The Wall Street Journal – By Iain Martin

26th October 2010

The UK Treasury is in a Flap

The government is struggling to find a way of making George Osborne’s plans to remove child benefit from those paying 40% tax work.

A Treasury source says the policy is “unenforceable” and likely to be ditched before its scheduled introduction in 2013. Another source at the heart of government says the expectation is that it will eventually not happen. Elsewhere I hear that it is “panic stations in the Treasury.”

At root is a problem that should have been apparent to those designing the policy, if detailed advice had been sought from civil servants before it was announced at Conservative party conference.

Child benefit is generally paid to the mother. She is under no legal obligation to tell the father that she receives it. The Treasury confirms this. It is her benefit. The father’s tax status is irrelevant. If a mother claims it there is nothing forcing her to flag up to the taxman that her husband earns above the level that Osborne stipulates should mean no child benefit.

Indeed, the child benefit was designed with the express purpose of keeping the cash away from men. Remember the argument of Barbara Castle and others when its precursor was introduced. It went direct to the mother in order that the father wouldn’t spend the proceeds on drink or gambling.

In the U.K. tax system households are not taxed, individuals are. The Treasury acknowledges that is the basis on which the system of personal taxation works. Potentially, this problem rather stuffs a flagship coalition policy, or makes it prohibitively expensive and complicated to implement.

How can the government easily prove the connection between mothers who pay no tax or earn less than £44,000 and the higher rate taxpayer she might live with? And then keep tabs on the situation on a monthly basis for almost two decades — with millions of taxpayers involved (moving in and out of work, having new children, some separating, getting divorced, finding new partners who may or may not be higher rate taxpayers, etc).

It’s easier to stop the mother getting the benefit if she herself is a higher rate taxpayer. It could be done via her tax code. But if she’s not, how good will the government be at establishing whether she is living with a partner paying tax at 40%?

A mother fills out the form for Child Benefit when her child is born, and then the money is paid until her offspring hits 19. If it wants to proceed, the government will have to scrap that simple universal system of payment and try to construct a mechanism that keeps track of what millions of mothers’ partners are earning.

This is what is causing “Thick of It” style panic in the Treasury and HMRC. I hear that ministers are considering (and tell me which part of the rest of this sentence might provide cause for concern) “a new government database” to try and match up mothers with their partners.

In theory it would enable cross-checking of the child benefit claims of mothers with the national insurance numbers, tax codes and addresses of fathers/husbands/partners. What could possibly go wrong? The government’s record with new databases is not great.

I sought guidance from the Treasury. They directed me to HMRC. Then HMRC said that this was the Treasury’s business. Asked about a potential new database, a Treasury spokesman responded:

“HMRC will need to check applications (for Child Benefit). They are considering the most effective method of doing so.”

I am told that an “honesty box” is also being considered on male self-assessment tax forms, so that fathers earning more than £44,000 can confess that the mother of their children is taking child benefit.

But again, the mother is under no legal obligation to tell the father. The father can simply say he doesn’t know and that his wife/partner won’t tell him. Is there a way round this? Not easily. Does the coalition have plans to legislate to force husbands, wives and partners to know each other’s finances inside out and tell the truth about them at all times. If so, good luck with that.

What are the government’s options “going forward” (in that terrible phrase of the moment)?

1) Scrap the policy now and admit it was a rushed job. This would be embarrassing for the Chancellor.

2) Stick to the line that HMRC is trying to find the most effective way of implementing the policy in 2013, and then quietly ditch it nearer the time (saying economic conditions have improved). Probably the best way out.

3) Plough ahead. Construct that vast new database and hope that it is cheap to build and police. Again, good luck with that.

4) Scrap child benefit completely, and replace it with a combination of child tax credits (or bolt it onto the forthcoming IDS universal benefit/credit) and transferable tax allowances. But David Cameron has expressly committed himself to Child Benefit.

5) Er… that’s it.

It will be interesting to see which option they choose.

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Some self-employed professionals, such as barristers, may be seen as “easier targets”by HMRC as they have earnings not taxed at source and could total millions of pounds in some cases.

It is estimated that of the £7bn of extra tax revenue sought by HMRC in the chancellor’s clampdown, it could be seeking about £2bn from the wealthy.

This follows a tax amnesty deal offered to doctors and dentists this year which HMRC described as “very productive”. People who came forward under the deal were offered a reduced penalty of 10 per cent of the tax owed as well as having to pay the original tax and interest on that sum. It resulted in 1,500 disclosures of untaxed earnings that yielded a total of £9m. One case raised £1.2m alone.

An HMRC official said: “This is a good model that we’re looking at taking forward. Amnesties cost us next to nothing.”

These targeted initiatives could obtain significant sums from individuals, including “professionals [who] should know better”, he added.

It is understood that a dedicated team of investigators is being set up to catch those individuals hiding money offshore in order to scrutinise financial records.

So far, amnesties aimed at offshore accountholders have raised only £500m, but an ongoing offer to very wealthy people with offshore accounts in Liechtenstein aims to raise about £1bn. More than 90 of those people have already come forward, HMRC said.

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BBC News – 19th October, 2010

Tax credit claimants will receive letters this week reminding them to contact HM Revenue & Customs if a partner moves in or out of their homes.

The letters are part of a new anti-fraud plan to stop people overclaiming when their circumstances have changed.

HMRC warned that deliberate failure to keep them informed could amount to fraud, which would lead to prosecution.

It said 150,000 tax credit claims in 2008-09 were incorrect single claims.

“There has been too much error and too much fraud for too long in our benefits and tax credits system,” said David Gauke, Exchequer Secretary to the Treasury.

The letters are part of a wider campaign against fraud and mistakes in the public services which the government hopes will save it about £25bn a year.

More generous

Earlier this year, the tax credit system was changed to vary the rules on what is called “notional entitlement”.

Claimants were still obliged to tell HMRC quickly if a partner joined their household or left as a result of a couple splitting up.

But the system became more favourable to people who were slow at doing so.

They could now backdate their revised tax credit claim by more than the previous three-month limit, and all the way back to the point at which their circumstances changed.

That meant they could offset all the money gained from the backdated element of their revised claim against anything they might owe due to the previous overpayments they had received.

Less generous

In June, though, the coalition government’s Budget announced many important changes to the tax credit system, most of which will make it less generous in a number of important ways from April 2011.

These include:

• Tax credits will be tapered away more quickly once a claimant’s income has reached the necessary thresholds for working tax credit and child tax credit.
• Families with children who claim the £545 “family element” of tax credits will find it is tapered away once their incomes rise above £40,000 a year, not £50,000 as at present.
• The annual “disregard” – the amount by which your income can rise without it affecting that year’s tax credit entitlement – will fall from the current £25,000 to £10,000 in 2011, then £5,000 from April 2013, thus increasing the likelihood of overpayments occurring.

Backdated claims may also be restricted to just one month, from April 2012.

But a spokesman for HMRC said it was not yet clear if this would affect the recent change to “notional entitlement.”

“The draft regulations will be prepared sometime in 2011 and will be put before the Social Security Advisory Committee for their views,” he said.

“How the draft regulations interact with other areas of policy will be made clear then.”

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By Nicky Burridge
The Independent – 14th October 2010

The tax breaks high earners get on pension savings are to be cut dramatically to save £4 billion a year, it was announced today.

The amount people can save tax-free into a pension each year is being slashed from £255,000 to £50,000 from next April.

But those on high salaries will continue to receive tax relief on pension savings at the highest rate at which they pay income tax.

The Government also plans to reduce the lifetime pensions savings allowance that benefits from tax relief from £1.8 million to £1.5 million from April 2012.

The reforms replace the complex changes to the regime proposed by the previous government, under which people earning more than £150,000 would have had the level of tax relief they received gradually reduced to 20%, despite the fact that they paid income tax at 50%.

The previous proposals sparked outrage from the pensions industry, with commentators warning that the rules would be complex to administer and might put people off saving through a pension.

Today’s measures received a broad welcome, although there were concerns that some people on middle incomes who had defined benefit schemes might face an unexpected tax bill.

As part of the reforms, the Government is raising the rate at which increases to the pensions accrued in defined benefit schemes are valued.

This means that someone whose pension entitlement rose by more than £3,125 a year could be hit with a tax bill.

