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Glenn Collins, head of ACCA UK technical advisory, take a look at how the new changes to child benefit affect you

The child benefit charge on ‘high income’ families is now part of our legislation. Section 8 and Schedule 1 to the Finance Act 2012 introduces a new Chapter 8 (sections 681B – 681HI) into Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), which is the part of the Act that taxes social security benefits. The new legislation comes into effect for 2012/13, although it only applies from 7 January 2013.

It is an income tax charge intended to ensure that child benefit is effectively removed from persons earning in excess of £50,000.

The charge is the ‘appropriate percentage’ of the total child benefit received by either partner in the fiscal year. Where the adjusted net income is £60,000, the appropriate percentage is 100%: [section 681C] and the total benefit is clawed back.

What is a partner?

Taxpayers are partners if:

  • they are a man and a woman who are married to each other and are neither separated under a court order, nor separated in circumstances where the separation is likely to be permanent
  • a man and a woman who are not married to each other but are living together as man and wife
  • the persons are two men, or two women, who are civil partners of each other and are neither separated under a court order, nor separated in circumstances in which the separation is likely to be permanent
  • the persons are two men, or two women, who are not civil partners of each other but are living together as if they were civil partners.

Adjusted net income

Adjusted net income is defined in section 58 Income Tax Act 2007. It is net income after deduction of (gift aid grossed up), pension scheme contributions and losses etc.

Weeks

Week means a period of seven days beginning with a Monday; it is in a tax year if, and only if, the Monday with which it begins is in the tax year. As the charge is by reference to weeks, it will apply only to those weeks of a fiscal year for which a partnership exists.

Example:

On 6 April 2013 Frances is a sole parent entitled to child benefit of £33.70 per week for her two children. Her annual adjusted net income is £55,000.

Percentage charge: (£55,000 – £50,000) / 100 = 50%

Frances is liable to a charge of 50% x £1752 (after rounding down). The charge would be £876. Note that this is the tax, not the assessable amount.

If child benefit is being paid, and a couple start living together, the charge will arise from the time the couple live together.

If a partnership breaks up the higher earning partner will only be liable from 6 April until the date the partnership breaks up.

There is an exemption if one partner had previously claimed child benefit on the basis that they were living with the child and after a period of less than 52 weeks, resumed the claim on the same basis. This would occur when a parent moves away temporarily or work purposes and leaves the child with a family member until they return.

Example:

Vicky and Andy are married, with three sons. Vicky receives child benefit for Ashley (£20.30), Daniel and Josh (£13.40 each). From 7 January to April, she receives (20.30 x 13) =£263.9 + (£13.4x2x13) = £348.4: rounded down to £263 + £348 total £611.

Andy earns £55,000 and Vicky earns £5,000.

Percentage charge: (£55,000 – £50,000) / 100 = 50%

Andy is liable to a charge of 50% x £611 (after rounding down).

The charge would be £305.

One of the major problems with this is the requirement for both partners to disclose their income. This caused a lot of difficulties prior to the introduction of separate assessment in 1990/91.

Election not to receive child benefit

Another potential problem arises from the election not to receive child benefit. If a partner’s income is in excess of £60,000, it may be preferable to disclaim the benefit in order to avoid the charge. The election takes effect in relation to weeks beginning after the election is made.

If the claimant decides to elect not to receive the benefit, because the expected income is over £60,000 and the higher income partner finds that this is not the case, the claimant can revoke the election.

The legislation provides that this can only be backdated up to two years, provided there would be no high income child benefit charge (because the income was less than £50,000). Therefore, if your income falls between £50,000 and £60,000, you would be worse off if you had elected not to receive the child benefit.

The practicalities

Child benefit should be claimed, normally when a child is born. This provides the entitlement to child benefit. Making the claim, even if the parents plan to elect not to receive the payments, is important if the parent wishes to obtain the National Insurance credits for state pension entitlement. It also guarantees that the child will be issued with a National Insurance number once they reach the age of around 15.

New claimants will be told about the new high income child benefit charge when they make their claim, to enable them to decide whether to make an election not to receive the child benefit and avoid the charge.

Existing claimants and their partners are not so easy to identify. HMRC need to get in touch with everyone who may be in the over £50,000 income bracket and either be a claimant or in a relationship with a claimant.

The charge

Child benefit itself is not liable to tax and the amount that can be claimed is unaffected by the new charge. The charge is levied upon the member of the household with the highest income.

Example:

On 6 April 2013 Lisa is a sole parent entitled to child benefit of £47.40 for her three children. Her annual adjusted net income is £55,000.

On 6 January 2014, Lisa lives with Johnny as man and wife. Johnny’s adjusted net income is £200,000.

For the period 6 April to 5 January, the child benefit received by Lisa will be clawed back by reason of her income. As there are 39 weeks in that period, the total child benefit would be £1848.60. As her income at £55,000 is between £50,000 and £60,000 there will be a charge to pay. This will be 50% x £1848, i.e. £924.

From 6 January, she is in partnership with Johnny and the benefit charge will be levied on him. This would be 100% x 13 x £47.4 = £616.20.

