The High Income Child Benefit charge applies to a taxpayer who has income over £50,000 in a tax year where either they or their partner, if they have one, are in receipt of Child Benefit for the year.

We set out below the main points of the charge and illustrate some of the practical issues.

Does this affect my family?

The High Income Child Benefit charge is payable by a taxpayer who has ‘adjusted net income’ (explained later) in excess of £50,000 where either they or their partner, if they have one, are in receipt of Child Benefit.

Where there is a partner and both partners have adjusted net income in excess of £50,000 the charge only applies to the partner with the higher income.

Practical issues

Some couples with fluctuating income levels may find that they are caught by the charge or perhaps that the partner who usually has the highest income does not actually end up paying the charge.

For couples who do not share their financial details, there is a problem as it is difficult to accurately complete their tax return (or know if they need to contact HMRC to request one) if their own income is over £50,000 and Child Benefit is being claimed. Only the highest earning partner is liable so this will need to be determined.

Changes in circumstances

As the charge is by reference to weeks, the charge will only apply to those weeks of the tax year for which the partnership exists.

If a couple breaks up, the partner with the highest income will only be liable for the period from 6 April to the week in which the breakup occurs.

Conversely, if a couple comes together and Child Benefit is already being paid, the partner with the highest income will only be liable for the charge for those weeks from the date the couple start living together until the end of the tax year.

So, what is the adjusted net income of £50,000 made up of?

It can be seen that the rules revolve around ‘adjusted net income’, which is broadly:

• income (total income subject to income tax less specified deductions e.g., trading losses and payments made gross to pension schemes)
• reduced by grossed up Gift Aid donations to charity and pension contributions which have received tax relief at source.

In some cases, it may be that an individual may want to donate more to charity or make additional pension contributions: for example, to reduce or avoid the charge.

Inequity applies as household income is not taken into account. Therefore, equalising income for those who have the flexibility to do so such as in family partnerships or family owner managed businesses is important.

Who is a partner for the purpose of the charge?

A person is a partner of another person at any time if any of the following conditions are met at that time. The persons are either:

• a man and a woman who are married to each other and not separated; or
• a man and a woman who are not married to each other but are living together as husband and wife.

Similar rules apply to same-sex couples.

The charge

An income tax charge will apply at a rate of 1 per cent of the full Child Benefit award for each £100 of income between £50,000 and £60,000.

The charge on taxpayers with income above £60,000 will be equal to the amount of Child Benefit paid.

How does the administration operate?

In the self-assessment system, individuals are required to notify HMRC if they have a liability to income tax, capital gains tax (CGT) and the High Income Child Benefit Charge by 6 October following the tax year.

This requirement is amended to include situations where the person is liable for the Child Benefit charge. In addition, the charge is included in Pay as You Earn (PAYE) regulations so that it can be collected through PAYE, using a reduced tax code.

It is also included in the definition of tax liability so that it could potentially affect payments on account and balancing payments.

So, should you continue to claim Child Benefit?

It is important to appreciate that Child Benefit itself is not liable to tax and the amount that can be claimed is therefore unaffected by the charge.

It can, therefore, continue to be paid in full to the claimant even if they or their partner have a liability to the charge.

On the other hand, Child Benefit claimants are able to elect not to receive the Child Benefit to which they are entitled if they or their partner do not wish to pay the charge.

However, this will not affect the credit available (for state pension purposes) to certain people who stay at home to look after children (provided that an initial claim for child benefit was made when the child was born). An election can be revoked if a person’s circumstances change.

But I don’t receive a tax return? 

It may well be that you and/or your partner have not received a tax return before, but this may need to change. You need to tell HMRC by 6 October following the end of the tax year if you think a charge may be due.

Guidance

HMRC has issued some guidance on the charge and the options available which can be found at www.gov.uk/child-benefit-tax-charge.

Luck can be fickle, but for 85-year-old Janus Wagonback, it is certainly on his side. The Nottinghamshire grandfather recently won £2,700.

This is not a ground-breaking amount, but what is incredible is that his original stake was just 3p. Janus made the bet on a 10-match accumulator at a bookmaker in Sutton-in-Ashfield, Nottinghamshire.

This included all his matches ending in a draw, encompassing Millwall’s home tie with Preston North End, the Dundee derby and a World Cup qualifier between Lebanon and Iraq.

Unsurprisingly the odds of this happening were high – nearly 90,000-1. So, it was a surprise to Janus, known locally as George, to win such a significant bet.

He said the small amount was “basically loose change that I had in my pocket. I’ve had some significant wins on the football over the years, much bigger than this one.

