Interaction between tax credits and tax planning

By Tolley

The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Interaction between tax credits and tax planning
  • Capital purchases
  • Pension contributions
  • Trading losses
  • Employing a spouse
  • Incorporation
  • Overlap profits
  • Starting a business

When tax credits were introduced in April 2003, the tax profession took the view that the tax credits system was something either to be embraced fully or avoided. The thought at the time was that because advisers had claimed the children’s tax credit on clients’ Tax Returns, there was an implication that they should deal with the clients’ tax credit claims unless this work was specifically excluded from the engagement letter.

The decision was taken by over 98% of advisers to exclude tax credits from the services supplied to clients. Most advisers have a default clause in their engagement letters along the lines of ‘we do not offer any advice on tax credits’.

There are over 20 million people in the tax credits system. Many of those people will be your clients. They will be dealing with their own tax credits claims and may potentially be reporting incorrect income figures and missing out on tax credits. In addition, you will have possibly carried out planning for your clients to mitigate their income tax liabilities, which could have had an effect on their tax credit entitlement without you realising it.

It is therefore essential that in deciding on various issues from a tax perspective, you also take into account your clients’ tax credit circumstances. Issues where the income impact on tax credits is worth bearing in mind include:

  • capital purchases ― should the client buy the asset and claim capital allowances, or lease the asset providing an ongoing profit deduction?
  • what is the effect of making a pension contribution?
  • should the client pay his spouse or partner a wage from his company or sole trader business?
  • what are the effects on tax credits if the client incorporates his business?
  • how do

More on Tax credits: