1999 Chapter 10

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These notes refer to the Tax Credits Act 1999 which received Royal Assent on
30 June 1999 (c.10)

Tax Credits Act 1999

EXPLANATORY NOTES

1.     These explanatory notes relate to the Tax Credits Act 1999. They have been prepared by the Inland Revenue in order to assist the reader of the Act and to help inform debate on it. 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 AND BACKGROUND

3.     This Act provides for the introduction of:

• Working Families' Tax Credit (replacing Family Credit); and

• Disabled Person's Tax Credit (replacing Disability Working Allowance).

These new tax credits were announced by the Chancellor of the Exchequer in his Budget Statement on 17 March 1998.

The new tax credits

4.     Both the tax credits will be introduced from 5 October 1999. Initially they will be paid by the Inland Revenue direct to recipients. In the case of employees, however, from 6 April 2000 the credits will, where appropriate, be paid by employers in wage packets. The Act includes the necessary provision for this. The self-employed will continue to receive their tax credits direct from the Inland Revenue.

5.     The level of the tax credits will be set by statutory instrument.

6.     The Working Families' Tax Credit will go to around 11/2 million families at a cost of around £4.9 billion.

Working Families' Tax Credit

7.     The award of Working Families' Tax Credit (WFTC) will be based on circumstances at the date of the claim and will run for 26 weeks. The main qualifications for entitlement will be that claimants must be working at least 16 hours a week and be responsible for children. It is available to both lone parents and those with a partner.

8.     The WFTC will consist of:

(i) an adult tax credit;

(ii) child tax credits for each child in the family (varying depending on the age of the child);

(iii) a 30 hour tax credit (if more than 30 hours a week are worked);

(iv) a childcare tax credit, providing help towards childcare costs.

9.     The childcare tax credit is new (replacing the childcare disregard currently within Family Credit). It will provide 70% of eligible childcare costs up to a maximum spent of £100 a week for one child, and £150 for two or more children.

10.     The total amount of the tax credit award will be withdrawn at the rate of 55 pence for each additional £1 of net earnings over a threshhold - income net of income tax and NIC, of £90 per week.

Disabled Person's Tax Credit

11.     Disabled Person's Tax Credit (DPTC) is similar to WFTC but eligibility will be based on disability affecting the applicant's ability to work rather than responsibility for children - other eligibility rules will be the same. As with WFTC an award will be based on circumstances at the date of claim and run for 26 weeks. In addition to the tax credits making up the WFTC (including the new childcare tax credit) the DPTC will have:

• a couples tax credit, and

• a disabled child's tax credit

12.     The total of these is the maximum award but, where earnings calculated under the rules exceed a threshold, DPTC - like WFTC - will be withdrawn at 55 pence for every additional pound of net earnings. Unlike WFTC, the DPTC will have separate thresholds for single people on the one hand and couples and lone parents on the other.

13.     Like WFTC, the legislation establishes that it will be introduced in October 1999 and from April 2000 it will be paid, where appropriate, by employers through the wage packet.

THE ACT

14.     The Act:

• replaces Family Credit (FC), and Disability Working Allowance (DWA), benefits currently administered by the DSS with Working Families' Tax Credit (WFTC) and Disabled Person's Tax Credit (DPTC);

• provides for the administration of the tax credits from October 1999 by the Inland Revenue;

• provides that from April 2000 payment of the tax credits will be through the wage packet - the Act includes powers to make regulations requiring employers to administer payments of WFTC and DPTC;

• provides for the protection of employees' rights not to suffer unfair dismissal or other detriment;

• provides for appeals on WFTC and DPTC claims to be heard by the new unified appeal tribunals established under the Social Security Act 1998, as they have the necessary experience to deal with the cases which come before them;.

• provides for necessary exchanges of information between Inland Revenue and Department of Social Security for the purposes of the new tax credits and the remaining social security benefits to enable the business to be carried on;

• ensures the security of WFTC and DPTC and combats fraud, using compliance provisions drawn from both the current social security legislation and the wider tax system; and

• provides for WFTC and DPTC to be excepted matters for Northern Ireland, and outside the legislative competence of the Northern Ireland Assembly. This is because the tax credits will be administered by the Inland Revenue as part of the tax system.

