Tax credits - do you and should you?

Tax credits : why accountants should advise on them

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Calucations

Anonymous | | Permalink

I've had difficulty in providing Tax Credit calculations which match with the finalised ones from HMRC - can you suggest anything definitive?

nogammonsinanundoubledgame's picture

How close to you get?

nogammonsinanun... | | Permalink

Getting it right to within £5 is a pretty good result, because you, me, and the rest of humanity calculate based on yearly rates and maybe days as a proportion of a full year, where the legislation strictly calls for weekly calculations and you could be out a bit if you don't match the precise number of whole weeks that HMRC computer comes up with. I have never been too bothered by that, as long as I get into the same ballpark.

With kind regards

Clint Westwood

stevepipehome's picture

Best Tax Credit tools

stevepipehome | | Permalink

I agree completely - which is why I posted these facts and figures last week on how big the opportunity is

http://www.accountingweb.co.uk/blogs/stevepipehome/proactive-accountant/...

The best Tax Credits systems and software I have seen are those created by tax credit specialists Marsland Nash - Zohan.Nash@marslandnash.com

STEVE

steve@avn.co.uk

Tax credits

Anonymous | | Permalink

Thanks very much for the reminder Rebecca, I remember you mentioning this on a course earlier this year. Not had chance to put interaction with AIA into practice yet but will certainly bear in mind.

RebeccaBenneyworth's picture

Daily rates

RebeccaBenneyworth | | Permalink

Tolley's Taxwise I uses daily rates, and in fact you also have to use the right rounding rules to come up with the right answer - I think it is round up fractions of a penny. So with that in mind, I think getting within £5 is brilliant.

For balance, Kevin Salter also produces a tax credit calculator in his range - I'm pretty sure it stands separate from "Tax Tips and Tools", but I'm sure 2020 can point you in the right direction.

For those who need a reminder of some of the rules I'm just putting together a short written tutorial on the income rules (including the treatment of trading losses) which we will put on AccountingWEB in the next week.

Best wishes
Rebecca

income disregard

dlp2008 | | Permalink

In 2nd to last paragraph shouldnt this be 25k?

additional receipts depends on award

Anonymous | | Permalink

It is possibly not correct to say that he will recive 39% of the AIA claim, as this will depend on the size of his award pre the reduction for income. You have to do the sums every time.

Finding out more

janineholland | | Permalink

How do you get up to speed with how to calculate them and the implications? I've searched for courses but am at a loss - is it just a matter of using HMRC publications to work it out?
Thanks
Janine

RebeccaBenneyworth's picture

A few replies

RebeccaBenneyworth | | Permalink

From Rebecca
1. Income disregard - yes, I meant to phrase it that the increase of £20,000 is ignored, but it reads better if I change this to £25,000. I will edit the para. Thanks for mentioning it.

2. In this case it does not depend on the size of the award, as he is in fast taper credits and his residual income after the reduction is still £10,000 so he would not be right through the taper band - i.e. will still have some taper in play. The only time his taper threshold would be more than £10,000 would be if he were a child tax credit claimant only, but clearly this isn't the case here from the facts given. Where the income after the AIA falls below £6,420 the tax credit award ceases.

3. We will be putting a some articles to help members get up to speed on tax credits, keeping it to easy bite sized chunks. These will start rolling out next week and we'll put a link on the tax home page in a box to lead you to a central tax credit library with plenty of tips, questions and resources. (this will also be mentioned in next week's wire)

Regards
Rebecca Benneyworth
Editor, AccountingWEB

davidwinch's picture

From a different perspective

davidwinch | | Permalink

From a different perspective I have had to learn about Tax Credits (and Working Families Tax Credit - which ceased in April 2003) in connection with the forensic accountancy work I do.

A number of my cases have involved persons charged with benefit fraud who have been claiming (typically) Income Support to which they have not been entitled (for example because they are living with someone who has a full time job).

