Kate Upcraft discusses tax credits. Kate Upcraft is Policy & Research Manager for the Institute of Payroll and Pensions Management and Payroll Legislation Manager for Marks and Spencer. She is a member of the Inland Revenue employer working group on New Tax Credits. This article appeared in the December 2002 issue of Tax Adviser.
It’s only two and a half years since the first incarnation of tax credits came into being in April 2000, but already it’s time for out with the old and in with the new.
Listening to the Chancellor during the launch week in September you could be forgiven for thinking that there will only be one tax credit to concern yourself with from next year, given his focus on the child tax credit (CTC). Fortunately payroll managers know differently and are well aware of the continuing role that employers will play in delivering welfare reform through the wage packet.
This article examines the key issues from both the applicant’s and the employer’s perspective across both the CTC and the employer-delivered working tax credit (WTC).
Child Tax Credit – entitlement
To receive CTC the applicant must be responsible for a child up to age 16, or 1 September after his/her 16th birthday. Additionally, and this is a key point for applicants, entitlement has been extended to young people up to 18 if they are in full-time non-higher education. On top of the family element, additional amounts will be paid to those with a disabled child or with a baby under one year old – this is the so called ‘baby bond’ that you may recall being launched with a fanfare last year.
The household income threshold has also been widened so that households with gross income up to £58,000 will now be entitled to the credit. For those entitled to the baby bond the income test extends to £66,000.
So what’s happened to child benefit and the child related elements of benefits such as income support and job seeker’s allowance? Child benefit, which incidentally moves under the wing of the Inland Revenue from April 2003, will continue to be universal and non means-tested. However, the child related elements from the other benefits will now all be rolled up in CTC.
What’s in a code?
Well definitely what is not in a tax code from next April will be CTC. Children’s tax Credit and its predecessor married couple’s allowance were both coding allowances. In contrast CTC is a payment directly from the Revenue to the main carer’s bank account. This is a key message for your clients – they must apply for CTC via the lengthy and detailed tax credits application process. All coding allowances will be removed automatically, but CTC won’t be awarded without a specific application. Current recipients are being sent claim packs now, but may well think because they are already getting CTC that they need take no action.
Help with childcare
Working families tax credit (WFTC) has always included an element related to childcare, but it was previously paid as part and parcel of the award paid through the wage packet. From next year the main carer will receive any childcare element directly, as well as CTC. Help with childcare is available for 70 per cent of qualifying costs up to a maximum of, for example, £200 per week for a family with two children.
Income – the ins and outs
In a move to align tax credits with the taxation system, and thus reinforcing the link between welfare and work, the definition of income will change next year from net to gross pay. This of course then begs the question of what taxable benefits should be included. The decision has been taken that only major benefits will be taken into account when calculating the joint household income. These are:
- company cars, taxable mileage payments and free private fuel;
- The cash equivalent of readily convertible assets (RCAs ) e.g. gifts of food and wine;
- tax/domestic bills paid by the employer on the employee’s behalf; and
- cash/non cash vouchers, but not childcare vouchers.
In calculating gross income the following will be disregarded:
- pension contributions and pension income;
- Give As You Earn (GAYE);
- Share Incentive Plan (SIP) deductions;
- maintenance; and
- the first £300 of savings interest.
Working tax credit – entitlement
So if it’s all change in respect of CTC is there anything new in respect of Working Tax Credit? But of course!
Entitlement to WTC is also being extended to childless couples aged over 25 who are working more than 30 hours per week. For those with children the rules remain the same: they must be usually working 16 or more hours per week. The 16-hour rule also applies to the disabled (including those without children) for whom the age 25 rule is also disapplied. You’ll have noticed the choice of the word ‘usually’ – just what does that mean? The Revenue has been hard pushed to define it. We know it doesn’t mean contracted hours or average hours but for those sectors where hours fluctuate week-in-week-out it is not clear how the applicant (and the Revenue!) will decide if they meet the criteria.
From an earning’s perspective those with children jointly earning up to £12,500 will receive at least some WTC, for the childless couple this is reduced to £10,000.
Although the new credits aren’t payable until next April applications are already being processed and stockpiled. There are two methods available. The paper method – much vilified in the press for being overly complex, or the electronic route that the Revenue are keen to promote. But employees should be aware that even if they apply now they won’t get any confirmation of their award until January. For this reason it’s important for them to notify the Revenue if they have any change in their personal circumstances – such as a change in household composition or income (but more of changes of circumstances later). Employers of course won’t get their first start notices until after 6April which will mean it will be mid-May before the first awards are payable, as there will now be 42 days lead time for the start of an award regardless of the employee’s pay frequency.
In order to complete their application employees will need to assemble a considerable amount of information, much of which may need to be supplied by the employer. As well as the standard national insurance (NI) number, works number and pay-as-you-earn (PAYE) reference they are also asked for some other more subtly complex details. For instance do you publish your ‘pay office address and ’phone number’ on your payslips? For some reason the employee is asked to supply this as well as the employer's name. We lobbied hard to use the PAYE reference as the primary source of the correct employer name and payroll department address, as we know to our cost that WFTC start notices often went astray as employees gave the address of their workplace rather than the payroll department. Unfortunately this didn’t happen.
