Tax credits and income disregard

Tax credits and income disregard

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About a month ago I posted a query that received no responses, here:
https://www.accountingweb.co.uk/cgi-bin/item.cgi?id=168125
I speculate that one reason that I got no responses might have been a flawed assumption stated in the original post.
I have just been filling in a new claim form TC600 effective for 2007-08, which requires income to be entered for 2006-07 which will form the basis of a provisional award. I had expected a requirement to enter 2007-08 estimated income (to be subsequently superseded by actual, with no income disregard), and with the income disregard only being relevant to the second and subsequent year of claim. Thus I was advised by someone and as it seemed reasonable I did not check it out at the time.
Not so, it seems, now having checked it out.
http://www.opsi.gov.uk/acts/acts2002/20021--b.htm#7
advises how income is to be determined for a year of claim. It makes no reference to a claim being the first year of claim. The income disregard for the purposes of Ss.7(a) and 7(b) of the main act was originally set at £2500 by Regulation 5, SI2002/2008 here
http://www.opsi.gov.uk/si/si2002/20022008.htm
and currently stands at £25000 as set by Regulation 4(2), SI2006/963, here:
http://www.opsi.gov.uk/si/si2006/20060963.htm

So: Take a scenario in which a single individual aged 26 who was not working in 2006-07 and had no income at all in that year takes on a job on 06 April 2007 working 35 hours per week with an annual salary of £35000. On 31 March 2008 he pays a lump sum of £10001 (as grossed up) into a personal pension scheme. Provided he puts in a claim for WTC by about the end of June 2007, he gets WTC of £2435 as a final award for 2007-08. That seems to me so outrageous that I doubt that I have it right. Perhaps someone else can point out the error of my ways.
Clint Westwood

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By User deleted
05th Jun 2007 12:48

You may not be correct.
If your rate of pay rises, or you get more interest on your savings, or you make a lower personal pension contribution then what you say applies. However, if the change in income is due to a notifable change in other circumstances then £25,000 rule does not apply.

In your example someone who did not work starts work. That is a notifiable change in circumstances and the tax credit will be reworked. Such changes in circumstances have to be notified promptly.

Similarly if the hours per week you work change significantly you have a notifiable change in your circumstances.

However, for those who can manipulate there income, like owner/directors of private companies, there is scope to optimise your tax credits.

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By AnonymousUser
04th Jun 2007 18:01

Just remember ...
It is you, I and the rest of Jo Public who are ultimately paying for this cr*p. And most of them don't realise it.

I'm not one normally to take a moral stance when advising clients to milk the system, but this is testing my conscience. Well, better than being sued for not giving the advice, I guess.

I'd be interested to know whether any reader, in the entire history of Working/Child Tax Credits since they were introduced in 2003-04, has yet had encountered (or heard of) a challenge under Regulation 15 SI2002/2006 (the antiavoidance measure regarding income deprivation to secure or increase tax credits).

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By AnonymousUser
04th Jun 2007 14:10

And another thing ...
If ever there was a rule that has been ingrained into my senses, it is that if your income rises from one year to the next by an amount that exceeds the income disregard, then you award the later year based on that (later) current year income, superseding the provisional award.

Now when I read S.7(3)(b) TCA 2002 (see link above) it seems to indicate that you use the current year income "reduced by that amount" ("that amount" being the prescribed amount, which is to say the income disregard). So, income in year 1 is £5000, income year 2 is £31000, disregard limit is £25000, conditions are satisfied for S.7(3)(b), so the award year 2 is based on income of £6000 (£31000 less £25000).

Am I really so far off base here? This stands everything I have so far understood on its head.

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By AnonymousUser
04th Jun 2007 14:54

The nightmare gets worse
OK, I think I have sussed out the second post. From leaflet WTC2 (which has not yet been updated for the change in the income disregard from £2500 to £25000), it says (page 31 of the PDF version) here
http://www.hmrc.gov.uk/leaflets/wtc2.htm#e4

"If your income increases by more than £2,500, then we will base your final award on your current year's income. We will only take that part of the increase over £2,500 into account when working out your tax credit award for the current year. We will, however, use the full amount of income when setting your award for the following year."

The first sentence is misleading, especially if read in isolation of the second sentence. The second sentence is however confirmed by example 2 in paragraph 07042 of the Tax Credits Technical Manual.

I have to conclude that in your first year of working, using the example in my second post (below) you have to be earning £36800 before you finally run out of WTC at the faster taper rate. Wow!

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By NeilW
04th Jun 2007 16:49

Correct - and it leads to some interesting fiddles.
Essentially tax credits are finalised based on the lower of last year's net income, or the year before.

So as long as you don't breach the 'must tell' conditions you can force your net income to nothing in one year, take maximum tax credits and earn £25K more in the next year. Then just repeat the process.

So the optimal income strategy is where your income gyrates by £25K over two years.

If you work it out with a bonus and an employer pension contribution alternating every year, you'll see that the pension contribution is essentially paid for by the state!

One for the list if you're advising on optimal remuneration strategies.

NeilW


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By User deleted
04th Jun 2007 17:03

EXCELLENT
Well done Clint - if we leave you long enough you'll answer your own question - and you're becoming such an expert on the subject the next time I have a query on tax credits, I'll know who to ask!

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By AnonymousUser
05th Jun 2007 13:21

Thank you David
Could you point me to the legislation that disapplies the Income Disregard in the event of a notifiable change of circumstances, and which specify the rules that kick in when that happens? Although you do not perhaps expressly say so (saying just that it will be "reworked"), what I read into your post is that someone who starts work will be awarded (ultimately) on the basis of current year income in the first year (ie as per my original understanding before I bothered to research it properly). However nothing in section 7 TCA 2002 seems to support this conclusion, unless it is contained in section 7(8)(b), in which case it will be hidden in the statutory instruments somewhere. But where? (I would expect it to be in one of the earlier SIs, because I do not believe that this will have changed since inception.)

I can understand that the award will be "reworked" on the event of a notifiable change. There are several variables involved in the calculation that could change, such as qualification for the 30 hour supplement, and changes in children and associated childcare costs, as well as (perhaps) changes in income. So, just because an award is reworked, it is not to me evidently necessary that the income basis automatically reverts to current year - unless, as I say, that is specified somewhere in the regs. I just cannot find it.

If what you say is correct, the application form TC600 is misleading. In relation to a new claim (which will generally arise as a result of a change of circumstances that would be "notifiable" had a claim already been in force) it clearly asks for the prior year income. It would have been more useful to require an entry of an estimate of current year income.

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By AnonymousUser
07th Jun 2007 14:43

Hmm
The 3 month deadline was reduced to 1 month by regulation 6 of SI 2006/2689 effective from 06 April 2007 (per ibid reg 1(2)).
http://www.opsi.gov.uk/si/si2006/20062689.htm

Nothing in SI 2006/2689 (as far as I can tell) indicates that the income disregard is cancelled on the event of such a notification, nor is there any such a stipulation in the original SI that it varies, that is to say SI2002/2014:
http://www.opsi.gov.uk/si/si2002/20022014.htm

They may be right, of course, and I may have missed something, but I am not sure that I would take the word of someone on the helpline (or 2, or 10 of them). Next time ask them for the statutory authority, I guess.

David James may be able to provide some insight on that point, as he seems to agree with the two individuals from TCO.

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