“I didn’t know I’d won until I checked the paper the next day. I did feel good but can’t jump around much these days – only little jumps.”

The 3p bet was smaller than the minimum stake of 5p usually allowed by Betfred, but it was happy to make an exception as George is a regular at the bookmakers.

Company boss Fred Done said: “I’ve been in this business for over 50 years and cannot remember anyone winning so much from just three pence,” he said.

We are fast approaching the deadline for filing your Self-Assessment tax return which is Monday 31st January 2022.

If you would like Cogent to prepare your tax return, please complete and return the Self-Assessment Tax Return Questionnaire for the tax year 2020/21 which was previously sent to you by email.

As we are close to the deadline, we cannot guarantee to complete the tax return to meet the deadline so it is important that you complete the questionnaire as soon as possible.

The standard charge, including VAT, for a basic tax return is £240 as we have passed the deadline to receive this service at a discounted rate. Please note, more complicated tax returns, where additional work or supplements are required, will be subject to additional charges.

If you have a second shareholder, they may also need to file a tax return even if they have not done so previously due to the changes to dividend tax from April 2018 on any dividends over £2,000.  If they would like Cogent to prepare their tax return, please download a second copy of the questionnaire for them to complete.

Please also be aware that if we have already prepared your tax return, this will not be filed until our fee has been paid and the tax return approved.

Outstanding Balancing Payments for 2020/21 and the First Payment on Account for 2021/22 are also due and payable by 31st January 2022 and interest will be charged on late payment.

STOP PRESS…
HMRC has announced that Self-Assessment taxpayers who miss the 31st January 2022 tax return deadline will not receive late filing penalties if their return is filed online by 28th February 2022. The 31st January 2022 payment deadline however remains. Taxpayers who do not pay any outstanding balance on their 2020/21 tax bill by 31st January 2022 will be charged interest from 1st February 2022.

Contractors have faced a tough couple of years dealing with rising costs, the COVID-19 pandemic, Brexit and, of course, the challenges of IR35.

These issues have constrained the contracting community, forcing some freelancers to completely alter the way in which they work.

So, what does the future hold? Our team has looked at some of the key developments on the horizon.

IR35 is not going away

Although many contractors have had to get used to the issues created by IR35, the reality is that it is still the biggest and most persistent difficulty that most contractors face.

The reforms have caused major disruption during a really tough time. Many contractors working via a PSC have had to alter their working arrangements to adapt.

However, things may be looking up. Although the Government hasn’t altered the IR35 rules, there is unmistakable evidence that larger businesses required to abide by these new rules have stopped using blanket bans in the main and have got to grips with making proper status assessments.

In fact, thousands of firms are still collaborating with contractors, engaging them outside IR35 and many more now better understand their requirements under the off-payroll legislation.

IR35 to be scrutinised

The well-publicised cases of incorrect status determinations and the various legal decisions against employers and HMRC over IR35 status has drawn the attention of Parliament.

There are several groups and committees requesting evidence and further scrutiny of the rules is expected.

This year we should see the follow-up Lords review into IR35 reform and a further National Audit Office investigation, which should reveal the true impact of the reforms.

It is hoped that the Government will make positive changes to the rules based on the recommendations that are delivered but much will depend on whether they listen.

Alongside this HMRC continues to update and overhaul its fundamentally flawed IR35 tool, CEST.

Tax avoidance is public enemy number one

Given the significant spending during the pandemic, HMRC is keen to stamp out tax avoidance, especially among smaller businesses and taxpayers.

During 2022, the Government has promised to tackle tax avoidance schemes and is implementing new powers under the latest Finance Bill to do so.

When it comes to contractors, there are growing calls for some umbrella companies to be investigated and new rules to be enforced preventing these businesses operation as unscrupulous tax avoidance schemes. We operate a fully compliant umbrella company under our Cogent brand should you be required to work through one: https://cogentaccountants.co.uk/cogent-umbrella

Many contractors may have already been stung by the Loan Charge legislation and should avoid repeating this situation again by using the wrong umbrella company, despite the assurances given by promoters of some schemes.

False self-employment

It is thought that the Government wants to take a wide look at the self-employed workforce beyond the IR35 reforms, which predominantly affected contractors working via PSCs.

It is understood that it may be looking into whether sole traders are genuinely self-employed or if the businesses engaging them are facilitating ‘false self-employment’.

Here to help

Whatever challenges may come your way in the year ahead, our team at Cogent are here to offer a helping hand, so please get in touch.

The ongoing probe into IR35 by the House of Lords has uncovered some interesting information and responses from contractors and those who use their services, as well as from HMRC.

