Partner Rebecca Benneyworth Training Consultants
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Working Tax Credit entitlement rules

19th Oct 2009
Partner Rebecca Benneyworth Training Consultants
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The focus for many firms of accountants in delivering advice to clients on tax credits is to concentrate on families with children of school age, as the family element of Child Tax Credit is available in full on household income of up to £50,000 a year. However, you might be surprised to find that many claimants of tax credits do not have children. Working Tax Credit will often be available to single or couple claimants without children in years when profits are very low, or indeed when the client is incurring trading losses.

Working tax credit is available to those who are either employed or self employed and are aged at least 25 (if they have no responsibility for children). They must be working for at least 30 hours per week, unless they have a disability, in which case the qualifying age is 16 and they must also work for 16 hours per week. When a couple make a joint claim, the hours they each work are added together to determine entitlement.

Working tax credit basic entitlement is currently £1,890 per annum, with a further £1,860 available for claims by couples. If the couple work a total of 30 Hours a week between them a further £775 may be claimed, bringing the gross award to £4,525. Further amounts are available to claimants with a disability and to claimants who are over 50 and returning to work after a period on Jobseeker’s Allowance. The taper rules work the same as for child tax credit, so the award reduces by 39p for each pound of income over the taper threshold of £6,420.

So a couple working 30 hours a week between them will receive some award of working tax credit if their income falls below around £18,000. However, as always with tax credits, it is essential to claim early to obtain the benefit of the credits. Where a claim is based on the income of a previous year, it will be updated after the year end when the renewal is filed, as usual subject to disregarding the first £25,000 of any increase in income.

HMRC has just launched a new information page about claiming working tax credit, with a useful calculator for prospective claimants intended to help them identify whether it is worth them claiming or not.

Tax credits and directors – entitlement rules

Directors of small companies claiming tax credits can run into various problems if they have paid themselves a low salary plus dividends. However, one trap for the unwary is the interaction between two unrelated pieces of legislation – tax credit entitlement rules and the National Minimum Wage rules.

In order to benefit from Working Tax Credit, a claimant must be engaged in qualifying remunerative work. Ignoring the self employed, the original definition of employed read “employed….means employed under a contract of service, and includes the holding of an office, the emoluments of which are chargeable to Schedule E…” (Reg 2 The Working Tax Credit (Entitlement and Maximum Rate) Regulations 2002 (SI 2002/2005)). Therefore the definition included those formally employed, and directors as office holders.

However, the Working Tax Credit (Entitlement and Maximum Rate) (Amendment) Regulations 2003 (SI 2003/701) amended this definition with effect from 6 April 2003. Regulation 2 is amended to read “employed….. means employed under a contract of service or apprenticeship where the earnings under the contract are chargeable to income tax as employment income under ..….”.

The removal of the term “and includes the holding of an office” means that directors do not qualify as office holders alone, and thus would need to be employed under a contract of service in order to qualify. Many directors do not choose to enter into a contact of employment with their companies, as this permits some flexibility over their pay.

When the National Minimum Wage legislation came into force, there was concern about the implications for directors of small companies who were drawing a minimal salary. The professional bodies sought, and obtained reassurance for directors of small companies from the then Inland Revenue (as enforcement body) as follows. If a director draws a salary from a company in return for his services, even in cases where he is the sole worker in a company, it is not necessary for him to pay himself minimum wage unless the director is also an employee of the company.

Under normal circumstances directors would not be regarded as de facto employees unless the individual director has sought to obtain the benefits that employment law could provide for him, by entering into a specific contract of employment with his company. Thus it is only necessary for a director to draw minimum wage when he has taken the step of entering into a contract of employment. Otherwise, any payment for services would be made to him as office holder, rather than a worker, and there is no minimum rate of pay.

