Vital tax credit deadline looms

Money Talk
By Jane Moore
Institute of Chartered Accountants in England & Wales

Jane Moore of the ICAEW

The tax credits renewal deadline - 31 July 2007 - is fast approaching.

Those receiving tax credits will have received their renewal packs, and no doubt a few reminders from HM Revenue & Customs (HMRC) if they haven't dealt with them yet.

There has also been a national advertising campaign.

So what is the tax credit renewal process all about? What do you have to do by 31 July? And what happens if you don't?

Tax credit awards and how they get renewed

First of all, a few words about how tax credits work, because this is essential to understanding what happens in the renewal process.

There are two renewal deadlines and the first and most important one is 31 July 2007

Tax credits - that is, Child Tax Credit (CTC) and Working Tax Credit (WTC) - are paid during the tax year on an estimated basis, based on the claimants' income from the year before.

For example, the tax credits "award" for the year 2006/07 will initially be based on income in 2005/06.

Your tax credits award may then be adjusted during the year when your circumstances change and you report that to HMRC, or if your income for the year changes and you tell them about that too.

But the award cannot be finalised until after the end of the tax year, when the claimants' actual income for the year is known.

Claiming

Tax credits have to be claimed - but once you have claimed, you are in the tax credits "club". You do not have to complete a fresh claim form every year, but can instead just keep renewing it.

Alexandra Roberts' £21,000 repayment demand

But you should note that in some situations - for instance, if you split up as a couple and become a single person again - your old claim ends and you have to make a new one.

So the tax credits renewal process does two things. It finalises the award for the financial year that has just ended, and renews the claim for the current financial year.

One further point to note is that in the period from 6 April 2007 to when you actually renew your claim, HMRC will keep on paying you "provisional payments" based on the latest information they have about you.

What has to be done by 31 July 2007?

There are two renewal deadlines, and the first and most important one is 31 July 2007.

Phone the tax credits helpline on 08453 003 900 if you get stuck

This is a full month earlier than last year's 31 August deadline - which itself was brought forward from the end of September in previous years.

All tax credit claimants are sent a Renewal Pack for 2006/07, which contains either one or two forms.

Everyone receives the Annual Review form (TC603R) which is a statement of the 2006/07 award.

Most people will also receive the Annual Declaration (TC603D).

Couples who have made a joint claim get one renewal pack between them.

A claimant who has been a party to more than one tax credit claim during 2006/07 will get a pack for each of them.

Those claimants who receive the Annual Declaration must complete and return it by 31 July 2007.

Estimates

The notes with the form tell you what to fill in - and you should read them.

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Phone the tax credits helpline on 08453 003 900 if you get stuck.

The deadline can be extended if you get your renewal pack late.

If this happens, the deadline then becomes 30 days after the renewal papers are actually issued, as long as that is later than 31 July.

The end of July is admittedly quite a tight deadline, but if you do not have final income figures for 2006/07 you can use estimates.

This might apply, for example, to a self-employed person who does not yet have final accounts for the 2006/07 tax year.

There is no need to explain why you have used an estimate - but if you do, you need to supply the final figures by 31 January 2008, which is the second of the two renewal deadlines.

Higher incomes

Claimants who do not receive the Annual Declaration will be people on higher incomes.

These people will either be receiving just the full family element of CTC, or they will be on a so-called "nil award" - in other words, their circumstances qualify them for tax credits but they do not get any money as their income is too high.

Do keep a copy of the form or a note of what you have told HMRC

All these claimants have to do is check the details on the Annual Review.

If these are correct, no further action is needed and their claims are automatically renewed. However, if the details on the Annual Review are wrong, they must tell HMRC.

You can renew your tax credits by sending back the paper form.

As an alternative, it is possible to renew tax credit claims by telephone on HMRC's tax credits helpline.

In the case of a joint claim, one of the claimants can give renewal details for both of them when renewing over the telephone.

Whichever way you renew, do keep a copy of the form or a note of what you have told HMRC.

It used to be possible to renew online, but the tax credits online service has been closed since December 2005 and is not expected to re-open until 2008.

What happens after you have renewed?

Once you have sent in the figures, HMRC will finalise your award for 2006/07 and compare it to what you were actually paid.

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If your income turned out to be lower than in 2005/06, you may not have been paid enough tax credits, and HMRC will pay you the difference right away.

If your income has gone up in 2006/07 compared to 2005/06, your tax credits may need to be adjusted.

But the final award will not be adjusted unless it went up by at least £25,000 - although it may also be adjusted if your circumstances changed but you did not tell HMRC at the time.

Over-payments

If it turns out that you did receive more tax credits in 2006/07 than the amount of the final award, you will have an overpayment which HMRC will expect you to pay back.

HMRC will send you a final award notice for 2006/07 and you should check it carefully

This is usually done by deducting it from the tax credits you get in the future, though you might instead have to pay it back to HMRC directly.

If this happens you can opt to pay it back over 12 months, or even longer if it would cause you hardship.

HMRC will send you a final award notice for 2006/07 and you should check it carefully.

HMRC will also adjust your tax credits for the current year, 2007/08, so that they are based on your actual 2006/07 income and your current circumstances.

They will send you an initial award notice for 2007/08.

What happens if you miss 31 July?

Where claimants return their information by 31 July 2007, their claims for 2007/08 are renewed with effect from 6 April 2007.

"I won't claim tax credits again"

This means that there is no break in your tax credits.

Where claimants do not meet this deadline, the 2007/08 award will not be renewed and tax credits payments will stop.

HMRC may do this quite quickly after 31 July.

The 2007/08 claim can be reinstated from 6 April 2007 if the claimant can shows "good cause" for missing the 31 July deadline and renews by 31 January 2008 at the latest.

"Good cause" means a reasonable excuse, such as illness or a family bereavement.

Second deadline

But if the second renewal date of 31 January 2008 is missed - or if HMRC does not accept that there was good cause for missing the 31 July 2007 deadline - the claimant will drop out of the renewals process and will have to make a new claim for 2007/08. This can only be backdated by a maximum of three months.

Failing to deal with the renewal papers can result in a penalty

As a result, some or all of the provisional payments made since 6 April 2007 until the old claim was cancelled will have to be repaid.

Beware that failing to deal with the renewal papers could not only mean losing out on tax credits, but could result in a penalty too, although HMRC does not charge penalties that often.

The maximum penalty for failure to submit an Annual Declaration is £300, plus up to £60 per day if the failure continues after the initial penalty is imposed.

These are not automatic penalties, and will not be charged if the person had a reasonable excuse for the delay and did comply as soon as that became possible.