To help protect workers on low and moderate incomes, people who exceed the annual allowance because of one-off spikes in pension accrual will be allowed to offset it against their unused allowance from the previous three years.

Exemptions will also be made for people retiring early on grounds of ill-health.

The Government also plans to hold a consultation on allowing people to meet any tax charges they face out of their pensions.

It estimates the measures will affect only around 100,000 people, 80% of whom earn more than £100,000 a year.

Financial Secretary to the Treasury Mark Hoban said: “We have abandoned the previous government’s complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes. We have taken a tough but fair decision.

“The coalition Government believes that our system is fair, will preserve incentives to save and – compared to the last government’s approach – will help UK businesses to attract and retain talent.”

The changes were welcomed by industry bodies and business groups.

Joanne Segars, chief executive of the National Association of Pension Funds, said: “Today’s announcement is a welcome and pragmatic approach that will help to ensure that saving through a pension remains tax-incentivised.

“Increasing the annual allowance to £50,000 will help to ensure that modest earners with long periods of pensionable service are not caught with an unintended tax charge.”

John Cridland, CBI deputy director-general, said: “Today’s announcement is not as bad as feared. The Government had considered making the annual allowance as low as £30,000.

“It rightly heeded warnings about the impact that restrictive regimes can have on pension saving, and these new proposals are a significant improvement on the approach proposed by the previous government, which was simply unworkable.”

But others pointed out potential problems with the new regime.

Marc Hommel, pensions partner at PricewaterhouseCoopers, said: “The current Government estimate is that 100,000 people will be affected but this could potentially double as many more people could be caught in future if the annual and lifetime allowances remain frozen and inflation takes off.”

Others expressed concerns about the impact the changes would have on the self-employed, whose incomes are more irregular, as well as the short timeframe in which the changes would be implemented.

The announcement comes a week after the Government hit the middle-classes by announcing that it would no longer pay child benefit to higher-rate taxpayers from 2013.

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BBC News 4th October 2010

Child benefit is to be axed for higher rate taxpayers from 2013, Chancellor George Osborne has announced.

Talking on BBC One’s Breakfast ahead of his appearance at the Conservative party conference, he said the move would save about £1bn.

“It’s a big decision for us, but we think it’s absolutely necessary and fair given the financial situation we face,” he said.

Parents earning over about £44,000 who pay 40% tax and above will be affected.

It is estimated the change will affect about 15% – 1.2m – families.

Mr Osborne said: “It’s very hard to justify taxing people on much lower incomes in order to pay the child benefit to some of the better off in our society.”

He confirmed the cut would hit homes with a single or two high earners. But families with two parents on modest incomes – which might add up to over £44,000 – will keep the benefit.

He defended this by saying his plan was “the most straightforward” option – which avoided means testing.

Currently child benefit is paid to all families with children.

Mr Osborne said he expected the public to accept that it was not fair to tax someone earning £18,000 a year to pay child benefit to someone earning £50,000.

‘In it together’

“It’s not a decision we’ve taken lightly, but given the scale of the debts Labour’s left us with, and given they’ve left us with no plan and we’ve had to come up with proposals, we think this is fair.

“It means we’re all in this together. Each part of society is going to be making a contribution”

At the moment, parents are paid £20.30 a week for the eldest child and £13.40 for subsequent children, with payments continuing until the age of 19 for those in full-time education.

“I understand these people are not super-rich, but we have to make sure that we’re all in this together”

Mr Osborne announced in June in the Budget that the child benefit will be frozen for three years.

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By Simon Cox

BBC Radio 4′s The Report

Up to £1.5bn of unpaid tax is likely to be written off by HM Revenue and Customs, insiders have told the BBC.

Staff said the vast majority would not be pursued because the cases involved were over two years old and open to legal challenge from taxpayers.

There is a backlog of 7.5 million cases of tax underpayment or overpayment – the latter estimated at £3bn which will be reimbursed – dating back to 2007-8.

An HMRC spokesman said no decision had been made on underpayment cases.

The details come just weeks after it emerged a further six million people had been wrongly taxed in the past two years, with 1.4 million people who underpaid set to receive an unexpected tax bill.

The latest cases to emerge, which are part of a huge backlog of open cases dating back to 2007/8, are not on the HMRC’s new computer system and will have to be dealt with manually.

