Tax credits renewals – why all the fuss?
QUESTION: When I submitted my Tax Credits renewal forms, I had to estimate my self-employment income because I had not prepared my accounts. I have now completed my accounts and I am about to file my tax return. Will the Tax Credits office be informed of the actual figures on my tax return?
ANSWER: Tax credits, unlike other benefits, follow an annual cycle based on the tax year (April 6-April 5).
Tax credits claims last for a maximum of one year. After the end of each tax year, HMRC send renewal packs to claimants. The renewal packs finalise the claim for the year just ended and act as a claim for the new tax year.
In order to finalise the claim for the year just ended and ensure any new claim is as accurate as possible, HMRC ask claimants to provide their actual income for the year just ended. These packs are generally sent out in the summer time. Many self-employed claimants will not have completed their tax returns nor had their final figures from their accountants. For this reason, HMRC allow claimants to complete their declaration forms using an estimated income.
It is important that claimants give an estimated income to HMRC by the deadline (in most cases July 31) even if they cannot provide an actual income. If they don't, their payments may stop. The claimant should give an estimate even if they receive an auto-renewal and their estimated income is within the limits quoted on the renewal form. This will ensure the system knows they have used an estimated income.
The claimant then has until the following January 31 to report their actual income. That is also the filing date for income tax self-assessment purposes. Thus, in order to renew a claim for 2015/16, a self-employed claimant should file income figures for 2014/15 by July 31 2013, but that may be an estimate. If so, the claimant must file final 2014/15 figures by January 31 2016.
It is important that they give HMRC their actual income otherwise HMRC will finalise the claim for the previous tax year using the estimated figure which may not be correct. This could potentially lead to penalties and overpayments. If you fail to meet the January deadline, your tax credits won't stop but the tax credits you receive from April 6 may not be accurate. And if you're overpaid, you may have to pay it back later- and you may even be charged a penalty.
Self-employment has many benefits, but one of the downsides is that income is not necessarily consistent and regular. It may be that your business is doing well and your income is too high to qualify for tax credits, but there is a chance that this could change at any time in the future.
Because tax credit entitlement accrues at a daily rate throughout the year, income is worked out by being spread evenly, day by day, over the whole year. This can mean that tax credits already received may have to be recalculated.
This can work to a claimant's advantage if they start the year on a high income and finish it on a low income, especially if they have made a claim at the start of the year and been given a Nil Award. This is because their award is recomputed for the whole year to give them the tax credit entitlement which is now due. If they had not made a claim, but had delayed claiming until their income fell, they would only have been allowed three months' backdating.
HM Revenue & Customs telephone numbers change fairly frequently, so it's always best to check their website for the present Tax Credits Office number or speak to your accountant for further advice.
:: Malachy McLernon (email@example.com) is a director of PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.