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Tax Credits claw bcak limit

Tax Credits claw bcak limit

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which I think I read in the latter part of last year. It was regarding a way to reduce income by buying a car, and claiming WTC on the reduced profits. (Seemed slightly un-ethical if I remeber rightly) I can't seem to find it on the search facility, and wanted to show it to someone.

Many Thanks if you can find it for me.
Sarah
sarah kitchen

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By Chaztax
24th Jan 2007 13:32

Income disregard
You may be thinking of the increase, from 2006/07, in the “income disregard” for WTC/CTC from £2,500 to £25k.

Firstly, as background: Tax credit (“TC”) claimants have always been potentially able to enjoy a very high rate of “tax relief” because TC’s are (at lower income levels) “tapered” at 37%: i.e., if the claimant’s income goes down by £X, then their TC award potentially increases by 37% x £X.

So for a self – employed TC claimant paying BR tax at 22% and NI at 8%, the effective rate of “tax relief”on expenses is 22% + 8% + 37% = 67%.

67% is a very high rate in any case, but the situation was compounded when the “income disregard” increased to £25k. This basically means that a TC claimant’s income can increase by up to £25k from one tax year to the next without their income being adjusted for TC purposes.

This clearly creates an incentive for TC claimants to arrange for their income to be low one year, and high the next. Consider a trader with steady annual profits of £30k who in 2006/07 purchases, for £15k, a low emissions car qualifying for 100% capital allowances. Their income for 2006/07 is £15k and for 2007/08 it is £30k. However, because the increase in income < £25k, their TC award for 2007/08 is based on £15k not £30k.

The 37% increase in TCs is effectively given in 2006/07 AND 2007/08 and the effective rate of tax relief is 22% + 8% + 37% + 37% = 104%!

This imbalance in annual profits could also potentially be attained by purchasing a large item of equipment qualifying for first year allowances and then disclaiming capital allowances in the second year, or by paying pension contributions in alternate years.

It should be noted that there is a TC “anti – avoidance” rule which states that “If a claimant has deprived himself of income for the purpose of securing entitlement to, or increasing the amount of, a tax credit, he is treated as having that income”. However, HMRC might struggle to successfully apply this to an entirely normal business transaction such as the purchase of a car.

Simply purchasing a car for business use, even to make use of the income disregard, does not seem unethical, although more artificial means of shifting income between years might be seen as such.

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