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Reported as [2023] AACR 5

Judicial Summary

Universal credit; Bonus payments; Earned income; Income tax; Tax refunds

The appellants claimed universal credit on 29 April 2020 following the first appellant (the claimant) being on paid sick leave from his employment from 17 April 2019, and then on unpaid sick leave from 17 October 2019, until his employment was terminated on 13 January 2021.

On 20 May 2020, the claimant鈥檚 employer paid him a bonus of 拢20,000 net of income tax deducted in accordance with the Income Tax (Pay As You Earn) Regulations 2003, SI 2023/2682 (PAYE Regulations). The tax deduction was in the sum of 拢6,893.60 - an effective rate of 34.47 per cent 鈥� giving rise to an overpayment of tax. The claimant became entitled to a repayment of the overpaid tax and he received from his employer a repayment of 拢2,144.60 during the assessment period 29 May 2020 to 28 June 2020 (the Assessment Period) and further repayments subsequently, so that by the time his contract of employment came to an end the outstanding figure for tax paid had been reduced to 拢1,706.80.

The tax repayment was included as earnings in the calculation of the universal credit award in the Assessment Period, which meant that there was no entitlement. The claimant challenged the decision arguing that the 鈥榮o-called income鈥� of 拢2,144.60 was the partial return of tax overcharged by Her Majesty鈥檚 Revenue and Customs (HMRC) in May 2020 and that as the one-off bonus payment had already been taken into account, leading to a zero payment of universal credit in the assessment period in which it was paid, the return of the overcharged tax 鈥榠n pieces over multiple months鈥� should not be considered as income.

The decision was unchanged at mandatory reconsideration and the claimant appealed to the First-tier Tribunal, also arguing that regulation 55(4A) of the Universal Credit Regulations 2013 (the Regulations) provides that repayments of tax will only be treated as earnings if the universal credit claimant was in any paid work during the tax year the repayment relates to and, as the claimant had not been in any paid work since October 2019, any tax repayments since April 2020 should not be considered as income.

The First-tier Tribunal dismissed the appeal, finding that, as the claimant鈥檚 employment contract continued, he was entitled to be paid when he worked, and he was therefore in paid work during the 2020/2021 tax year. It also found that, in the absence of evidence that the employer was under a legal obligation to pay the bonus during a previous tax year, the claimant鈥檚 entitlement to receive the bonus arose during the 2020/2021 tax year. The issue before the Upper Tribunal was whether the tax refund constituted employed earnings which fell to be taken into account in the Assessment Period. The claimant鈥檚 argument on regulation 55(4A) raised the further questions (i) to which tax year the repayment related, (ii) whether the claimant was 鈥榠n paid work鈥� while on unpaid sick leave and (iii) whether regulation 55(4A) applied to 鈥榮ame year鈥� refunds. Those questions are considered in paragraphs 49 to 65.

Held, allowing the appeals, that:

1. the correct starting point is not with regulation 55(4A) but with regulations 54 and 61. Under regulation 54, the calculation of a person鈥檚 earned income in respect of an assessment period is, unless otherwise provided in Chapter 2 of the Universal Credit Regulations, to be based on the actual amounts received. It was not suggested that Chapter 2 made any relevant alternative provision. Under regulation 61(2), where a person is or has been engaged in an employment in respect of which the employer is a Real Time Information employer, the amount of the person鈥檚 employed earnings from that employment for each assessment period is to be based on the information which is reported to His Majesty鈥檚 Revenue and Customs under the Pay as you earn (PAYE) Regulations. Regulation 61(3) permits the Secretary of State to determine that paragraph (2) does not apply in certain circumstances and regulation 61(4) then requires the Secretary of State to make a decision on the amount of the person鈥檚 employed earnings in accordance with regulation 55, but was not been suggested that a paragraph (3) determination had been made in the present case. It therefore followed from regulations 54 and 61(2) that the tax refund constituted employed earnings for the Assessment Period.

2. regulation 55(4A) did not apply to the tax refund. The regulation refers to repayments 鈥榬eceived by a person from HMRC鈥� and the claimant received the refund from his employer. Where regulation 61(2) applies, that is an end of the matter. Any tax refund dealt with through the PAYE Regulations will inevitably be a payment of which the DWP is aware and since it will in some way be connected with the claimant鈥檚 employment it will properly be counted as employed earnings.鈥� (paragraph 45)

Decision set aside, remaking it by substituting the decision to the same effect.