Introduction »

Tax credits: challenge and change

HMRC are required under the 2010 Spending Review settlement to significantly reduce spending and increase tax revenues. Tax Credits and Child Benefit affect working and non-working families alike and are specific headline areas that continue to attract attention. This is due to both the level of expenditure involved and because they potentially affect many individuals. As a result, HMRC are now charged with making expenditure reductions in Child Benefit, tax credits and other welfare benefits of £8.3 billion over the four years from 2011/12 to 2014/15.

Specifically, the planned changes have been outlined as:

• a reduction of almost £2.5 billion from changes to Child Tax Credit (CTC) and Working Tax Credit (WTC) entitlements from 2011/12
• a reduction of £5.5 billion through the withdrawal of Child Benefit from higher rate taxpayer families from 2013 and
• a £300 million saving from using Real Time Information to inform the calculation of tax credit payments from 2014, thereby reducing the level of in-year overpayments which need to be recovered.

Further, HMRC are also committed to reducing losses arising from errors and frauds in tax credits by £2 billion a year.

HMRC’s challenge

As well as the entitlement changes detailed below, HMRC will need to make alterations to its administrative systems for checking entitlements and making payments. This is because reducing errors and overpayments is considered critical to the challenge of achieving these significant cost reductions. In particular, a recent House of Commons Public Accounts report drew attention to the levels of debt arising from overpaid tax credits which has risen year on year since its introduction in 2003/04.

It stated:

‘Tax credit debt stood at £4.7 billion at the end of March 2011. The Department’s campaign to collect £550 million of newly established tax credit debt has met with limited success, with only £170 million collected or cleared after five months. It estimates that £1.7 billion of new tax credit debt will be generated in 2011/12 and that the overall level of debt could increase to £7.4 billion by 2014/15 without further intervention.’

The report also indicates that £1.1 billion of old tax credit debt, some dating back to 2003/04 has recently been written off but clearly there may be resistance for any such repeat action of this kind if expenditure targets are to be met.

Tax credit changes 2012/13

A number of changes affecting entitlement to tax credits were implemented for 2011/12.

However, further and arguably more significant changes commence from 6 April 2012 and it will be critical that claimants are aware of the more significant of these to avoid loss of entitlement or be faced with demands for repayments. A summary of the key changes are as follows:

• the period for which a tax credit claim and certain changes of circumstances can be backdated will be reduced from three months to one month
• a disregard of £2,500 will be introduced in the tax credits system for in-year falls in income
• the separate threshold for tapering the family element will disappear altogether
• there is to be an increase in the joint weekly working hours requirement for WTC for couples with children from 16 to 24 hours, with one partner working at least 16 hours, and
• the 50 plus element will be removed from the WTC.

In addition most rates are frozen for 2012/13 with the exception of certain disability elements of WTC and the child element of CTC.

If you require more information about how these changes may affect you for the new tax year 2012/13 please get in touch with your normal contact.

Introduction »