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Tax Credit Repayments: Does HMRC Have the Power to Withhold Them?


The tax credit is a powerful tool to fuel the success of your business by reducing your tax liability. But, you must report your financial information correctly to avoid tax credits repayments.

Understanding the HMRC policies is vital if you intend to claim tax credits for your business. HMRC is a gateway of your tax credits and is powerful enough to withhold your tax credits repayments. Once HMRC is satisfied with your provided information, the tax credit will be repaid.

What are tax credits and how do they work?

A tax credit is a pound-for-pound sum of money that individuals and businesses can utilise to reduce their tax liability. So, a £1000 tax credit will reduce your tax liability by £1000. This is basically the government's effort to promote innovation and research that benefits the economy, environment, or other purposes. For instance, tax credit as a reward to people who install solar panels or to offset child care costs.

It differs from deductibles that apply only to marginal tax rates and only reduce the final tax liability. For instance, if your business falls under the 22% tax bracket, you'd save 0.22% for every dollar that will be deducted as marginal tax from your income in case of deductibles. But, you can save a full one dollar in case of tax credit payments.

But, tax credits depend on the type of credit; some types of tax credits are eligible for specific locations or industries.

Woman reading r&d tax repayments
How do you know if your company qualifies for tax credits?

The business or individual claiming the tax credit must be a qualified business entity. The business should be a UK limited company that's accountable for Corporation Tax. Plus, the project for which tax credit is claimed has the necessary documentation, and the company must have invested money in it.

There are some other requirements regarding the number of employees and qualified expenditures spent by the company on a said project which vary from industry to industry.

Why might HMRC withhold your tax credit payments?

It's important to claim your tax credit right. Otherwise, HMRC will suspect your claim.

HMRC will question the accuracy of the claim you've prepared, and an inquiry will be initiated. The usual 28 day payment processing procedure won't be followed in this case. HMRC will withhold the payments until they are satisfied with the accuracy of your claim and additional information has been reviewed.

But, companies can ask for part payment while the inquiry is undergoing and the claim is being investigated. This will be extracted from the sum of money already agreed upon for tax credit.

Once the investigation ends on a happy note and HMRC is satisfied with the claim, the remaining amount, including accrued interest, will be released. Note that HMRC still holds the right to initiate an inquiry even after the tax credit payments are processed.

HMRC can stop your working tax credit because;

  • You didn't report the change in your circumstances during the tax year

  • Your annual review isn’t completed in time

  • You didn't respond to HMRC’s compliance check (which HMRC wrote to know the details of your claim)

  • HMRC examined your annual review and decided you're no longer qualified for tax credits

In such cases, HMRC will write a letter telling you that your tax credit has been stopped. The reason for no longer receiving tax credits will also be mentioned. After receiving this letter, a final award notice will also be sent to you. If you can't find this letter, call the tax credit helpline to know the reason for not receiving tax credits.

woman filling out paperwork for R&D tax credit repyments
Can HMRC impose a penalty in case of a false claim?

If HMRC identifies that your tax credit claim is incorrect, you'd be liable to pay the penalty based on Exchequer’s tax loss. The fine amount will depend on whether the claim was fraudulent or the company could not pay the due care. But, if the requisite attention is given and the company's tax record is clean, a penalty of “nil” will be applied.

The amount of penalty will depend on the scenario surrounding the claim. If HMRC finds evidence that the claim is fraudulent, you're liable to as much as 100% of the tax lost. But, less penalty will be incurred if the company responds actively and provides information when needed.

It may even be possible that HMRC will suspend your penalty to give some time for the company to address the mistake. For instance, it may need to improve its record-keeping or accounting practices.

How can you successfully get tax credit payments?

Even if you've received the tax credit but could not properly manage your finances, you're liable to a penalty that will drastically impact your business. Therefore you need a scalable online accounting service to manage your finances. You can quickly estimate how much tax relief you can get using an R&D tax credit. This way, you'll avoid penalties and can better focus on growing your business.

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How does HMRC calculate your tax credits?

HMRC calculates tax credits for the whole tax year that runs from April to April. HMRC estimates the amount of tax you'll receive in that tax year based on your previous year’s income.

You must renew your tax credit at the end of the tax year and report your previous year’s income to HMRC. The Revenue and Customs then assess whether you've been correctly paid or not based on your income.

What changes should be reported to HMRC?

Some changes must be reported, while others should be reported to avert underpayment or overpayment.

Changes that must be reported to HMRC are;

  • You've broken ties with your spouse

  • You've plans to leave the UK for more than eight weeks (in this case, your tax credit will be ended, and you've to renew it when you return)

  • You've no more right to stay in the UK

  • You no longer pay for child care, or childcare costs have been significantly reduced (up to £10) for four consecutive weeks.

  • You can't fulfil the working criteria of 16 to 30 hours a week

  • You've stopped being responsible for a child you're claiming for (in case the child dies or the full-time education has completed)

Some changes that you should report to HMRC are;

  • you're expecting another child

  • Your child has recovered from disability or has become disabled

  • You expect that your current income and the previous year’s income have a significant gap

  • You've changed a job, and there is a considerable gap between leaving your previous job and joining the new one

Woman looking up tax credit repayment information

How to repay in case of overpayments?

It’s imperative to avoid overpayment scenarios as HMRC will reduce your credit and even stop them until all the amount has been repaid. In case of overpayment, you'll receive a letter from HMRC in which the type of reduction that will apply to your tax credit will be discussed.

The method of tax credit repayment will depend on whether you're receiving a tax credit, universal credit, or none.

1. If you're still receiving the tax credit

HMRC will deduct money from your future tax credits until you've repaid all the overpayments. The amount deducted from your future tax credit will depend on your household income.

2. If you've shifted to universal credit

The amount will be deducted from your universal credit until you repay your debt

3. If you don't receive any credit

In this case, you'll receive “a notice to pay” which you've to pay within 30 days. Make sure the payment has reached HMRC.

What to do if you can't afford your repayments?

If you've to repay in case of overpayments but have financial difficulty, you can request to make payments over a long period. This way, you've to pay less each month. you'll be asked about your income, savings, living expenses, and other repayments you owe, such as credit card repayments, utility bill repayment, loans, etc.

If you get tax credits, HMRC will deduct money from that there. So you can request HMRC to reconsider your repayments, either by phone or through your Government Gateway user ID. The decision will be delivered to you within 14 working days.

If you've shifted to universal credit, contact the DWP Debt Management centre to discuss your financial difficulties.

If you don't take the tax or universal credit, contact the tax credits payments helpline to reconsider your overpayments.

Man looking up tax credits repayment information

Last thoughts

You must follow HMRC guidelines to enjoy your tax credit payments. Understand the whole process, from tax credit claims to annual reviews, to avoid penalties or overpayments. HMRC is powerful enough to withhold your tax credit repayments if they suspect your claim.

Therefore, providing accurate and additional information is vital if requested. HMRC will thoroughly examine your claim and release the payments once they are satisfied. If HMRC has stopped your tax credit and you disagree with the decision, you can challenge the HMRC’s decision by asking for mandatory reconsideration.

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