1. This clause and schedule introduce the new children's tax credit from April 2001. The clause provides for the amount of the credit to be £4,160 at the rate of 10 per cent in 2001-02 where a claimant has one or more qualifying children, as defined, resident with him or her in the year of assessment. If the claimant has income chargeable at the higher rate of tax in the year of assessment, the clause provides for the credit to be tapered away by reference to that income. Schedule 3 introduces Schedule 13B which sets out the rules for allocation of the credit where a qualifying child is resident with more than one adult during a year of assessment.

2. The children’s tax credit will be available to married and unmarried couples and to individuals who have one or more qualifying children resident with them during a year of assessment. The credit will be progressively withdrawn from claimants who have income chargeable at the higher rate: the amount of £4,160 will be reduced by £2 for every £3 of income in the higher rate band (equivalent to losing £1 of credit for every £15). A qualifying child is a child under 16 who is a child of the claimant’s or maintained by him at his expense during the year of assessment. The amount for which relief is given at 10% will be subject to statutory indexation from 2002-03.

3. Schedule 3 inserts new Schedule 13B into the Income and Corporation Taxes Acts (ICTA) 1988. The Schedule sets out the rules for allocating entitlement to the children’s tax credit when one or more qualifying children are resident with a married couple living together or an unmarried couple living together as husband and wife. It also sets out the rules for apportionment of the credit in cases where one or more qualifying children are resident with more than one individual claimant or married or unmarried couple during the year of assessment, or with one or more individual claimants and/or one or more married or unmarried couples. The Schedule also provides rules for dividing up the credit in respect of one or more children in a year of assessment when a change of circumstances happens, for example, a marriage takes place or a couple who have been living together as husband and wife separate.

4. The children’s tax credit is part of a package of reform of income tax reliefs, under which the non age-related married couple’s and related allowances are largely abolished and replaced by the new credit.

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15. Sub-section (1) inserts a new section 257AA into ICTA 1988. New Section 257AA provides for a claimant with whom one or more qualifying children is resident during a year of assessment to be entitled to an income tax reduction, called the children’s tax credit. It provides that the amount for which relief is given at 10% is £4,160 and that that amount should be reduced by £2 for every £3 of the claimant’s income chargeable to higher rate tax. The new Section defines a qualifying child as the claimant’s child under the age of 16 (including stepchildren and illegitimate children) or a child under 16 maintained by the claimant at his expense during the year. It also provides for Schedule 13B, which contains the rules for allocating entitlement to the credit in cases where the child or children live with more than one adult during the year, to have effect.

26. Sub-section (2) inserts Schedule 13B into ICTA 1988.

37. Sub-section (3) adds the amount by reference to which the children’s tax credit is calculated to the amounts subject to the statutory indexation rules in Section 257C ICTA 1988.

48. Sub-section (4) makes some consequential changes to Sections in the Taxes Management Act (TMA) 1970 that refer to the provisions for transfer of married couple’s allowance, to add similar references to the provisions for transfer of the children’s tax credit. It also adds a reference to proceedings before Commissioners in respect of the children’s tax credit to Section 58 (3) TMA, which deals with proceedings in tax cases in Northern Ireland.

59. Sub-sections (5) and (6) provide for the provisions introducing the children’s tax credit to take effect in 2001-02, apart from the provision about indexation, which first takes effect for 2002-03.

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10. Paragraph 1 sets out the conditions and definitions which determine when the rules on allocation of the children’s tax credit within married and unmarried couples apply. It provides that the rules in paragraphs 2 to 5 of the Schedule apply when at any time in a year of assessment a married couple are living together or a man and a woman are living together as husband and wife and a relevant child is resident with them. The Schedule refers to the husband and wife, or the man and the woman, as the partners. A relevant child is defined as a child who is a qualifying child in relation to both of the partners. For the purposes of the rules applicable to partners, the higher-earning, or the lower-earning, partner in a couple is defined as the partner with the higher, or the lower, total income for a year of assessment, respectively. If, exceptionally, both partners have the same total income, they may elect which of them is to be treated as the lower-earning partner.

211. Paragraph 2 provides that, unless the partners make a different allocation, the lower-earning partner is not entitled to claim the children’s tax credit for the year of assessment.

312. Paragraph 3 governs the transfer or sharing of the credit where neither partner is a higher-rate taxpayer. It provides that if either partner has income chargeable at the higher rate for the year, the provisions for transfer or sharing do not apply, so that it is only the higher-earning partner who is entitled to claim the credit. If neither partner has income chargeable at the higher rate, the lower-earning partner is entitled to claim a children’s tax credit and, in that case, the amount by reference to which the credit is calculated for each partner is halved. Or, if the partners make an election, the higher-earning partner loses the entitlement to the credit for the year and it passes instead to the lower-earning partner.

