HMRC will send about a million letters during November to families that may be affected by the new High Income Child Benefit Charge (HICBC). Tax experts have warned of confusion over the charge, set to take effect from 7 January 2013, and some Conservative MPs were reported last week to be warning that it ‘might prove unworkable’.
Paul Aplin, chairman of the ICAEW Tax Faculty’s technical committee, said last week that he was not surprised to hear that an estimated 500,000 taxpayers would need to complete a self-assessment return for the first time. He understood that the estimate originated at HMRC, he told the Commons Treasury Committee.
Aplin warned that some ‘basic situations’ were likely to give rise to problems. ‘One person receiving a [state] benefit – it doesn’t even have to be a taxpayer – can generate a tax charge on another person. That’s a very interesting situation,’ he said.
However, the Chartered Institute of Taxation welcomed confirmation today that parents who decide to stop receiving child benefit because of uncertainty over the level of their own or their partner’s income, but find that the higher income falls below £60,000 for the tax year, will be able to revoke that decision within two years after the end of that year.
CIOT president Patrick Stevens said the tax body had spotted a practical problem with the draft HICBC legislation, and envisaged that many people would choose to continue to receive child benefit even if there was only a slight chance they might otherwise lose out. ‘This would have meant more people having to pay the HICBC and complete self-assessment returns, an unwelcome burden,’ he said.
New ‘directions’ issued today will ensure that those who elect not to receive child benefit, because they or their partner are on a higher income, should not lose out if their income unexpectedly falls. ‘Many on income over £60,000 are expected to elect out of the new system, i.e. as a household choose not to receive the child benefit nor pay the tax charge and potentially avoid the burden of completing a self-assessment return too,’ Stevens added.
HMRC said in a press release: ‘The new charge will apply when a taxpayer’s or their partner’s income is more than £50,000 in a tax year and if they or their partner receives child benefit. For those with income of more than £60,000, the tax charge is 100% of the amount of child benefit. If income is between £50,000 and £60,000, the charge is gradually increased to 100% of the child benefit.
‘Those affected will need to decide whether to keep receiving child benefit and pay the tax charge through self-assessment, or to stop receiving child benefit and not pay the new charge. If their income is less than £60,000, the tax charge will always be less than the amount of child benefit, and they could lose money to which they are entitled if they stop receiving child benefit.’
Guidance is provided on the HMRC website and in a new issue briefing. Partners should decide jointly what they wish to do ‘if possible’, according to the briefing. ‘Those who are unable to discuss the matter with their partner and who are unable to establish whether they need to pay the charge will be able to ask us for limited information about their partner’s income and/or entitlement to child benefit. We will be able to tell someone whether their partner’s income was higher than theirs, or whether child benefit was paid, but we will not be able to tell them the exact amount.’
Andrew Penman, director of personal tax at PKF, noted that the new charge would have an adverse impact on some households with lower incomes than others. ‘You may find a household with a combined income of £99,999 does not lose child benefit whereas one with a single income of just over £50,000 will lose out,’ he said.
The BBC reported that accountants ‘expect calls from people confused by the change, or looking to avoid losing benefit by legal means, for example making additional pension contributions’.
Conservative MPs feared a backlash from ‘the “striving” voters David Cameron wants to woo at the next election’, the Financial Times reported last week, adding that HM Treasury argued that the plan ‘would not affect 85% of families and represented the main contribution made by middle Britain to £18bn of welfare savings’.
