Article by Peter Gravestock, Past President of The Association of Taxation Technicians and Past Chairman of its Technical Committee. This article appeared in the October 2002 issue of Tax Adviser. Key Points
- Income for Tax Credits will be broadly the same as for income tax, but with significant differences
- Claim forms will be filed by the couple, each will have to sign, claims can only be backdated by up to three months
- Time limits for filing details of income are significantly tighter than for self-assessment
- Anti-avoidance legislation could catch the innocent.
- There are still holes in the jigsaw.
Piecing Together The Jigsaw – The New Tax Credits by Robin Williamson, Tax Adviser, June 2002, p. 32 set out the basic rules for claims and credit awards. They are not repeated here.
Legislation contained in the Tax Credits Act 2002 (TCA 2002) which received Royal Assent on 8 July 2002 and the associated Statutory Instruments (SIs) are reviewed here. Those SIs are significantly different to the draft instruments on which The Association of Taxation Technicians (ATT) and other professional bodies made comments earlier in the year - see Giving due credit Tax Adviser, August, 2002, p.34.
Calculation of income
The Statutory Instrument is: The Tax Credits (Definition and Calculation of Income) Regulations 2002 (SI 2002/2006). This calculates the income of the claimant, or joint claimants, for a tax year as follows:
(1) Add together:
- pension income
- investment income
- property income
- foreign income
- notional income
If the result is £300 or less, treat as nil. If the result is more than £300 only the excess is included.
(2) Add together:
- employment income
- Social Security income
- student income ( i.e. certain student dependant grants )
- miscellaneous income
(3) Add together (1) and (2).
(4) Add trading income to (3) or deduct a trading loss of the year from (3). Deduct the following from above:
- Gift Aid payments
- pension payments
- (It would appear that the deduction is the gross amount in all instances.)
This is basically any emolument and certain benefits taxable under Sch. E, but excluding Statutory Maternity Pay except the excess over £100 per week. Only car and fuel benefits and vouchers and credit tokens are included. All other benefits are excluded. Thus benefits used to provide childcare that would be relevant childcare are not included in income. The amount is reduced by expenses that are allowable against Sch. E.
This is the Sch. D Case I profit or loss before averaging for farmers or authors, etc.
This is income arising outside the United Kingdom (UK) that is not already included under any other heading. Foreign income is computed on an income arising basis whether or not remitted.
This is income which the claimant is treated as having, but he does not in fact receive. This would include premiums on rent (s. 34), settlement income (s. 660A, and s. 660B) and loans to a participator released by a close company (s. 421).
Includes all amounts chargeable under Sch. D Case VI.
The legislation also includes under notional income any income that is available to the claimant upon making an application for that income. Furthermore if a claimant provides services to another person, who could afford to pay, for less than full value then trading income or employment income is deemed to include such an amount that could have been charged. This does not apply where the claimant is a volunteer providing services to a charitable or voluntary organisation.
Additonally if a claimant has deprived himself of income for the purpose of securing entitlement to, or increasing the amount of, a tax credit he is treated as having that income.
In order to claim Child Tax Credit (CTC) it is necessary to be responsible for at least one qualifying child or young person. A child is defined in The Child Tax Credit Regulations 2002” (SI 2002/2007) at reg. 3 and a young person at reg. 4. The definition is a young person who normally lives with the claimant, who is under 19 and in full-time education (not university). In addition if the young person is under 18, not at school, registered with the Careers Service and then not working for a maximum period of 20 weeks CTC will be payable.
If a child or young person dies the entitlement ceases eight weeks following death (not exceeding age 19). (Reg. 6 )
It should be noted that the wording of the Tax Credits (Income Threshold and Determination of Rates) Regulations 2002 (SI 2002/2008) relate to relevant periods. It would therefore appear that all credit payments will be made on a weekly or four-weekly basis, but income is on an annual basis.
This is achieved by calculating benefits for a relevant period, i.e. all days with the same entitlement. If that is less than the full fiscal year then income and threshold limits will be reduced pro-rata.
This will mean that benefits for a child will start when the child is born, will reduce after one year, will be payable to 1 September following their 16 birthday or when they leave full-time education. The effect of dealing with claims in this way is that the twelve months following the date of birth will normally straddle two fiscal years. The detailed legislation provides for a calculation of a daily maximum rate for each element. This is then combined into a relevant period which means any part of the period of award throughout which:
- the element of the award remains the same; and
- there is no change in the Child Care element.