Whilst it is true that they were ineligible for Income Support they most times would have been eligible for Tax Credits had the true facts been known. So the amount by which they have profited from their false claims may be substantially less than appears at first sight. On occasion the alleged fraudster would have received more in Tax Credits than he/she has actually received in Income Support.

This is a factor to be taken into account when the matter comes before the courts and so I find myself ploughing through Tax Credit computations for several years to calculate what the position ought to have been overall. Great fun if you like that sort of thing!

David Winch

Tax Credits Software and Training

steve marsland | | Permalink

I have read with interest the comments made by Rebecca and also those by Steve Pipe and before anyone reads on I would like to declare an interest with Steve Pipe and the AVN group which he belongs to, not in the biblical sense though!! which will became apparant as you read this reply.

I could not agree more with Rebecca's comments that accountants should be talking to their client's about their tax credits affairs. As accountants we are extremely good at telling our client's how to mitigate their income tax liabilities, particular with our director/shareholder clients, but the question I would ask of accountants is how can you possibly give that sort of advice without knowing whether your clients are in the tax credit system and whether they are receiving tax credits or not? The advice we give to our client's could have a huge effect on a client's tax credit award not only for one year, but also the following year when you take into account the income disregard. The typical example which we see on a regular occurance is to recommend to our director/shareholders to maximise their dividends up to the start of the higher rate threshold, which assuming profits are available is perfectly good advice, as that dividend could be left on the directors loan account or withdrawn if funds are available. But say your client is married with two kids and has household income of around £25,000 before the dividend is awarded. At this level his basic tax credits award is just under £2,300 per year. If you then vote a dividend to max out his basic rate band, his tax credits award will drop to £545! It then becomes all the more worse for the client if he decides to leave the money on his loan account, because not only does he not get the cash, his tax credit award will be reduced. Clearly there is income disregard to consider and therefore in the current year of the award he will probably still get the £2,300, but in the following year his award will be reduced. I have over the years seem umpteen examples of this type of thing that accountants do which with some training and understanding of the tax credit system they can then offer as a service to their clients. I have also seen clients get it horrendously wrong where they deal with it themselves, again typical examples are trading results, clients will take the accounts figure and not the taxable profits figure or they miss out on claiming all the relevant deductions. However, accountants also get it wrong. Although we say we don't deal with tax credits there will be a lot of firms out their that have given clients the figures for their tax credits annual declaration even though their LOE says they don't deal with it. How can firms possibly give clients these figures if they don't know how the tax credits system works and what income and deductions are actually taken into account in the tax credits system? With a tax credits withdrawal rate of 39p in the pound if is vital that the figures entered on the annual declaration are correct. With a little training and understanding accountants can deal with this for their clients.

What accountants fail to realise is that they will have most of the information they need on their files! I don't wish to gripe at accountants as I am one as well in practice, but I encourage all accountants to actually look at tax credits, after all with 6 million families in the system, the likelihood is that a lot of your clients and probably your staff as well are in the system!

Now I said that I had a link with Steve Pipe and AVN and here it is!!! Last week I gave a brief talk about tax credits to upwards of 500 accountants at the AVN national conference. Out of those 500 accountants 4 people raised their hands to say they dealt with tax credits, a shocking result. We then did a 50 minute session to well over half of the delegates on some opportunities that clients should be made aware of such as AIA and other areas and the systems and software that enable accountants to deal with tax credits from compliance to planning. These systems and software have been developed in conjunction with AVN over the last 9 months from what we have been using for the past 6 years. We believe they are 'probably' the best on the market and whilst they are not the cheapest I do not think any other package offers such a complete system as ours. We already have a number of practices that have taken on the software and systems and some of the results they have achieved with their existing clients on charging for the work they do is astounding. If you ever thought you could not make money by offering a tax credits service..... we have a firm that has signed up that made around £10,000 in one month from 30 clients and another that made £5,000 over the first weekend by handing out information at of all places 'Costco'. Lets not get carried away with the numbers as not all firms will be as successful as others, but what I can say is that by offering tax credits as a service it will win you new clients or at least get you a 'foot in the door' to talk to clients about all the other services you can offer them.