A former tax official  was recently quoted as saying: “Absolutely everyone else has a different experience to HMRC. But based on their past report, I have every confidence that the committee will soon sort the reality from this fiction.”

She isn’t alone in condemning HMRC’s findings and comparing it to the very different experience faced by contractors. In fact, Qdos CEO Seb Maley said that “HMRC’s submission doesn’t tell the full story of IR35 reform” pointing out that “the Government paints a picture that suits it’s own narrative”.

These comments are not surprising given that HMRC said that most contractors and engagers had found operating the new IR35 rules “easy”.

This was at complete odds from the written evidence submitted by industry organisations, such as IPSE, FCSA and the LITRG.

However, HMRC went further saying that most businesses had found the rules “reasonable to apply.”

Many experts have, however, pointed out that the £135 million of fines issued against other Government agencies and departments for failing to comply with IR35 suggested otherwise.

Elsewhere in it’s submission, the tax authority said when it was made aware of contractors “changing the way they work” due to IR35, it became “pro-active” to “raise awareness…among contractors.”

However, the industry has pointed out several examples of HMRC publishing factsheets and guidance late, not adding it to the GOV.UK website or not sending it out to those who must abide by the new rules.

HMRC seems to be painting a vastly different picture to peers than the realities faced by many contractors and, unsurprisingly, it has some experts concerned.

In fact, the 14 page submission shows HMRC not fully answering the Lords’ questions on five separate occasions, each time claiming it is “too early” to say what the impact is.

One area that the peers were particularly interested in was the cost of administering the scheme. It is clear that many PSCs and medium or large commercial organisations have found administering the rules more onerous and costly.

However, it seems HMRC itself has struggled with the administrative burden and revised the initial cost of managing the scheme from £14.4 million to £19.7 million.

It is clear then that the impact of IR35 has been far greater than HMRC had predicted and more wide reaching.

Hopefully, the House of Lords report should be issued later this year, and given the evidence presented to it by contractors and organisations, should make further recommendations to improve the complex and costly IR35 rules.

A new report has found that almost nine in 10 UK businesses have been forced to increase their rates for contractors to attract the right talent.

Much of the UK is experiencing a labour shortage at the moment, driven by a number of distinct factors, and the world of freelancing and contractors seems to be no different.

However, the main impact forcing the rates of contractors higher appears to be IR35 reform in the private sector.

According to the new study, of those firms that had increased their rates for contractors, 75 per cent were required to raise the amount paid by more than 10 per cent.

The research also showed that 77 per cent of end clients now find engaging contractors difficult, with half describing the process as “challenging”.

Despite rising rates, 90 per cent of the companies questioned intend to extend their use of contractors during the next year and a half to fill gaps in their workforce or to support further growth.

Surprisingly only 31 per cent of businesses had increased rates due to fears of non-compliance. Instead, contractor costs (53 per cent), talent attraction (42 per cent) and project delays (42 per cent) were seen as the bigger risks of using a “bad IR35 solution”.

The report stated: “For businesses that rely on the contractor workforce to deliver projects on time and to budget, access to a talented flexible workforce is vital to growth.

“With job vacancies reaching an all-time high, presenting an attractive, compliant and competitive IR35 offer to talent is the best way to regain some control in an uncertain environment.”

Hotel company Travelodge has revealed the strangest requests it has received from its guest in the last 12 months – and some of them are really out there.

According to the popular accommodation provider, one resident staying Derbyshire asked what time they can see the snake on the Snake Pass – a popular local tourist destination.

In another example, one guest in York kindly asked a member of staff to sing in the next room to check he had a quiet room.

Making special requests at a hotel is common Travelodge said, but the last 12 months had been particularly odd.

With growing demand for staycations, the company had experienced a surge in bookings across it’s 582 hotels across the UK following the lifting of all COVID-19restrictions.

Some other examples of odd requests included one guest in St Austell asking for a room with a south-facing window because he required sunlight to charge his aura first thing in the morning, while staff at Newcastle Quayside Travelodge were left shocked after a customer asked for a children’s paddling pool so their pet fish could have a spacious bed for the night.

A spokesperson for Travelodge said: “With more Britons holidaying on British shores than ever before, our hotel teams have also received a high volume of interesting requests and questions, especially around place names, local dishes, customs and traditions across the British regions.

“Where possible, our hotel teams will go above and beyond to help customers as they relish a good challenge.

“However, there are some requests beyond their control, such as arranging afternoon tea with the pandas, getting a shooting star to appear at 10pm, getting a part on Emmerdale, and getting seagulls to sing instead of squawk.”