15.     The greater part of the Act consists of amendments to existing legislation: principally the Social Security Contributions and Benefits Act 1992 and the Social Security Administration Act 1992 (and the corresponding Northern Ireland legislation) and the Taxes Management Act 1970.

COMMENTARY ON SECTIONS

Section 1(1) effectively converts the existing benefits into tax credits.

Section 1(2) gives effect to Schedule 1 which contains the detailed references to family credit and disability working allowance which need to be changed.

Section 2: Transfer of functions relating to tax credits

Section 2(1) and Schedule 2 Parts I, II and III provide for a transfer of functions relating to the tax credits. Much of the detail of the social security legislation for FC and DWA is in subordinate legislation. The primary legislation therefore contains a large number of regulation making powers. In order that WFTC and DPTC can be administered by the Inland Revenue these powers, insofar as they relate to WFTC and DPTC, need to be transferred. Section 2(1) transfers the purely administrative powers to the Board of Inland Revenue, and powers affecting the levels of WFTC and DPTC to the Treasury. Functions relating to the making of decisions go to Officers of the Board of Inland Revenue.

Section 2(2) provides that functions relating to periods of awards which begin before 5 October 1999 will not transfer. They will remain with the Secretary of State for Social Security, but may be exercised by the Inland Revenue on behalf of the Secretary of State. This is because awards run for a period of 26 weeks and therefore on the transfer there will be awards in payment which were authorised before the transfer. Payments authorised under rules prevailing before 5 October will be paid from the DSS vote.

Section 2(3) makes provision for Schedule 2 Part IV which modifies certain enactments for the purposes of WFTC and DPTC.

Section 2(4) gives effect to Part V of Schedule 2, which provides for the detailed consequential amendments needed to provisions in social security legislation which apply to benefits generally, so that they can be applied for the purposes of WFTC and DPTC.

Section 3: Property, rights and liabilities

Section 3(1) provides that the property, rights and liabilities relating to the functions being transferred to the Treasury will also be transferred. The primary purpose of this is to allow for the transfer of contracts.

Section 3(2) is the same provision as section 3(1), in relation to the functions being transferred to the Board.

Section 3(3) limits the transfer so that it does not apply to property, rights or liabilities which are subject to proceedings commenced before the transfer takes effect.

Section 3(4) provides for the transfer of staff currently employed in the Northern Ireland Civil Service to the Home Civil Service. This will be by Order in Council.

Section 3(5) provides that the statutory instrument containing the Order shall be made by negative resolution by both Houses of Parliament.

Section 4: Special provisions for certain contracts

The Benefits Agency, who administer Family Credit, receives goods and services under a range of contracts, and section 3 provides that where the contracts relate wholly to the functions being transferred, they will become contracts with the Inland Revenue. However, they also receive goods and services under contracts which provide for the supply to other parts of the DSS. Section 4 provides for continuity in the transfer of these contracts.

Section 4(1) defines the contracts to which the section applies. They are contracts which are which relate partly to functions being transferred and partly to those being retained by the Secretary of State.

Section 4(2) disapplies section 3 for the contracts covered by this section.

Section 4(3) provides that the contracts involved shall be treated as also providing goods and services to the Inland Revenue. So when the functions are transferred, the Inland Revenue will be able to receive goods and services under these contracts, although they will be managed by the DSS.

Section 4(4) ensures that references to the Secretary of State also include those to the Department of Social Security.

Section 5: General functions of Board

Section 5(1) provides that WFTC and DPTC shall be under the care and management of the Board.

Section 5(2) amends the Exchequer and Audit Departments Act 1866 to allow for payments of WFTC and DPTC to be made from tax receipts.

Section 5(3) provides that tax credit is included within the meaning of inland revenue for the purposes of the Inland Revenue Regulation Act 1890. That Act provides for the Board's powers and responsibilities.

Section 5(4) allows the Board to appoint collectors, officers and other persons for the purpose of paying and managing WFTC and DPTC.

Section 5(5) provides that the Board of Inland Revenue will have a duty to account for the tax credits, distinguishing between amounts of WFTC and DPTC.

Section 5(6) provides that the declaration of secrecy taken by members of staff and General and Special Commissioners will include tax credits.