We also give training to accountants on the systems and software and the next group training date is in London on the 29th July. There are other dates planned in October, November and December in Birmingham and Manchester but depending on demand I am sure we will put on more dates if necessary. We will also do one to one sessions at accountants offices or our own offices. On these training days we look at tax credits in details, the systems and software and also the opportunities that accountants should not miss out on for their clients and also the way in which you can charge for the service. I appreciate it all sounds like a sales pitch, which it is at the end of the day!!! but on my part it is a bit of a crusade as I have always been of the opinion that accountants should be encouraged to actually deal with tax credits for the clients, if the clients want it of course............

If anyone is interested we have set up an email address taxcredits@marslandnash.com. Details of the training will be posted on the AVN website shortly www.avn.co.uk or you can call Tracy Bettley at AVN on 0845 226 2371 to book onto one of the dates.

Steve Marsland

Bob Harper's picture

Accurate up to date records?

Bob Harper | | Permalink

Is it fair to say that you need accurate, up to date records to do the work?

Our strategy is offer (force) free bookkeeping software into micro/small clients that can't cope with entry level accounting software. We're working with hundreds of accountants who I believe would be interested in your solution. How much is it?

Bob
MORE

Tax Credits Service

steve marsland | | Permalink

I was made aware of the MORE software from an AVN member firm some time ago. If you would like to email me at taxcredits@marslandnash.com I will email you a fact sheet which provides details of the service we offer to accountants and the like and also how we charge for the software. Clearly, if any other practices would like these details, if they send me an email, I will respond with all the relevant information.

Steve Marsland

Which accounts are used?

Anonymous | | Permalink

For some of my clients the last years accounts are accepted even with a year end date in June, some others have to give accounts up to 5 April which means apportioning two years accounts.

What years to include

steve marsland | | Permalink

For tax credit purposes the trading income to declare for a particular tax credit award year will be similar to that declared for income tax purposes. So for example if a trader has a year end of 30 June 2008 and then decides to change the year end to 31 March 2009, for tax credit purposes the trading income to be shown on the tax credits annual declaration will be the taxable profits for 12 months to 30 June 2008 and the 9 months to 31 March 2009, not forgetting to deduct any available overlap profits. It is therefore essential when the accountant is considering this option for clients that they take into account the impact on the tax credits award the chgange will have. There could be a situation where the client has made a large profit to say 30 June 2008 but then the trade takes a down turn and losses are likely to be incurred in the following 12 months in which case a change of accounting date should be considered. Conversely if the accountant is not aware of the tax credit position he could advise the client to change his year end to 31 March or even incorporate on this date and if profits are made in this 9 month period after taking into account overlap profits, the results could be a withdrawal of tax credits at an effective tax rate of 39%.

In opening years where for example a trade commences on 1 July 2008 and the first accounts are prepared up until 30 June 2009 the taxable trading income to declare for tax credit purposes will be the same as that disclised for income tax purposes, 1 July 2008 to 5 April 2009.

What should not be forgotten is that every case will be different as family circumstances and household income will vary from client to client. That is why I believe accountants should have a much better awareness of the tax credits system as the advice they give to their clients on the income tax implications of change of accounting date, incorporation of a business, losses, AIA claims, pension contributions etc can have a major impact on the amount of tax credits a family receive.

I hope this helps.

Steve Marsland

RandD's picture

R&D Tax Credits

RandD | | Permalink

And of course as well as individual tax credits there are also R&D tax credits. While companies in the past may not have looked at these, in today's economy it may be worthwhile for them to be revisited.

Our experience as a specialist provider of R&D tax relief consulting at http://research-and-development-tax-credits.com has been that even after the SME scheme being in existence for over 9 years now, there are many companies that are not aware that these credits can be claimed across a very broad range of work.

On the other side of the coin, we work closely with firms of accountants who frequently need extra assistance in analysing and validating the science or technology involved in a claim but often again, both the company and their professional adviser will not realise that qualifying R&D is being carried out and the scope of a claim is much wider than the 1-2 key problem solvers.

