Thousands of parents are expected to receive letters from HMRC this month outlining changes to the way child benefit is claimed, including details of the new claw-back charge for higher earners.
The new system, to be introduced from 7 January 2013, will impose the so-called high income child benefit tax charge (HICBC) on equivalent to 1% of the benefit received for every £100 of income on those earning between £50,000 and £60,000.
Since the measure was announced in the Budget AccountingWEB members including Rebecca Benneyworth have criticised the new child benefit rules for being too complicated and unfair.
Two parents who each earn £49,999 keep all of their child benefit, while someone earning more than that amount, but part of lower combined annual income household, will be subject to the charge.
“Income splitting for those who are able to do so (which will only be a minority) becomes important again,” noted Mercia’s head of tax Mark Morton in a recent article for Taxation magazine.
Benneyworth flagged up the "very aggressive" marginal tax rates that would result in her Budget Analysis Report; taking into account the withdrawal of credit, the shift could exceed 100% for parents in the £50,000-£60,000 bracket with more than five children.
The charge will be calculated based on the adjusted net income for the household for the whole of year in which benefit was achieved - so the charge from January 2013 is based on the income for 2012/13 - so it cannot be reliably determined until after the end of the tax year, she noted.
For sums below £3,000 the HICBC will be coded out in arrears for taxpayers under PAYE, although it is not yet clear how this will be achieved. Everyone affected by the charge will go into self assessment, even if the charge is collected under PAYE. It's estimated that this will add another 500,000 SA taxpayers to the existing 10m.
The charge also aroused anger by ending the long established principle of independent taxation. To work out whether they are affected couples may need to disclose their income to each other.
To add to advisers’ difficulties in this situation, they will also need to check how many weeks claimants were living as partners (not just married couples) as well as their income levels to establish who needs to make the return, commented Karen Clark and Sarah Saunders of Baker Tilly.
Where couples have separated, getting the relevant information from a former partner may be challenging, and paying for a benefit they received might be downright insulting, they added.
At last month’s Digita conference, Rebecca Benneyworth called for HIBC to be reversed. After looking at the new rules, she commented: “It is the train wreck we were expecting and it’s picking up speed. It’s going to be a disaster for us and even worse for HMRC.”
This view is set out in more detail in the ICAEW Tax Faculty response to the initial proposal, which predicted the HICBC will impose considerable administration costs on HMRC and cause further problems with its service standards.
The faculty response continued: “Given the fact that a large proportion of the tax population is likely to be affected by HICBC, we suspect that there will be widespread non-compliance.
“While some of this may be deliberate non-reporting, the scope for ordinarily compliant taxpayers to get this wrong and to not pay the charge appears to be considerable. We understand that HMRC’s systems cannot cross-match child benefit recipients with partners and their income data, so a typical risk analysis approach to checking compliance will not be available.”
Further advice on the charge is available from the Tax Faculty website.