Section 5(7) provides for the accounting arrangements provided for in section 5(2) to take precedence over the accounting arrangements provided for in s.163(2) of the Social Security Administration Act 1992.

Section 6: Payments of tax credits by employers

Section 6(1) establishes the responsibility of employers to make payments of tax credits awarded to their employees in accordance with regulations to be made by the Board.

Section 6(2) provides for regulations to be made relating to the making of these payments. In particular the regulations may require employers to:

• make payments of tax credits as notified by the Board of Inland Revenue

• produce wage sheets and other documentation to verify payments of tax credits;

• provide employees with information relating to the tax credits paid to them.

The regulations may also provide for:

• funding by the Board of employers, either before or after they pay the tax credit. The means by which this funding may be provided include set-off against income tax or national insurance for which the employer is accountable to the Board;

• recovery of overpayments of funding to employers;

• calculation and payment of interest on amounts due to or from the Board;

• appeals relating to matters covered in the regulations.

Section 6(3) specifies that regulations made under this section may make provision for different cases and circumstances. The regulations will be made by statutory instrument which will be subject to the negative resolution procedure.

Section 6(4) provides that the section is to come into force on 6 April 2000. Although the WFTC and DPTC will be introduced in October 1999, payment by employers will not begin until April 2000. This will give employers time to make the necessary adjustments to their payroll systems.

Section 7: Rights not to suffer unfair dismissal or other detriment

Section 7 gives effect to Schedule 3. This gives provision for the rights of employees not to suffer unfair dismissal or other detriment as a consequence of the obligations imposed on employers by section 6.

Section 8: Powers to obtain information

Section 8(1) provides that s.20 and s.20B of the Taxes Management Act 1970 (TMA) will apply in relation to employers' compliance with the regulations under section 6. These sections relate to the powers of the Inland Revenue to call for documents. Provision for penalties for non compliance in relation to tax credits are in section 9(3)(c) and (5)(c).

Section 8(2) provides for consequential changes to references in s.20 and s.20B for the purposes of applying those sections to the tax credit regulations for employers.

Section 9: Penalties for fraud etc. and failures to comply

Section 9 contains the sanctions to deter fraud and support the Inland Revenue's powers of investigation. The provisions for imposing the penalties and appeals against them are contained in Schedule 4.

Section 9(1) provides that a person will be liable to a penalty if they fraudulently or negligently make a false statement or declaration in relation to a claim. The penalty will not exceed the amount specified in section 9(2).

Section 9(2) provides that the amount of the penalty will not exceed the difference between the amount of tax credit the claimant is actually entitled to and the amount he would have been entitled to if the claim had been correct. Section 9(1) and (2) reproduce the effect of s.95 of TMA, in relation to the tax credits. Appeals against these penalties will be to the unified appeal tribunals set up by the Social Security Act 1998.

Section 9(3) provides for a penalty for failure to provide information, or produce or deliver documents. It applies to:

• the information powers in the Social Security Administration Act 1992 and corresponding Northern Ireland provisions (section 9(3)(a));

• regulations relating to employers under section 6 (section 9(3)(b));

• the use of s.20 of TMA for employer compliance (section 9(3)(c)).

For (a) and (c), no penalty can be imposed after the offence is remedied. For (b), an initial penalty can be imposed, but no continuing penalty, after the offence has been remedied. This follows the approach of s.98 of TMA, which distinguishes obligations based on notices from other obligations. Appeals against these penalties under section 9(3)(a) will be to the unified appeal tribunals set up by the Social Security Act 1998 or the corresponding Northern Ireland legislation. Appeals against penalties under section 9(3)(b) or (c) will be to the tax commissioners.

Section 9(4) provides the amount of the penalty to be imposed under section 9(3). This will be a penalty not exceeding £300, and if the failure continues, further penalties not exceeding £60 a day for each day the failure continues. This mirrors the penalties in s.98(1) of TMA.

Section 9(5) provides that a person shall be liable to a penalty, not exceeding £3000, for fraudulently or negligently furnishing, producing or delivering incorrect information. Like section 9(3) it applies to:

• the information powers in the Social Security Administration Act 1992 or the corresponding Northern Ireland legislation (section 9(5)(a));

• regulations relating to employers under section 6 (section 9(5)b));

• the use of s.20 of TMA for employer compliance (section 9(5)(c)).