Any company hiring engineers, software developers or scientists should be closely examining whether they are eligible for this as should their professional advisers. The more generous benefits for loss-making SMEs in the form of a cash credit rather than additional tax deductions will have particularly wide appeal at the moment.

Micah Levy
http://research-and-development-tax-credits.com

gsullymorgan's picture

Tax Credit assessments

gsullymorgan | | Permalink

I have been reading these postings with a lot of interest, as you’d expect when you see what I have to say. The postings raise a lot of important and to me very interesting, points

I didn’t post earlier as I’ve been trying to decide how to present things in an informative rather than advertising way.

By way of background, We, Ferret, have been producing advice tools for advisers in areas such as benefits, tax credits and other state support for over 25 years and can fairly claim to have a lot of expertise in the area. For example we produced the system that the Revenue used for giving advice to enquirers about possible Tax Credit entitlement before the system came into force.

Most of our users are in government, housing, law and advice services but we have increasingly been becoming involved with financial services and are beginning to do work within the accountancy world.
Our existing systems carry out assessments of WTC and CTC entitlements as part of the holistic view we take of our clients’ needs but they haven’t been focussed on planning, forecasting or the self-employed. We have though, for some time, been developing systems which meet this kind of need and which might be appropriate for some participants here.

There are a number of important points within the TC system which are the consequence of trying to fit the annual culture of the tax system together with the weekly needs of those dependent upon state support and as you might expect we do pretty well in bringing those together. This can be extremely important where, for example, there may commonly be an entitlement to Council Tax Benefit as well as to Working Tax Credit or where the entitlement to a means tested benefit can passport a client to the maximum rate of Tax Credits.

Using the example in the initial article, the kind of outputs that our systems can produce look like this (making some assumptions, where detail is missing, such as two children, wife not in employment, mortgage etc.)

Outline Report Current Situation

Year 1
2009/2010
Annually
Net Profit £30,000.00
Net Earnings - after Income Tax and N.I. £23,227.40
Benefits & Credits Income
Working Tax Credit 0.00
Child Tax Credit 355.99
Housing Benefit 0.00
Council Tax Benefit 0.00
Means Tested Job Seekers Allowance 0.00
Pension Credit 0.00
Child Benefit £1,726.40
Other Income 0.00

Total Net Income £25,309.79

Housing Costs £6,900.00

Remaining Income Before Living Costs £18,409.79

Year 2

Tax Years
2010/2011
Annually
Net Profit £10,000.00
Net Earnings - after Income Tax and N.I. £8,827.40
Benefits & Credits Income
Working Tax Credit £3,133.59
Child Tax Credit £5,022.40
Housing Benefit 0.00
Council Tax Benefit £430.06
Means Tested Job Seekers Allowance 0.00
Pension Credit 0.00
Child Benefit £1,726.40
Other Income 0.00

Total Net Income £19,139.85

Housing Costs £6,900.00

Remaining Income Before Living Costs £12,239.85

Year 3

2011/2012
Annually
Net Profit £30,000.00
Net Earnings - after Income Tax and N.I. £23,227.40
Benefits & Credits Income
Working Tax Credit £3,133.59
Child Tax Credit £5,022.40
Housing Benefit 0.00
Council Tax Benefit 0.00
Means Tested Job Seekers Allowance 0.00
Pension Credit 0.00
Child Benefit £1,726.40
Other Income 0.00

Total Net Income £33,109.79

Housing Costs £6,900.00

Remaining Income Before Living Costs £26,209.79

We have not released this system yet, so there are no details on our website, http://www.ferret.co.uk , but I’m happy to talk about it with anybody. We also have a training operation and courses include Tax Credits. Finally we produce electronic publications which include Tax Credit legislation, precedent and guidance.

Please do get in touch if we can do anything to help. I’ll try and chip in with some of the other relevant topics as well if that seems useful.

Thanks

Gareth Morgan

gsullymorgan's picture

Formatting

gsullymorgan | | Permalink

Apologies for the absence of any, I did try.