of "married couple" follows that used for income tax and means any married couple in which the partners are neither formally separated nor separated and likely to remain so permanently (subsection (5)). An "unmarried couple" is defined as a man and a woman living together as husband and wife (subsection (6)). Individual claimants make a "single claim", and couples make a "joint claim" for tax credits. Section 4: Claims: supplementary 44. Section 4 allows for the detailed rules about claims to be set out in regulations. These regulations may:
45. This section also enables the Board to disclose to a claimant (whether or not a joint claimant) information in relation to his claim or an award of tax credit on the claim or to any change of circumstances relevant to his claim or award and any other information which is or appears to be relevant to his entitlement to a tax credit. For example, where a couple have made a joint claim and one member of that couple notifies the Board of a change of circumstances, the Board can explain to the other member of the couple why they have amended the award. | |
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