So the interaction of these two pieces of legislation is quite clear. In order to claim Working Tax Credit the director of a small company should enter into a formal contract of employment with his company, and therefore should draw National Minimum Wage for the hours worked. Otherwise a claim to WTC will fail, unless the claimant’s partner is working for the necessary number of hours per week. Note that the NIC cost of drawing minimum wage as salary as opposed to the Earnings Threshold (with no NIC cost) is around £800 after allowing for the corporation tax relief on the extra salary and employer’s NIC. This cost may well erode any benefit in claiming WTC.

It is not at all clear that this was the intention of the amendments to the Entitlement Regulations in 2003, which were really intended to change all references to ICTA to align them with the new terminology and statutory references in ITEPA 2003. However, when advising clients without children to claim WTC it would be sensible to bear this rule in mind.

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By Anonymous
19th Oct 2009 15:00

30 hour element
It is my understanding that you can only aggregate the hours worked where the couple have responsibility for a child? If you use the eligibility calculator and put in the following: a joint claim both working 16 hours, no children and under the income limit, there is no entitlement?

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By Malcolm Veall
19th Oct 2009 15:51

30 hours @ NMW

If the previous respondent is correct and the hours for the 30 hour element have to be worked by one of a couple then would it not be possible for HMRC to challenge any tax credits claim which includes employment income as the only earned income and income is below 30 hours @ £5.80 =£9,048?

So the possibilities aseem to be:

- the 30 hours can be shared between a couple

- HMRC do not have the systems in place to identify cases where employment income is below £9K

- HMRC tax credits department do not consider NMW part of their remit

- HMRC do not follow Rebecca's logic, ie do not identify the need for "Employment" rather than "Office" income following the 2003 re-write

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By steve marsland
19th Oct 2009 16:04

Entitlement to Working Tax Credits

Another good post on Tax Credits by Rebecca.  Looking at the number of reads there appears to be a growing interest in Tax Credits.  My previous replies to the articles that Rebecca has posted set out why I think it is vital that accountants deal with tax credits for their clients and have an awareness of how the system works.  Coming very soon is a complete solution to tax credits for accountants that would like to offer this service to their clients and if anyone is interested please visit www.taxcreditsteam.co.uk to register your interest.

That's the plug out the way!!

Rebecca's article has raised a couple of issue that I don't entirely agree with.  This does seem to be the case with some of the tax credits legislation in that how you decide to interpret certain parts of the legislation will determine the type of claim that that can be made.

Firstly, a couple or an individual with no children, no disabilities and not over the age of 50 and returning to work after being on certain benefits can make a claim for working tax credits only provided they meet the criteria set out in the legislation.  Rebecca has set out the rules that need to be met to qualify, however, her second paragraph does state that couples can add the hours together to get to 30 hours.  This is not correct in situations where a couple are claiming and they have no children.  In such cases one of the couple must work at least 30 hours a week and be over the age of 25, unless they are making a claim for the 50+ element in which different rules apply to determine the number of working hours. In cases where there are children involved in the claim, the working hours are reduced to 16 and if a claim is being made for the 30 hour element, then you can add together the hours worked, but one of the couple must still work at least 16 hours.  Therefore, a claim for the 30 hour element would not work where a couple worked say 15 hours each.  I may have misunderstood rebecca's paragraph and I am more than happy to be corrected on this.

Secondly, the section on Directors and making claims for Working Tax Credits makes interesting reading.  Rebecca is quite correct in pointing out the changes that were made in 2003 following the initial publication of the regulations in 2002, but in the 2003 amending regulations number 701, it also introduced paragraph 4 of the interpretion section which states the following:

"In these regulations as they apply to an office a reference to being employed includes a reference to being the holder of an office"

I am not sure why they removed the reference to office holders from the main definition of employed but I am not convinced that when they did change it they considered that Directors being paid a basic wage would not qualify for WTC because they weren't under a contract of service.

Looking at the bigger picture, if what Rebecca states proves to be correct and I for one am not convinced I have to say, how many claims across the UK are wrong and how many millions if not billions of pounds have been incorrectly paid to claimants?  After all with over 6 million people in the system and no doubt a large number of those clients of accountants throughout the UK that have been advised to only pay themselves a basic salary and possibly dividends, there will be many claims for working tax credits that are incorrect.  I should point out that in all the years that we as a practice have dealt with tax credits for our clients, we have never yet seen an enquiry on any clients salary levels.