This rather complex calculation should give the correct overall answer. (Reg. 7 and 8.)
Under the Tax Credits ( Claims and Notification ) Regulations 2002( SI 2002/2014) a claimant should make an initial claim as soon as entitlement arises.
Except for claims made before 6 April 2003 a claim cannot be made before entitlement arises. A claim must then be made within three months of the date on which entitlement arises. Failure to claim by that date will give rise to loss of entitlement. A claim can only be backdated by three months. This indicates that claims for the new CTC for 2003/04 must be made no later than 6 July 2003. Any later claim will result in loss of credits payable. Contrast this with the old Children’s Tax Credit where the latest date for claims for 2002/03 is 31 January 2009.
The initial claim will be based upon the income for 2001/02. This will then be corrected to the actual income for 2003/04 in due course. A claim may be based upon estimated income for the year of claim - again amended to actual at the end of the year.
At the end of the tax year all claimants will be sent a renewal form. This will set out income and circumstances for the year just ended, and will represent a claim for the subsequent year. Thus the claim for 2004/05 will be based upon the income of 2003/04. This form will have to be signed by both of the claimants if it is a joint claim. It will have to be submitted by 5 July 2004. However if income is not known by that date e.g. a self-employed person, then an estimate will be required. The actual figure will then need to be provided, no later than the filing date for the following year i.e. 5 July 2005 for 2003/04.
Under TCA 2002, s. 32 there will be a penalty for fraudulent or negligent claims limited to a maximum of £3,000 per offence. There will be a penalty for failure to file, with an initial maximum penalty of £300 but with provision for daily penalties of up to £60 per day if the failure continues. The information will not be taken from the tax return, but inevitably will be compared with the tax return.
Currently the Revenue do not propose to deal with agents and Form 64-8 will not give authority for tax credits.
If a claimant has actual income that is lower than the base year then it is likely that they will be entitled to a further tax credit. This will be paid to them by giro.
However if the claimant’s income has increased by more than £2,500 then the excess over £2,500 will be taken into account and the excess tax credit paid recovered from the claimant. Where excess credits are to be recovered on a joint claim both parties are jointly and severally liable to repay the amount. This will normally be done by spreading the amount equally over the tax year, alternatively the Revenue will deem the amount to be underpayment of tax to be collected by way of pay as your earn (PAYE) coding adjustment. If it is not possible to recover in these ways then the Inland Revenue can issue an assessment under TCA 2002, s. 30 of the and the amount will be payable as income tax within 30 days. The amount is treated as tax and the collection and recovery procedures of the Taxes Management Act 1970 (TMA 1970) apply. Interest may be charged on late payment.
It must be appreciated that with a recovery rate of 37 per cent, a fairly modest increase in income can result in large underpayments. For example if a couple’s joint income increased by £5,500 in a year compared with the base year then, excluding the disregard of £2,500, the recovery would be £3,000 multiplied by 37 per cent, a total of £1,110.
Although the Revenue do not see agents becoming involved it is highly likely that any represented client will expect their agents to help with the Tax Claim forms. If you do not wish to be involved then your Letter of Engagement must specifically exclude work relating to Tax Credits. For many practitioners this will not be an option. It will therefore be essential to discover the relevant deadlines, and to be aware of the difference in income for the two calculations.
The rules would appear to set major difficulties to many self-employed claimants. How do you know your current level of income? It may well be that based upon the previous year there is no claim to be made, but if a claim is not made immediately then entitlement will not be backdated. If it takes more than three months to prepare accounts then there can be no possibility of backdating, and the claim will then be revised to the actual current income in due course. The only way around this problem would appear to be to make accounts up very early in a fiscal year e.g. 30 April, to finalise those accounts and make a claim based upon those accounts by 5th July. Full claim entitlement will then arise
To someone who has been involved in taxation for over 30 years the new claim form sounds remarkably like an old-style income tax return. It covers the joint income of the family and the Revenue undertakes the assessment.
The new Tax Credits should offer a fairer method of providing benefits to lower earners. However because the credits include the previous CTC they will affect families with income up to £66,000 a year.
Although the aim of Tax Credits is to remove the disincentive to work high marginal rates remain. The Revenue paper still anticipates that some 45,000 families will have a marginal tax rate in excess of 90 per cent and some 1,450,000 families will have a marginal tax rate of 70 per cent.
Tax advisers will become involved and will have to complete two sets of forms where previously one sufficed, but unfortunately, may not get a double fee.
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October 2002 by