413. Paragraph 4 provides for surplus children’s tax credit to which either partner is entitled to pass to the other, if the partner with the surplus chooses. If a partner is entitled to more children’s tax credit than would be enough to reduce his income tax liability to nil, he or she can give notice that they wish to pass the excess to their partner. The excess entitlement passed to the other partner may newly give him or her an entitlement to the credit of that amount. Or it may be added to the amount of children’s tax credit to which the other partner is already entitled (where they are sharing the credit). A notice to transfer surplus credit is subject to the usual time limits for claims, should be made in the form determined by the Board and is irrevocable.

514. Paragraph 5 sets out the rules governing elections for transfer of the children’s tax credit under Paragraph 3(3). An election is to be made in the form determined by the Board and may cover one year or two or more consecutive years of assessment. It should normally be made before the start of the year (or the first year) it is to cover, on the basis of what the partners expect their relative incomes to be, subject to the facility to make an election during the first year in some circumstances. An election can be made during the first year it is to cover if written notice has been given before the beginning of the year and the election is made within the first 30 days; if the partners marry or start to live together as husband and wife; if a relevant child becomes resident with the partners and they did not have a relevant child living with them earlier in the year; or if their relative incomes have changed, so that the higher-earning partner last year is expected to be the lower-earning partner this year. The partners can withdraw an election by making a new one or either partner can withdraw it. A withdrawal takes effect for the year in which it is made and for later years. An election ceases to be effective if there is a change in the relative incomes of the partners between one year and the next.

615. Paragraph 6 covers the situation where:

a child is resident with two or more people during a year of assessment; and

is a qualifying child in relation to at least two of those people; but

no two of them are partners within the meaning of paragraphs 2 to 5.

The people for whom the child is a qualifying child are described as the taxpayers and paragraph 6 provides the rules for dividing up the children’s tax credit amongst them. The amount (or the aggregate amount) apportioned to a taxpayer under this paragraph takes the place of the amount specified in Section 257AA(2) for calculating the credit. The taxpayers may divide up the children’s tax credit as they agree but if they do not agree, the Commissioners are appointed to decide how it should be divided up. A taxpayer may be allotted the whole of a credit but cannot be entitled to more than one whole credit, no matter how many shares of credit he is allotted. The Board may direct which body of Commissioners should carry out the apportionment, provided that it should be the General Commissioners for a division in which one of the taxpayers resides, or the Special Commissioners, if none of the taxpayers resides in the United Kingdom. If a claim to the children’s tax credit has to be decided and apportionment of the credit may be needed, the Board can assign both the claim and the apportionment to a relevant body of Commissioners. The Commissioners are to carry out an apportionment of the children’s tax credit in the same way as hearing and settling an appeal and the taxpayers involved are entitled to appear before, and be heard by, the Commissioners, or to make written representations.

716. Paragraph 7 covers the situations in which a child is a relevant child for more than one pair of partners in a year of assessment or where he or she is resident with more than one person during the year and paragraph 6 would apply, except that he or she was also a relevant child in the year. Paragraph 7 provides that, in these cases, the rules in paragraph 6 about apportioning the children’s tax credit amongst taxpayers should still apply. But for the purposes of those rules, each pair of partners within the meaning of paragraphs 2 to 5 should be treated as a single taxpayer (so that the pair get one allotted share between them) and the allocation of a share (or shares) of a credit between the partners should be determined by the rules in paragraphs 2 to 5.

817. Paragraph 8 sets out the rules for dividing up the children’s tax credit in a year when a change of circumstances arises. Essentially, the year is divided up into periods by reference to the length of time for which different circumstances applied and the rules appropriate to the various circumstances apply to divide up entitlement to the credit available for that period. A change of circumstances happens when a relevant event occurs and the result is that a child begins to be a qualifying child in relation to someone, or stops being such a child, or when, immediately before the event, the child was a qualifying child in relation to both parties to it. Relevant events are defined as marriage or a man and woman beginning to live together as husband as wife, or a separation. Separation means a husband and wife ceasing to live together or a man and woman who were not married but were living together as husband and wife ceasing to do so. Paragraph 8 divides up the year in which there is one or more changes of circumstances into separate periods, each of which is treated as a separate year of assessment. Entitlement to the children’s tax credit for each period is allocated according to the rules for the circumstances that applied. The year is divided up into the periods between the start of the year and the change of circumstances, or between the change and the end of the year or between two changes. The children’s tax credit for a year is time-apportioned by reference to the length of the periods and that time-apportioned amount takes the place of the amount set out in Section 257AA(2). But any questions as to income levels are settled on the basis of income for the year and not for a particular period.

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