Child benefit claw-back sets another challenge for accountants

01 November 2012

Andrew Flanagan, Managing Director of Digita, Thomson Reuters Tax & Accounting

The new high income child benefit charge, designed to claw back child benefit from those on high earnings, became part of UK tax legislation in the 2012 Finance Act.

Under the legislation 1% of child benefit received is clawed back for every £100 of annual income earned in excess of £50,000 by the higher earner of a couple, with the result that all of the benefit will be clawed back if income exceeds £60,000.

On the face of it, this seems a relatively straightforward calculation, but there are many complications that accountants will need to take into account when advising their clients and in many cases firms may not currently know which of their clients will be affected by this new legislation.

As it is the higher earner of a couple that bears the charge, irrespective of which partner actually receives child benefit, it will be necessary for the accountant to ask clients if either they or their partner receives child benefit, and if so, who has the higher annual income, to determine whether the charge applies to their client.

In the case of clients who have entered or left a relationship during the tax year, it will be necessary, in addition to the above, to determine the amount of child benefit received for the period they were in the relationship as the legislation provides for the rules to be applied on a weekly basis.

For clients whose income will exceed £60,000 it is possible to elect not to receive child benefit in order to avoid a claw-back charge at the end of the year, but the election needs to be in place by 7 January 2013 if it is to apply for the 2012/2013 tax year.

The 2012/2013 tax return introduces two new boxes which will need to be completed if clients are liable to this new charge: the number of children in respect of whom child benefit is received and the amount of child benefit received for any relevant period(s) in the tax year.

In many cases, this aspect of a client’s personal circumstances will not have been relevant to their tax affairs in the past as income for each partner in a relationship is separately assessed, so much of the information needed to advise clients will not be readily available on the client’s file. Firms need to be preparing now to request this additional information so that they may be able to assist clients in filing 2012/2013 tax returns and give appropriate advice.

Tax software will need to be modified to provide firms with support for this new legislation in time for the new tax year on 6 April 2013 when work on 2012/2013 tax returns will commence.

To facilitate collection of the extra information required, the annual tax return questionnaire will need to be changed in order to prompt clients to provide the necessary detail when responding. Work is already underway to implement these changes in Digita Personal Tax from Thomson Reuters.

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