"Dear Benefits Owl
I started receiving invalidity benefit in the early 1990s. In 1995, Invalidity Benefit was replaced by Incapacity Benefit, and this continued until claimants of Incapacity Benefit were slowly migrated over to Employment Support Allowance. I was transferred to ESA in 2014 and am in the 'support' group of taxable ESA, as mine is contributions based.
However, it's recently come to my attention that as ESA is a taxable benefit, then it must be included in my annual tax self-assessment. This is unfair, as claimants of invalidity benefit or pre 1995, incapacity benefit, were entitled to tax-free incapacity benefit and until it was transferred to ESA, never had to include this figure in their self-assessment. As I have other income, I now will be effectively paying 20% tax on my ESA, as this new ruling has taken my income over my tax code. How can they suddenly abolish a ruling that has stood for the last 18 years, that claimants of incapacity before 1995, did not have include it as a taxable benefit?
I've had to think quite hard about this, as there's more to this than meets the eye. Here's my response.
First, I need to confirm that Ms A's understanding of the facts is correct: sadly for her, it is.
Invalidity Benefit and Sickness Benefit were both replaced by Incapacity Benefit in 1995. Incapacity Benefit was taxable from the outset. However, having dusted off (literally!) some old handbooks I can confirm that it was not taxable if a claimant was transferred onto it from Invalidity Benefit.
In 2008 Incapacity Benefit was, in turn, replaced by Employment and Support Allowance. Again, Employment and Support Allowance was (and is) taxable. However this time there was no concession for people whose Incapacity Benefit was not taxable (because they had been transferred from Invalidity Benefit).
For many people this will not be an issue one way or another, because their total taxable income is less than their Personal Allowance (normally £10,600 per year). But for some people, including Ms A, it is.
So, secondly, I need to look at the actual question: "How can they suddenly abolish a ruling that has stood for the last 18 years, that claimants of incapacity before 1995, did not have include it as a taxable benefit?"
The simple answer is: because they can. But of course it’s actually a bit more complicated than that.
When Employment and Support Allowance replaced Incapacity Benefit what actually happened was that the (then Labour) government created and implemented a new set of laws, and removed ('repealed') some of the old ones. It could write these any way it liked, provided it could get them through Parliament (you could say that this is Parliament's main job).
MPs or Lords could have argued that it was unfair to make Employment and Support Allowance taxable for claimants who had been on Invalidity Benefit: they could even have argued that it shouldn't count as taxable income for anyone. Maybe some did: I don't know. But we do know that if they did they were unsuccessful.
However, once any new law is enacted, people affected by it may challenge the law in the courts. There are two main types of reasons why laws are challenged:
- The new law is unclear. For example, in the rules for the mobility part of Disability Living Allowance (originally Mobility Allowance), one of the conditions for the higher rate was that you had to be 'virtually unable to walk', but didn't say what this meant. So over the years there have been lots of rulings from various judges to try to make this clearer. Decision makers have to consider these rulings when they make their decisions about Disability Living Allowance.
- The new law conflicts with other laws that have not been repealed. For example, there was a case at the Court of Appeal regarding the 'bedroom tax', in which the judges decided that to refuse to allow an extra bedroom to a disabled child conflicted with the requirements of the Human Rights Act. Local authorities now have to follow this ruling when they consider how much Housing Benefit to award claimants with disabled children.
In your case, type(1) clearly doesn't apply. It's very clear in the way the law is written that Employment and Support Allowance is taxable, and there is nowhere in the law that gives any exceptions from this.
And sadly type(2) doesn't apply either, as far as I can work out. There is no other law that says that contributory benefits should not be taxable, or that someone who has been transferred from one that wasn't taxable should continue to benefit from this. The laws that created Invalidity Benefit allowed for it to be non-taxable, but these laws only applied to that benefit and have been repealed anyway. The Incapacity Benefit rules had a section which allowed transitional protection for people moving onto it from Invalidity Benefit, but these only apply to that transition and not later ones.
Ultimately what this all comes down to is that MPs and Lords were not, on the whole, worried about people losing the tax free status of this type of benefit. Or perhaps they were, but were outvoted, or felt the issue was outweighed by the need to balance government expenditure.
Where does this leave someone in this position?
- They could campaign to change the law, to make Employment and Support Allowance not taxable for everyone, or for those transferred onto it from Invalidity Benefit via Incapacity Benefit. One problem with this is that there probably many people affected by the taxable nature of Employment and Support Allowance to make sufficient impact, especially if we're only looking at people who were originally on Invalidity Benefit.
- If a person had received a demand for tax arrears because they were not informed of the change, they could complain to the DWP. However this would rely on them never having received anything from the DWP that included reference to it being taxable, and normally people are sent year end statements from the DWP specifying how much taxable benefit they have received. And even if a complaint was successful, I am doubtful whether they would receive compensation to make up for the tax lost. And as problems like this are not the fault of Her Majesty's Revenue and Customs (HMRC) they may be sympathetic but they're unlikely to write off the tax due.
- If the government's thinking of changing, or replacing, a benefit that matters to you, make sure you look into it and let your MP know of any concerns. Find out if other people share your concerns: if they do, think about campaigning. None of this may work, but it's probably your only chance. Once the law has changed it's normally too late to do anything about it.
- If you're on a benefit and it 'transitions' to another one, don't assume anything. Changes may sneak through that aren't publicised at all...