This mirrors the provisions in s.98(2) of TMA. Appeals against these penalties under section 9(5)(a) will be to the unified appeal tribunals set up by the Social Security Act 1998. Appeals against the penalties under section 9(5)(b) or (c) will be to the tax commissioners.

Section 9(6) provides for a penalty to be imposed where an employer refuses or repeatedly fails to make payments of tax credits, so that the Inland Revenue has to take over direct payment. The penalty will be an amount not exceeding £3000. Appeals against these penalties will be to the tax commissioners.

Section 9(7) provides for a penalty to be imposed where an employer fraudulently or negligently makes or receives incorrect payments of tax credits; or delivers an incorrect return. The penalty will only be applicable once in respect of each employee, and will not cover matters already dealt with under section 9(6), where the Revenue has had to intervene. Appeals against these penalties will be to the tax commissioners.

Section 10: Penalties: supplementary

Section 10(1) provides that no penalty under section 9 in relation to failures (to furnish information, evidence or documents) under section 9(3)(a) or (c) shall be imposed after the failure has been remedied. This includes the penalty for initial failure, and the penalties for continuing failure. For failure under section 9(3)(b) the continuing penalty is prevented once the failure has been remedied, but the initial penalty may be imposed. The penalty under section 9(3)(b) is for failures in relation to employers regulations.

Section 10(2) provides that a penalty under section 9(7) shall not be imposed until the end of the tax year, and only one penalty in relation to any one employee can be imposed for any tax year.

Section 10(3) provides that s.118(2) of TMA shall apply for penalties under section 9(3) and (6). This allows for extra time to remedy a failure and for a reasonable excuse for failure to comply.

Section 10(4) gives effect to Schedule 4. This gives details of the procedure for imposing penalties and appeals against them.

Section 11: Liability of company directors etc.

Section 11(1) provides for ss.121C and 121D of the Social Security Administration Act 1992 (and corresponding Northern Ireland provisions) to apply in relation to the tax credits. This will relate to liability of directors for tax credits and allows for transfer of responsibility for unpaid tax credit debt to directors where they are considered to have acted in a fraudulent or negligent way. It provides for a notice to be served requiring payment of a proportion of the outstanding tax credits, and for appeals against a notice served under s.121C. The section applies the provision to prevent use of tax credits by directors for their own use.

Section 11(2) provides for amendments to apply the sections to the tax credits, so that the references are to officers of the Board of Inland Revenue, and powers under the sections are transferred to the Board in relation to the tax credits.

Section 11(3) provides that regulations made under section 11(2) shall be by negative procedure by both Houses of Parliament.

Section 12: Disclosure of information

Section 12(1) provides that the Inland Revenue's general restrictions on disclosure of information apply to the Inland Revenue's tax credit functions. The rest of the section gives the detailed amendments needed to the disclosure provisions.

Section 12(2) amends subsection (1) of s.182 of the Finance Act 1989 ("FA 1989"), to provide for it to be an offence to disclose information in respect of any identifiable person which is held or has been held in the exercise of functions relating to WFTC/DPTC, in addition to the current provision referring to tax functions.

Section 12(3) adds a new subsection (2AA) to s.182 of FA 1989 to specify that tax credit functions refers to the functions of working families' tax credit and disabled person's tax credit.

Section 12(4) amends s.182(4) of FA 1989 to provide that it is also an offence to disclose information relating to the tax credits held by the National Audit Office and the Parliamentary Commissioner for Administration in the exercise of their functions.

Section 12(5) amends s.182(5) of FA 1989 to provide that it is not an offence to disclose WFTC/DPTC information with the consent of the person to whom the information refers.

Section 12(6) provides for Schedule 5 to have effect. This deals with the use and exchange of information

Section 13: Documents and forms

This allows documents and forms which refer to Family Credit and Disability Working Allowance to be used after the transfer in relation to payment periods beginning before 5 October 1999. This is to allow for the situation where work is continuing on outstanding awards of FC/DWA after the transfer of functions.

Section 14: Persons qualifying for disabled person's tax credit

This section extends the qualifying conditions for the disabled person's tax credit. It gives disabled people a longer time (182 days instead of 56) in which to find a job (and thus qualify for DPTC) after other benefits have been withdrawn because of an improvement in their condition. It also provides for a new fast-track gateway into DPTC for people who become long-term sick or disabled while in work.