The first thing you’ll notice when you get a Start Notice (TC700) for WTC is that there is no end date. A further part of the alignment with the taxation cycle is the fact awards will run for the whole tax year, or at least until the applicant notifies any change of personal circumstances. So the six monthly stops and starts disappear altogether and with them the snapshot of earnings, to be replaced with an award based on the previous year’s gross household income. This will certainly help in sectors such as retailing where the current regime had an in-built disincentive to work additional hours during the snapshot period. If the applicant’s circumstances change during the year they are responsible for notifying the Revenue. Prescribed changes are:
- increases in income of over £2,500;
- all decreases in income;
- any change in the composition of the household e.g. the birth of a baby;
- changes in employer including additional jobs;
- changes in childcare costs of plus or minus £10 per week; and
- a change in hours that breaches the 30 hours additional premium threshold.
All these changes will be self-certified so earnings enquiries will, we are assured, be a thing of the past.
For the first year of operation of the new credits the income/benefits used will be those shown on the 2001/2 P6O and P11d/P9d. Going forward the P60/P11d will become a crucial document – how many times do you get asked for duplicate P60s? Many Payroll Managers may have to consider making a charge for this service. We have confirmed with the Revenue that there is no legislation that prevents you issuing a duplicate P60 if you have the technology. At the end of the tax year the applicant will be sent a final notice – allegedly this will already be pre-populated with the P14 figures submitted by the employer, I’ll believe this when I see it knowing how long it currently takes to process an end of year return. The employee will then be required to return this notice by 6 July in order for the award to continue, albeit in all likelihood amended to account for any budget changes in tax credit rates. The observant among you will notice that there is an unfortunate clash of dates inherent in the system. The deadline for applicants to return their final notice is the same day that you are obliged to provide them with their P11d//P9d details – again potential pressure on you to supply documents. Failure to return the notice will lead to the award being stopped and to this end the employer will receive a stop notice
Using the worst-case scenario of an employee returning their final notice on 6 July any amendment that is required will in all likelihood reach an employer in early August with an implementation date of the end of September. In the meantime, as now, the Revenue will pay the applicant direct. A concerning aspect of this timetable is that if there has been a significant overpayment in the previous year, perhaps because of an income rise that was not notified, there will only be half of the tax year left to recover it. This could lead to hardship for the applicant and employers becoming involved in welfare cases.
Ending an award – a double-edged sword
Unlike WFTC, an award of WTC ends if the applicant leaves employment. For this reason employers are no longer required to supply a Certificate of Payments (TC02). Awards can also be stopped of course by the issuing of a Stop Notice (TC702) or Emergency Stop Notice (TC703) – the only difference being that you may be asked by ’phone if you can implement an emergency stop earlier than the 42 day lead time. There is also still the facility for the employer to stop the award if no pay is due for the pay period. To take up this option the employer needs to ring the employer’s helpline on 0845 7143143 and arrange for the TCO (Tax Credit Office) to issue a confirmatory Emergency Stop Notice. You could also be on the ’phone to the helpline if you inadvertently pay WTC beyond the date of leaving, or pay an incorrect employee or amount. The double-edged sword of losing TC02s is that employers may no longer utilise the easement of paying past the date of leaving until the pay period end. This often mitigated the amount of an overpayment due to a retrospective leaving date. The good news is that we have achieved a change of policy in respect of overpayments. Where these have happened through innocent error on the part of the employer they can now be recovered as overpaid tax credit rather than overpaid wages, which is a real step forward. Payroll systems will therefore for the first time have to have the facility to process negative tax credits where these need to be recovered in a subsequent pay period.
From the employee’s perspective the only time an award can continue after a break in employment is if he takes up a new employment within seven days of leaving the last job.
One of the problems with WFTC is that it had to rely on the old family credit IT system that had inherent restrictions. To support NTC –- where nine out of ten families will be in receipt of support in one way or another –the twelve regional databases that form the current revenue PAYE system have had to be joined together. As part of this project known as Customer Data Management the Revenue have been trying to ‘tidy’ up mismatched and temporary national insurance numbers (NINOs) – it was this process that led inadvertently to the issuing of 278,000 P46(5)Ts at the beginning of September.
The online application form has also been part of the move to use new technology and of course to meet the Revenue’s ambitious e-service targets. Electronic Data Interchange (EDI ) is a major part of this of course, and employers will find that new messages will be in place for April to support the electronic transmission of Start, Stop and Amendment notices.
The last piece in the jigsaw is the internet employer portal as part of the Filing by Internet (FBI ) service. This is recommended as the choice of e-filing vehicle for employers with less than one or two thousand end-of-year records. The FBI portal is due to go live in October 2003.
And there we have it – tax credits mark two. Let’s hope that the promised changes deliver a simple system for employers and a robust responsive system for employees.
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December 2002 by