I think the more important issue is for all those Directors that are being paid a basic salary and dividends that are in the tax credits system is the question of notional income and whether they are perceived to have provided their services at an undervalue? The tax credits legislation does include various notional income sections, most of which will not apply to Directors being paid this way, except for the provision of services at an undervalue.  If accountants continue to advise their clients to withdraw income by way of a basic salary and dividend, they really need to find out if their clients are claiming tax credits.  It maybe that when taking the dividends into account the clients total income wipes out all entitlement to tax credits with the exception of the family element, but in the current climate with profits falling and cash being scarce for some clients, it is highly likely that your clients will be looking for other means of maintaining their personal cashflow and tax credits may be the area that they look at.

I have mentioned on various posts time and time again that as accountants we cannot simply ignore tax credits the way we done so in the past.  Like it or not, tax credits can have a huge impact on our client's cashflow and whilst the system is in place I would encourage all accountants to have a look at it or at least find out some more information about it.  The Tax Credits Team has been set up to offer a fully comprehensive profitable solution to offering tax credits as a service to clients and if anyone is interested please register at the website above or contact me on [email protected] and I will email you details of the solution we are already providing to a number of accountants around the UK. 

Steve Marsland

 

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By steve marsland
19th Oct 2009 16:17

30 Hours @ NMW

An interesting point of view, but the first reply to Rebecca's article is correct in that you can only aggregate hours if there are children involved.

With regard to the TCO computer identifying low employment income for those claiming working tax credits, the system is set up in such a way that when you provide details of employment income you are allowed to deduct from that income certain payments like pension contributions, gift aid payments, SMP,SPP etc and thus the only figure you give the TCO at the end of the year is this net figure.  This gets even worse if you have a spouse/partner that incurs trading losses that can also be offset against their spouse or partners income.

The main problem is that the Tax Credits Annual Declaration form that gets completed each year has for most claimants the requirement to fill in either 9 income boxes for a joint claim or 5 income boxes for a sole claim.  if you consider that the figures that you include in these boxes on the declaration are similar to the figures that you include on an annual self assessment tax return which can be many pages long and many boxes, you will then start to realise my claimants get it hopelessly wrong.  After all, as a professional accountant that completes clients tax returns, would you even contemplate asking your clients to complete their own tax return.  I know for one that I wouldn't. 

Steve Marsland

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By Malcolm Veall
19th Oct 2009 17:40

Notional Income

Steve, a very helpful & interesting comment, thank you.

I certainly press my clients to either make no tax credits claim or to agree the renewal with me - after one (director) client confirmed the entries on my drafted tax return were correct & then a fortnight later said that it was surprising that the entries on the tax credits renewal he had done did not need to be the same!

Would be interested to hear your thoughts on the notional income rules.  A number of accoutants I have discussed this with have been, (in my opinion unduly), cautious and have spread dividends equally accross tax years even where this has horrendous effects on tax credit claims - in case HMRC challenge an uneven, (between years), dividend distribution.

In my mind there is a terific difference between a waived dividend and a having a year where, say, no dividend is declared, maybe because the director has a large director's loan to draw against.

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
19th Oct 2009 21:33

30 hour element

Apologies to all, I had the wrong end of the stick, and didn't spot that there is a differential between CTC and WTC. Thanks very much to those who have corrected me.

As far as the "officer" vs "employee" issue is concerned, the question arose because of a question on a course which came out of a tax credit challenge for a director claimant. I was very surprised to see the change in the legislation, and presume that the particular HMRC officer was taking the same reading that I have taken.

It is my experience that tax credit people within HMRC seem to have very sketchy understanding of what the law says at the front line - which I guess is understandable because in most cases they don't need a detailed appreciation of the law, but this is such a hugely complex area that practitioners need to take care not to miss anything.

Clint has posted a very interesting (and challenging) issue in relation to tax credits today which those with an interest might like to read.

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