Section 14(1) provides for amendment of the legislation relating to the qualifying conditions.

Section 14(2) updates a reference in the existing legislation.

Section 14(3) provides that an application for DPTC may be made up to 182 days after ceasing to receive a qualifying benefit. The current limit for DWA is 56 days.

Section 14(4) provides the conditions for the fast-track gateway. These are that:

• a person has received statutory sick pay, short term incapacity benefit paid at the lower rate, income support paid on the grounds of incapacity, national insurance credits only or occupational sick pay;

• that person has a condition which puts him or her at a disadvantage in getting a job;

• a medical practitioner certifies that the illness or disability will last for at least 6 months; and

• on returning to work the applicant will receive earnings at least 20% less than would have been the case if there had been no disability.

Section 14(5) and (6) make consequential changes to references in the existing legislation.

Section 14(7) and (8) ensure that the existing provisions allowing repeat claims will apply for people whose initial claims are via the fast-track gateway.

Section 14(9) provides that this section will come into effect from October 2000.

Section 15: New category of childcare providers for tax credit purposes

Section 15 extends the range of childcare costs that can qualify for help through the childcare tax credit within the Working Families' Tax Credit and Disabled Person's Tax Credit.

Section 15(1) sets out the general principle, purpose and limits of the section. It enables the Secretary of State to make regulations for a scheme to establish a new category of childcare provider, the costs of which would be taken into account in calculating the maximum Working Families' Tax Credit and Disabled Person's Tax Credit.

Section 15(2) states that the scheme will enable "accredited organisations" to approve the new type of childcare provider, and enable grants or loans to be made to the "accredited organisations", for them to charge reasonable fees to prospective providers, and for the Secretary of State to make such other provisions as are necessary.

Section 15(3) confirms that the "accredited organisations" are organisations accredited by the Secretary of State under rules set out in the scheme.

Section 15(4) makes provision about the powers to make the rules for the scheme in regulations and states that other than when they are made for the first time, they are to be made by statutory instruments under the negative procedure where either House can resolve to annul them.

Section 15(5) states that when the regulations are made for the first time, they are to be made under the affirmative procedure where both Houses must resolve to approve them.

Section 16: Northern Ireland

Section 16(1) provides for WFTC and DPTC to be excepted matters under the Northern Ireland Act 1998 and outside the legislative competence of the Northern Ireland Assembly. Tax matters in general are excepted from the authority of the Northern Ireland Assembly and administered on a UK wide basis by the Inland Revenue. As WFTC/DPTC will be administered by the Inland Revenue, it has been agreed that they should be excepted matters.

Section 16(2) and (3) provide that the Northern Ireland Assembly may amend or repeal the Employment Rights (Northern Ireland) Order 1996, as amended or applied by Schedule 3 to the Bill, provided that the amendment or repeal affects employment rights generally. The fact that WFTC/DPTC are excepted matters would otherwise prevent this.

Section 17: Financial provisions

Section 17 is to allow for expenditure, by the Board or Secretary of State, arising from the provisions of the Act to be paid out of money provided by Parliament. It also allows for payments into the Consolidated Fund of any increase as a result of the Act.

Section 18: Interpretation

Section 18 defines certain terms used in the Act.

Section 19: Transitional Provisions, savings and repeals

This section provides powers to make regulations for transitional purposes.

Section 19(1) provides that the Board or Treasury may make regulations under the powers transferred in section 2(1) at any time after the Act is passed, if the regulations only come into force after the commencement date. This allows the regulations to be in place, ready to operate from the commencement date.

Section 19(2) ensures the validity of things done on behalf of the Secretary of State, or by the Department of Health and Social Services for Northern Ireland, before the transfer date in relation to the tax credits, and enables the actions to be continued by the Board, or by an officer of the Board, after transfer.

Section 19(3) provides that things done before transfer on behalf of the Secretary of State, or by the Department of Health and Social Services for Northern Ireland, should be treated as if they were performed by the Treasury, Board or by an officer of the Board in order to allow administration to continue.

Section 19(4) provides for Schedule 6, with the details of the necessary repeals, to have effect.