CIOT welcomes tax credits package but warns claimants of penalty regime The Chartered Institute of Taxation (CIOT) welcomes the announcement in the Pre- Budget Report (PBR) on 5 December 2005 that from 2006/07 increases in income of up to £25,000 will be ignored when finalising tax credit claims.
John Whiting, Chairman of the CIOT’s Tax Policy Sub-Committee, says: “This effectively means that most tax credit claimants, whose income increases from one year to the next, will have their final awards based on their previous year’s income. This was a common suggestion for simplification made by our members when we surveyed them in December 2003 just after tax credits were introduced.”
John Whiting adds: “We welcome the change because for most claimants who experience increases in income, it will remove the quirky effect of the annual income measure whereby, even if claimants notify their income change on the day that it happens, they can still be in an overpayment situation.”
The CIOT also welcomes the announcement that from November 2006 the same rates of recovery will apply to overpayments in-year as apply to overpayments from the previous year. The CIOT has been calling for a change in the method of recovery of in-year tax credit overpayments. At present the method works against claimants notifying certain changes quickly because it can lead to payments being stopped or drastically reduced.
John Whiting says: “However, we would like to see this change come in from an earlier date. We know that the change can only be dealt with automatically from November next year but HMRC could enable the change to be effective now, if they made changes to their Code of Practice 26. As claimants will not be able to benefit from the new £25,000 disregard until April 2006, we think that this is particularly important.”
The CIOT warns claimants of the changes announced in the PBR, which will mean that claimants have to notify more changes within a fixed time frame.
John Whiting explains: “There is a penalty of up to £300 in the tax credits legislation for not notifying certain changes on time. More claimants will become liable to these penalties as more changes become compulsory. We are also concerned about the shortening of the time limit from April 2007 to one month. It is often not possible to tell whether a new household has been formed or an existing household has broken down within these sorts of time limits. We hope that HMRC will apply the penalty regime with a light touch in these circumstances.”