Today brings the implementation of one of the most inoperable tax changes I've seen in my long career as an accountant – the child benefit tax charge. While seemingly simple on the surface, the new child benefit tax charge seems to me to be a disaster waiting to happen...
The details of the new tax charge have been explained previously (see http://www.taxdonut.co.uk/blog/2012/11/will-forthcoming-child-benefit-tax-charge-affect-you) but let’s recap:
- A tax charge will apply where one or other partner in a relationship has an annual income of more than £50,000 and where they or their partner receives child benefit.
- The tax charge applied will be 1% of the full child benefit for every £100 of income over £50,000. It will be charged to the person with the income that exceeds £50,000 – regardless of whether they are the one who receives the child benefit.
- The tax charge on a taxpayer with income of more than £60,000 will be equal to the amount of the child benefit and at this level the advice is for the taxpayer or their partner to opt out of receiving child benefit.
- However, you should still register for child benefit to ensure that National Insurance credits are received, where applicable, even though you would opt out of receiving payment of the benefit.
So what is the problem?
The issue comes in the implementation of these rules – as always the devil is in the detail. Not all relationships are perfect nor is it always possible to know your income or that of your partner or spouse.
Let’s look at some realistic examples...
- Income can easily vary from year to year as a result of bonuses, job changes, redundancies, career breaks, etc. The onus will be on taxpayers to make sure they review their circumstances regularly, file a self-assessment when they should do, make sure their personal allowance adjustments are regularly updated and to adjust their claim for child benefit as needed.
- What is a relationship? Relationships are very complex, yet I can find no clear definition of what HMRC would deem to be a "partner". What if someone “lives” together on an occasional basis? What if that person has another partner elsewhere? What if your partner leaves you? This may sound like stuff from a soap opera, but it happens in real life. Not only do you need to handle the emotional side of a complex relationship, but you also need to keep HMRC in the loop!
- We’d all like to think that relationships are honest and open, but what happens when they are not? What if one partner said they had cancelled child benefit but hadn’t actually done so, leaving a high-earning partner in the position of unwittingly not declaring a benefit for which they had a tax liability? The HMRC rules on penalties state that “reasonable care” should be taken when completing tax returns, but would they consider it to be a lack of reasonable care where a partner (and not the self-assessment completer) is less than honest?
And, of course, there will be cases where one partner is not aware or allowed to be aware of the income of the other for many reasons.
It seems that you can only ask HMRC for very limited information about your partner and only if you have an individual income of more than £50,000 in a tax year and live with that partner or have split up from your partner during the year.
Even then HMRC will only tell you whether your partner/ex-partner was entitled to receive child benefit for a specific tax year and/or whether your individual adjusted net income was higher than your partner's/ex-partner's income for a specific tax year – hardly useful for a self-assessment return!
Suffice to say that I expect there will be some significant issues surrounding the practical implementation of this tax change along with some rather interesting test cases, all adding to the taxpayers’ stress as a result of this ill thought-out and conceived (excuse the pun!) child benefit tax change.
Tax is taxing and anyone who says otherwise is frankly kidding you!
• Using 20 years' experience spent working at some of the UK's leading businesses, award-winning chartered accountant Elaine Clark is the founder and managing director of www.cheapaccounting.co.uk.