Article by Liz Lathwood, Technical Officer, published in the May 2002 issue of Tax Adviser.
Readers will be aware that the Institute has been involved in consultation on the New Tax Credits due to be payable from 5 April 2003.
The last article I wrote for Tax Adviser was in November 2001, explaining our response to the August consultation document. Since then the Tax Credits Bill 2002 has been published and at the time of writing is still passing through parliamentary procedures.
The Bill has renamed the Employment Tax Credit the Working Tax Credit (WTC), but a lot of the details on how the new credits will work are not in the Bill and are still to be formulated in regulations. At the time of writing we also still do not know the rates and thresholds for the credits and therefore cannot be certain how many individuals will be entitled to claim. However in the debates on the Bill in the House of Commons the Paymaster General,Dawn Primarolo, said ‘we are talking about 6 million applications’ (Hansard, 15 January 2002, col 34).
Clause 7(3) of the Bill gives the rules for determining which year of income is used for means-testing the credits. The meaning of this clause gave rise to considerable debate in the House, with one Member of Parliament (MP) – Ms Karen Buck – commenting during part of it:
‘Although I congratulate my hon. Friend The Minister on the clarity with which he explained the intention of the clauses, I too found my ears gently seeping blood by the end of it.’ (Hansard, 17 January 2002, col 79)
The Paymaster General explained that the clause ‘seeks to provide maximum manoeuverability in respect of the regulations ... it will not be necessary for claimants of the new tax credit, or their advisers, to read clause 7’ (col 82). From the debate it is clear that the intention is to use the previous year’s income wherever possible. It is in this context that the importance of the 2001/2002 P60 becomes apparent.
Because there can be little or no backdating of tax credit claims and probably also because of the sheer number of claimants the Revenue anticipate that claims for 2003/2004 will start to be made from the end of 2002/beginning of 2003 onwards. These claims will require a return of aggregated income so that the Revenue can calculate the tax credits due, ready for the start of the 2003/2004 year. The Working Tax Credit (WTC) will be paid by employers, the Child Tax Credit (CTC) by the Revenue.
The problem of course is that to get the awards up and running for 6 April 2003 the only full year’s income that will be known will be that for the year ended 5 April 2002. The Revenue are therefore advising all employees to take good care of their 2001/2002 P60s so that they have the information needed for their 2003/2004 tax credit claim. Employers might usefully put a reminder in with the P60 as well, one feels.
We think this advice is also important for tax agents. Knowing that the 2001/2002 P60 is vital to the first claims for New Tax Credits means that agents will be prepared when clients come to ask how they can claim their entitlements. The IFS estimate that 80 per cent of families will be entitled to the CTC (Green Budget, January 2002, p. 70) so do not be lulled into thinking that this will not include at least some of your client base. We still wait to see what other details will be required by the claim forms and will pass on further information as we are able. Watch this space!
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May 2002 by