Are you one of the million?
Major changes to child benefit have now come into effect. Around one million families have received HM Revenue & Customs’ (HMRC’s) letter explaining the new high income child benefit charge (HICBC), which started from 7 January 2013.
Over two-thirds of these households have effectively lost all of their child benefit, and an estimated 500,000 taxpayers will now have to complete a self-assessment return for the first time.
The new HICBC applies if your income is more than £50,000 and you or your partner receives child benefit. You could, however, be subject to a charge if someone who is not living with you is also claiming child benefit for a child who is living with you – so as well as having to pay for a benefit received by somebody else, there could be the added complication of obtaining information from a former partner.
If your income exceeds £60,000, the HICBC will be equivalent to the full amount of child benefit received – so effectively, you receive nothing. Where income is between £50,000 and £60,000, the charge is calculated as 1% of the amount of child benefit for every £100 of income above £50,000. But it is an ‘earn now, pay later’ system, with the full child benefit paid up front and the tax charge being paid after the end of the tax year – so you could regard it as an interest-free loan from HMRC.
You will have to declare the amount of the child benefit in your tax return if your income exceeds £50,000, although employees have the option of paying the charge using their tax code if less than £3,000 of tax is due. As child benefit is worth £20.30 for the oldest child and £13.40 a week for each younger child, this should normally be the case. Where both partners have an income over £50,000, the person with the higher income must declare the child benefit and pay the HICBC.
For 2012/13, a person’s income for the whole year will be used to establish whether a charge applies, but the charge will just be on the amount of child benefit received between 7 January and 5 April 2013. The HICBC has been widely criticised because two parents who each earn £50,000 have not lost any benefits, but a single parent with income of £60,000 has lost the entire entitlement. For some couples, income splitting may be an option. For example, in the case of a couple with partnership profits of £100,000 – if they share out their profits 60:40 they will lose their child benefit, but if they share the profits equally, they will keep the benefit.
For other people, additional pension contributions or charitable giving may be the only ways to reduce their income, ideally to below £50,000. If your income is between £50,000 and £60,000, and you have three children, then each £1,000 of gross contribution will save £645 (40% tax plus a HICBC reduction of nearly 24.5%). If the withdrawal of tax credits also comes into play, the saving could be more than 100%.
This is obviously a rather complex area, so please contact us to see if any of these options will work for you.
The year end starts here
We may just have started 2013, but one aspect of tax year end planning is already well underway.
Venture capital trusts (VCTs) have three important tax benefits.
- Investment in newly issued shares will normally qualify for income tax relief at 30%.
- Dividends paid by VCTs are generally free of personal tax (although dividend tax credits cannot be reclaimed).
- Capital gains, both within VCTs and realised by investors, are generally free of UK tax.
Such tax generosity is not given lightly: VCTs are high-risk investments, focused on small unlisted companies. They may not suit your investment risk profile and, even if they do, VCTs should form only a small part of your overall portfolio.
Around the turn of the calendar year, the first crop of VCT offerings starts to appear. The VCT promoters all want to be at the front of the queue, so that they are not left scrabbling for investors’ funds in late March. One of the most successful VCT managers had three of its five trusts on offer fully subscribed before Christmas.
Many of the issues now on offer, or due to arrive soon, are top-ups to existing trusts. This can mean that you buy in to a ready-made portfolio, depending upon the structure of the offering. It also helps to avoid the risk of choosing a new VCT that has limited success in raising funds and either returns your money just as the tax year ends, or starts life with disproportionately high fixed costs.
In 2011/12, 76 VCTs sought to raise funds according to HMRC, a number that has changed little in recent years. Picking the wheat from the chaff among all the prospectuses is no easy matter. If you think VCTs might suit you, taking advice should be your starting point.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Services Authority does not regulate tax advice.
HMRC offers an exit route
Under renewed criticism for its inefficiency, HMRC is turning up the heat on users of complex tax avoidance schemes.
Shortly before Christmas, HMRC announced that it was offering a ‘settlement opportunity’ to users of some of the more aggressive tax avoidance schemes, including certain film-based arrangements. HMRC plans to have contacted anyone eligible by the end of January, although it has not spelt out an end date by which an offer must be accepted. Ominously, HMRC says that, “Where people decline the settlement opportunity, we will increase the pace of our investigations and accelerate disputes into litigation.”
The move by HMRC is not an example of seasonal kindness – HMRC is under great pressure from the Government and Parliament. The National Audit Office recently revealed that HMRC had a backlog of 41,000 open avoidance cases involving individuals and smaller companies.
The vast majority of these resulted from marketed avoidance schemes and almost half of the cases were three or more years old. These statistics attracted considerable criticism from the House of Commons’ Public Accounts Committee. Its Chair, Margaret Hodge, described the HMRC case load as ‘eye-watering’ and expressed concern that “without a credible plan to resolve these cases and to stamp out future avoidance, the public will lose confidence in the tax system’s ability to collect even-handedly what is due from all individuals and companies.”
Cut your corporation tax
A new regime aims to give companies an incentive to protect and commercialise their patents.
The ‘patent box regime’, which was initially proposed in 2010, will be introduced from 1 April 2013. Companies can make an election so that profits attributable to patents are effectively taxed at a corporation tax rate of just 10%, and it doesn’t matter whether these profits are received as royalties or are embedded in a product’s selling price.
Only 60% of the benefit will be given in 2013, however, because the 10% rate is being phased in annually. The fully reduced 10% rate will apply from 2017. This is in addition to tax relief that may be available for research and development expenditure.
The patent box is limited to companies involved in the innovation lying behind a patent, so a company claiming the patent box must show that it has carried out development activities in relation to the invention. A patent must also have been granted by the UK Intellectual Property Office or the European Patent Office. So now is a good time to be reviewing your patent arrangements to ensure that you benefit fully from the new regime.
HMRC set to name and shame tax defaulters
This year could see the first naming and shaming of deliberate tax defaulters by HM Revenue & Customs (HMRC) who will be able to publish details of those who have evaded tax.
The legislation was introduced in 2010, but has yet to be used. It applies to return periods starting on or after 1 April 2010, and to failures or wrongdoings from that date. Previously, HMRC could only publish details of tax evaders in criminal cases.
The scheme is aimed at the more serious cases of tax evasion; so for a taxpayer to be in danger of being named the amount of tax evaded must exceed £25,000. This threshold is worked out by adding together all taxes that have been subject to a penalty for a deliberate error – and it is for all periods after 1 April 2010. Naming can apply to individuals, partnerships and companies, and the taxes covered include income tax, corporation tax, PAYE, capital gains tax, VAT, national insurance and inheritance tax.
Naming can only take place after a compliance check, so there are two ways that major tax evaders can avoid seeing their names in print. The first and most obvious option is to make a full and complete disclosure before the start of any check. The second approach is to make a complete disclosure at the start of a check and then to co-operate with HMRC afterwards. Such action should result in HMRC granting the maximum penalty reduction, and where they give this, HMRC will not publish any details of the taxpayer.
Publication can only occur as a result of a deliberate error rather than carelessness – so in future, HMRC can be expected to argue that more errors are deliberate. It remains to be seen when the first naming and shaming occurs, but given the start date, it is most likely to be for a VAT offence.
