TT40: Child & Working Tax Credits

A pointless parallel? …Or smoke & mirrors?

These new tax credits have been in existence since 6 April 2003 and are seen by many as little more than political sleight of hand. They are really means-tested benefits, presented in a way that massages down two politically sensitive sets of figures: the overall tax take and the amount paid out to benefit claimants. As a result, we now have two separate tax systems, each with its own rules. Normal Self-Assessment tax returns have to be completed to enable the pre tax credit liability to be calculated, and those people who wish to claim their tax credit entitlement then have to complete a separate complex form (TC600).

Levels of Child Tax Credit (“CTC”) & Working Tax Credit (“WTC “)

There are different levels of CTC depending on the number of children the claimant has. The most generous level (three or more children) is withdrawn entirely once annual income (including the partner’s income) reaches £58,000.

There are also different levels of WTC. These depend on the weekly hours worked; whether the claimant lives with a partner and whether they have any children. Even the most generous of these is withdrawn completely once annual income (including the partner’s) reaches £15,000. However, there is an additional element if payments are made to an approved ‘child care provider’ which is not withdrawn until a higher income level.

For these purposes, the definition of income is broadly similar to that for income tax purposes, although some allowable deductions for income tax purposes are ignored.

Making the claim

The claim for the tax year 2003-04 is made by completing the form TC600 (based on income for 2001-02). If the claimant’s income for 2001-02 is above the limits then the entitlement is £NIL. However, it is sometimes worthwhile submitting a ‘protective’ claim, because if there is a change in circumstances and such a claim has been submitted, the final award will be based on averaged annual income and will be paid out for the entire year.

If a protective claim is not submitted and circumstances change such that averaged annual income will be low enough to qualify, the final award will again be based on annual averaged income. The difference in this case is that it will only be paid for a period starting three months before the claim is submitted and ending at the end of the tax year.

The situation is particularly critical for the self-employed, as a fall in profits will not be quantifiable until their accounts have been finalised.

Drawbacks of protective claims

These are: the additional administrative burden; the necessity to notify the Inland Revenue of increases or falls in income outside the de minimis limits; form-filling; and the possibility that an initial award will be withdrawn if the subsequent income is higher than the year on which the initial award is based.

 

Barnes Roffe Topical Tips

  • Claims for 2003/04 should be made by 5 July 2003 otherwise entitlements will not be paid for the whole year.
  • In borderline cases protective claims should be made even if the initial amount receivable is nil.
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