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Tax credits ' 30 September deadline looms!

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23rd Sep 2005
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Rebecca Benneyworth has some words of advice for practitioners preparing accounts for tax credit purposes

As I write, practitioners will be rounding up the last of their tax credit clients who need accounts in time for tax credit renewals.

A declaration of income and circumstances for the 2004-05 tax year, on which the finalised tax credit claim for that year is based, must be submitted by 30 September

In view of this here are some timely reminders about points to watch!

Income calculations
Most accountants dealing with tax credit renewals are aware that the income definitions differ from the calculation of income for tax purposes. The key difference is the ability to set losses of one spouse against income of the other. Any losses not set off in this way are carried forward and set against household income in the following year. Losses cannot be carried back for tax credit purposes.

Don't overlook pension contributions and gift aid payments made by basic rate taxpayers! For tax credit purposes, the gross amount is a deduction from income, thus increasing the tax credit award by up to 37% of the value of the gross contribution or gift.

For those acting for directors of their own companies, you will also need to consider the income 'deeming' provisions. These require a claimant to increase his tax credit income under two rules.

First if a claimant deprives himself of income for the purposes of increasing his tax credit claim, he is treated as having received that income. This is a difficult call to make in most circumstances, as income deprivation is a subjective concept. The client may have incorporated his business, and thus any retained profit in the company will be income that is no longer available to him (which would have been shown on his tax credit claim as a sole trader), but in no sense could that be regarded as income deprivation.

The second rule is that where a claimant provides a service to someone who could afford to pay, and he is paid less than the full amount for his services, he should treat that income as tax credit income for tax purposes. This is tricky if you are advising a director of a small company who is drawing a very small salary to save National Insurance Contributions. However, if the income is topped up by dividends drawn, it would be appropriate to say that the overall income drawn covers an appropriate salary for the job done, so no adjustment is necessary for tax credit purposes. Settlement considerations are not necessary provided the couple are living together, as both incomes are aggregated for the purposes of tax credits. You are more likely to have a problem if a client has incorporated, leaving a large loan account to draw down, and is therefore drawing a very modest amount of income. However, if the company is not yet making profits, you have justification in that it cannot afford to pay.

Family element and nil claimants
These clients do not need to return a declaration by the end of September. Their renewal consists of a review, and if their income for the last year is within certain limits, no reply is necessary. You will need to be careful with these claimants, as if their income is below the boundaries given they may be entitled to an additional award for that year. However, if they do not respond to the review by 30 September, either to indicate that their income is lower or to ask for more time (in writing), they will lose the opportunity to revisit the claim later. You need to ensure that any clients who have protective claims in place will be able to increase those claims if their income proves to be low once the accounts have been completed. This means that they must write to the tax credit office this week to indicate that their review is not yet complete.

Overpayments
Once the claim has been finalised, a final award notice is issued. You may well then have to deal with claimants who have substantial overpayments, and therefore tax credit debt. It is wise to be aware of the consequences of overpayments arising, so that you can advise clients when their accounts are complete.

An overpayment from a preceding year (as revealed by the renewal) will normally be collected from any subsequent award ' this is the preferred method. The amount of current award clawed back varies according to the level of the award ' information about this is in Code of Practice 26 (COP 26).

The amount of current award taken is :

* 10% if the current award has no income taper at all (the income would therefore be under £5,220);
* 25% if the award is tapered but still more than the family element; and
* 100% if the award is the family element only.

However, current year overpayments are adjusted first, and there is no such structure applying. If the last year has been overpaid then the current year is also likely to be, as the payments have probably continued at the same rate since April. The overpayment for the current year will be deducted from the total award, and any remaining tax credits due spread over the rest of the year. There is some scope to claim hardship when this reduces claims to nil.

The clawback in respect of previous years is then adjusted against the net award for the balance of the current year.

Small wonder that claimants do not understand what is happening!

The final point to be aware of on overpayments is that if there is a change in claimant ' such as a couple separating - there is no subsequent award to the same claimant, so any overpayments will fall due in full. This is an aspect of the system which causes most hardship, and you will need to be ready to deal with the consequent tax debt and collection procedures which will swing into play if a client is in this position.

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By dorothysaint
26th Sep 2005 12:41

Carry forward of losses
Rebecca,can you please confirm that losses carried forward for tax credits can be used against household income in the following year and are not restricted to being set off aginst profit of same trade. Your comment is the first time I have seen this mentioned.Thank you

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