In certain circumstances, a person can claim child benefit even though the child is not living with them. This would occur then the person is paying for the child’s maintenance at least to the extent of the child benefit claimed.

Exemptions

Exemptions apply:

  • When an election has been made to disclaim child benefit
  • After the death of the child.

If you are ensure about how you may be affected by the new law you should consult a qualified accountant as every situation is different. More information can be found on the HMRC website

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By Chas Roy-Chowdhury, head of tax, ACCA

The UK government are calling it a ‘victory’; critics are saying it’s unfair to honest taxpayers. So, which is the UK-Swiss tax deal?

It’s actually a bit of both, as Saffrey Champness’ Ronnie Ludwig points out here. Those hiding funds from the taxman overseas still won’t be paying the full whack, but they will, for the first time, be paying something. It brings to mind the saying ‘a bird in the hand is worth two in the bush’.

This is actually as good a deal as the Treasury and HMRC could have got. The Swiss were never going to give up banking anonymity in one fell swoop, but this deal is the first chink in the armour. Some have said that the deal means the UK is giving up tax sovereignty; this is a bit of an over-reaction and misses the bigger point: it’s better to have something than nothing, and the deal leaves the door open for prosecutions after 2013.

Certainly, if I had money held in a Swiss bank account that I hadn’t declared I would be very nervous right now, anonymous or not. HMRC are allowed to ask the Swiss for the account details of up to 500 individuals per year; for those with Swiss accounts it’s like playing Russian Roulette with more than one chamber loaded. It’s not a lottery I’d like to be part of.

The deal could cause some with Swiss accounts to move their money elsewhere, but tax evaders are starting to run out of friendly havens thanks to some good work by the Treasury and HMRC.

So, is this a fair deal for UK taxpayers? No, not in the normative sense. But is it a realistic deal? Yes, it is, and it’s an important step towards getting HMRC a significant part of the money that it’s owed. HMRC have come in for a lot of criticism recently over all sorts of issues, but here they deserve some credit.

HMRC Discovery powers

accawebmaster —  8 August 2011 — 2 Comments

By Jason Piper, technical officer, ACCA

It’s not news that HMRC sometimes struggles to do its job. A cynic might suggest that the recent Treasury Select Committee (‘TSC’) report on The Administration and Effectiveness of HMRC seemed to conclude that there wasn’t much evidence of either. And a couple of recent cases on the Discovery Assessment regime illustrate that point.

In both cases, HMRC had been given all the information that any competent Inspector would need to open enquiries into tax returns – in one case, the accountant even wrote to them reminding them to open an enquiry. And yet, no enquiries were opened within the normal two year deadline, so when HMRC did try to open enquiries after the two-year window by using their Discovery powers, they got into a bit of bother with the Tax Tribunal.

Said tribunal wasn’t impressed: they concluded that the Discovery powers were there for when it was discovered out of time that the taxpayer had done something wrong, not when the Revenue discovered out of time that they’d got things wrong.

The first case involved a tax avoidance scheme which was known to be of dubious legality; this was disclosed by taxpayers, complete with reference numbers, on their returns. Dubious legality or not, it’s not great that HMRC tried to recover from their own administrative failures (and there were more than one in this case) using powers designed to combat taxpayer failures.

Case two though is a far more damning indictment of HMRC’s approach, and illustrates many of the problems highlighted by the Treasury Select Committee. This case came to light through an application for costs, as HMRC had belatedly withdrawn the Discovery assessment – but not before putting the accountant to the time and trouble of appealing it and getting a listing before the Tribunal.

The accountant was an experienced practitioner, used to dealing with the unusual quirks of tax for Lloyds ‘names’ (members of the world famous insurance market), and in particular, the process where a name passes away. Because it takes some years to finalise the Lloyds accounts, the final tax return has to be enquired into, even if it is technically correct at time of submission. The Revenue Manuals make this quite clear, because there is no other way that the Lloyds rules and the tax code between them can actually get to the right answer in terms of tax due. And yet, the Revenue failed to open the enquiry, even when the accountant wrote asking where the enquiry letter had got to.

When, some years later, the accountant sent the final figures in, the Inspector realised what had happened and tried to make good the error through discovery. Not only was this something that most people might consider unfair, it was (again, because of the special rules of Lloyds accounting) totally unsustainable. Despite being pointed very clearly to their own guidance, HMRC did not back down until ‘very late in the day’, then did not even send a representative to plead their case before the tribunal when the accountant, to his credit, stuck to his guns and used the hearing to apply for his costs (which he was awarded). The Tribunal seemed unimpressed by HMRC’s failure to own up to their mistakes, either in the correspondence surrounding the case or at the hearing itself.

The sorry events brought into the public gaze by these cases all took place long before the TSC report was published – but that’s hardly the point. HMRC needs to sharpen up its act, and pronto. The image portrayed by these cases is one of an arm of government which is not simply failing on the basics, but then trying to fix things by misusing its powers. Two wrongs don’t make a right. By allowing these cases to reach public tribunals, HMRC is losing more than a few cases; it is losing the trust and respect of taxpayers and their agents.

By Jason Piper, technical officer, ACCA

To people of a certain age, programmable digital computers were The Future, promising 3 day working weeks, the end of manual labour and untold leisure time. For another generation, they are all about social interaction, and keeping in touch with all your friends and contacts from the comfort of your own sofa.

But for one group of people, computers are the cause of misery, delays, frustration and expense, the cause of longer working hours and a replacement for human interaction. Those people of course are tax agents, taxpayers and in fact anyone who has any dealings with HMRC. Over the past few years, HMRC has pushed technology as the solution to all its woes, and the replacement for all (well, a sizeable chunk) of its staff. And has the computer really improved things?

Case study 1: Penalties. In October 2008, the Revenue computer sent out a penalty notice to a taxpayer, in the name of Mike Christensen. Unfortunately, Mike Christensen had retired that August, and so the penalty was invalid and had to be withdrawn. But because no-one had told (ok, reprogrammed) the computer, it had issued several months worth of invalid penalties – and Mike Christensen was the Area Director, so it had probably issued thousands of invalid demands to taxpayers in that time. Verdict: an embarrassing error, though many of the actual penalties had probably been rightfully assessed and could have been reissued.

Case Study 2: CIS refusals. Up until a couple of months ago, HMRC routinely refused building companies the benefit of “Gross Payment Status” in the Construction Industry Scheme for three technical failures in tax compliance – and the letters were sent out automatically by the computer. However, the tax tribunals pointed out that the legislation required HMRC to exercise some discretion, and that meant human intervention into the process. To their credit, the CIS team instantly dropped all their ongoing disputed cases where the computer had issued refusal letters (around 50, an indication of how dissatisfied businesses were with the computer’s decisions), and revised the process so that judgement is now exercised by an HMRC officer. Verdict: A failure to fully appreciate the terms of the underlying legislation, but a prompt and reasonable response by HMRC.

Case Study 3: Debt Collection. Described by one MP as “scaring old ladies and pensioners”*, one of the computer’s finest moments came when it started sending threatening letters out to taxpayers, warning them of impending bailiffs and auctions of their goods to settle tax debts. Not only were the letters short on contact details for the taxpayers to respond, they were also light on the details of the tax debt. For the very good reason that in many cases, there wasn’t one. Verdict: No excuse. A basic programming error left the machine responding incorrectly to nil submissions. We can and should demand better of a publicly funded body.

So what’s the overall conclusion? No doubt computers have a (huge) role to play in administering tax in the UK – I haven’t listed the tax code debacle under NPS (National Insurance and PAYE Services System) above, for the reason that I still believe NPS is a Good Thing; the coding issues arose from HMRC failures in project planning and communication. But taxpayers (and their agents) are all, ultimately, human. We need human contact, and the good sense that humans can bring to the mind numbing complexity that is the UK tax system. Maybe we can’t go back to a Dixon of Dock Green style policing of our tax system, but we need to stop the headlong rush into the Big Brother ‘steel plate in the wall’ dystopia. Digital by default is fine as a communication channel, with humans at each end, but must not become a digital abyss into which taxpayers time, money and efforts are poured with no guiding mind to make sure that things run sensibly. Administrative efficiency is only useful so long as it is also effective, and computers cannot measure that, only properly trained Revenue officers.

*Taken from uncorrected committee evidence

The Main Event

accawebmaster —  14 July 2011 — Leave a comment

By Chas Roy-Chowdhury, head of tax, ACCA

While everyone else was watching the phone-hacking debate in the Commons yesterday, I was at the much more exciting ‘Administration and effectiveness of HMRC: Closing the tax gap’ Treasury Sub-Committee alongside witnesses from the ICAEW, CIOT, and Taxaid.

Here’s a quick summary of some of our evidence.

We all agreed that taxpayers in general do try and be compliant. They are sometimes stifled by paperwork and get things wrong due to the complexity of the tax system. We need to urgently pursue tax simplification in order to facilitate compliance.

We agreed that at the top level of HMRC where we are generally engaged, we’ve [the institutes] been able to provide some constructive criticism and have hopefully helped make the tax system work better. But it is at the coal face, where ordinary members of HMRC deal with the routine tax work of accountants, that things do not appear to be working well and effectively.

One of the lines of questioning the MPs looked at was the NAO report dealing with the HMRC accounts for 2010/11, published on 8 July. The NAO had suggested that when it came to tax settlements with large businesses, we should have a separation of process where any HMRC Commissioner involved in the negotiations with the business should not also be a part of the signing off of the agreed settlement.

I felt that so long as there was no duplication of effort, such an approach would be fine; David Heaton of the ICAEW seemed to agree. The CIOT and Office of Tax Simplification’s John Whiting felt that, for perception reasons, there should be two commissioners involved who had not been a part of the negotiations involved in the signing off process.

The second major discussion point was how exactly the tax gap could be calculated. We agreed that the elements used to compose the tax gap may not be entirely appropriate or easy to quantify. For example, I considered that the inclusion of legal interpretation or avoidance being included would make tax gap calculations a highly subjective process open major differences in interpretation.