Client started work in Feb 04 after long period on IS and HRC DLA. Husband doesn't work, also on HRC DLA. Earned aprox £2700 in 2003/4.

Estimated income for 2004/5 is 14,108. Works 25hrs a week, so no 30 hr credit.

IR are using her whole income for this year as basis of award ie £14180. I thought, from reading CPAG, that as her current year's income is MORE than £2500 greater than last years income, then a disregard of £2500 should be applied to current years income, before the award is calculated.

Am I wrong- the IR assure me I am. Have even referred them to CPAG, page 136,and also the referred to reg( Reg 4(4) Table 1 para 8 TC(DCI) Regs. They still say I'm wrong.

Can someone reassure me that I'm not barking up the wrong tree?

Meg.

The relevant bits are:

S7(3) of the act

"(3) In this Part "the relevant income" means-

(a) if an amount is prescribed for the purposes of this paragraph and the current year income exceeds the previous year income by not more than that amount, the previous year income,

(b) if an amount is prescribed for the purposes of this paragraph and the current year income exceeds the previous year income by more than that amount, the current year income reduced by that amount,

(c) if an amount is prescribed for the purposes of this paragraph and the previous year income exceeds the current year income by not more than that amount, the previous year income,

(d) if an amount is prescribed for the purposes of this paragraph and the previous year income exceeds the current year income by more than that amount, the current year income increased by that amount, and

(e) otherwise, the current year income."

and SI 2002 No. 2008
The Tax Credits (Income Thresholds and Determination of Rates) Regulations 2002

5. The amount prescribed for the purposes of section 7(3)(a) and (b) of the Act is £2,500."

You are right and they are wrong. If IR are assessing TC using the full CY income without applying the £2,500 CY/PY disregard then they are engineering an underpayment of up to £925 (37% if £2500).


If quoting relevant bits of the Regs/Act won't budge them then it might be worth pointing IR people to the Tax Credits Tech Manual (TCTM) (although this isn't a particulary well written document)
- the relevant bit is at ...

http://www.inlandrevenue.gov.uk/manuals/tctmanual/tctm07042.htm

it's not very clearly put here but the relevant sentence is ...
"If CY income is more than £2,500 higher, then the income used is CY income less £2,500."

One thing to keep in mind is that (in some cases with HB/CTB) your clients might be in the end be better off collecting the underpayment at the end of the tax/year.

thank you both! Will go and fight the IR now, as client wants the extra money now each week rather than waiting till April. Looking forward to proving to them they are wrong though don't expect it to be easy! Let you know how I get on!

Thanks again,
Meg.