‘Frustrating’

Front-line staff at HMRC have told The Report on Radio 4 that only those cases that verge on fraud will be pursued.

Cases where money is owed to taxpayers by the Exchequer will still be processed.

One staff member told the BBC: “For each underpayment there are thousands of pounds owed. Underpayments are very frustrating.

“If we had the chance to sort it out three years ago we could have recovered the money. It is now likely to be written off if it’s over two years – we’re not looking at underpayments beyond two years.”

The staff member added: “Our directors are telling people that [those who owe tax] will appeal and fight it and this will generate more work.”

Another staff member who has worked on open cases said that in their experience the underpayment of tax was never pursued.

“These people who have underpaid earn 30, 40, 50k a year and got benefits such as a company car and we’re not told about them until after the tax has been paid.”

The staff member added: “The cases cannot be dealt with by the new computer as they have to be done manually – what did we do with the cases older than two years? We wrote them off.”

The delay in handling these open cases is due to a combination of a historic backlog, which once reached 30 million, the additional work created by problems with the new computer system and a shrinking number of staff.

‘Future decision’

“But while we are reviewing the cases of underpayment, no decision has been made on on these cases.”

He added: “It’s a provisional period, where staff have been asked to review underpayments. If they find someone who has underpaid then that is set aside for a future decision.

“We are going to be looking at at how best to deal with these. We are going to look at the specifics of each case and apply a normal criteria in due course.

“Those who have underpaid, they will be part of the overall decision-making process – no decision yet on what to do with them. But they are being identified.”

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Will you still be around next week? Most of us work on the basis that we will be – which is entirely reasonable. However, over 1,500 people die every day in the UK and sadly an awful lot of them leave chaos behind them.

Statistics show that over 70% of UK residents have either not written a Will or worse in my view, have done so but the Will is worthless because it is either not properly drafted, is out of date, or cannot be found. Which means that all too often grieving relatives are faced with the financial and administrative headaches that come with someone dying intestate – in other words, someone dying without a will.

So while the odds are that you will still be with your family this time next week, it is worth making sure you have a will written – just in case.

Why you need a will

If you die without a will there is a legal framework designed to distribute your estate. However, it might not work quite as you think.

If you die married, but without children, your spouse will receive all your ‘personal chattels’ – car, furniture, stamp collection etc. The rest of your estate (including your house if it’s in your name only) will be split, with your spouse getting a legacy of £450,000 (or whatever there is up to £450,000) and half of whatever’s remaining. The other half goes to your parents, or, if they are dead, is split between your siblings. So if your house is worth more than £450,000 and is solely in your name, your spouse may have to sell it to release value to other claimants.

If you are married with children, then your spouse still gets your personal belongings, plus a legacy of £250,000. They also get lifelong interest on half of the remaining money, which goes into a trust for your children to receive on their 18th birthday. If that is what you wanted, that’s fine. If it isn’t, and you haven’t a will, best make one.

However, there are people who are much more vulnerable than spouses when it comes to intestate law – unmarried long-term partners. If you die leaving a partner behind, the Treasury will treat your estate as though you were single. So your partner will get absolutely nothing. Instead, your estate will go to your children, or if you don’t have kids, to your parents; or (in order of priority) your siblings, half-siblings, grandparents, aunts and uncles. And if you don’t have any family at all, the government will retain the entire estate, regardless of how many years you have lived with your partner, or what your wishes might have been.

There is an excellent and in-depth explanation of the Intestacy Rules on the Citizens Advice website http://www.adviceguide.org.uk

If you have children, then it is vital that you make a will so that you can appoint a guardian to look after them if both their parents die. If you die without doing this, your next of kin will be appointed as their carers. Again, that might be what you want, but it can cause problems if your next of kin are, say, elderly parents. Note too that if you are an unmarried mother with children and die without leaving a will, the children’s birth father will not automatically get custody. So make sure you have a will stating who you want to look after your children in the event of your death.

Once you have done this, don’t forget about it. If your circumstances change (you get divorced or remarried or you have your first child perhaps) you need to update your will. Otherwise your beneficiaries will face the problem of dealing with an out-of-date will.

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Sep 20 2010 – Daily Record

By Torcuil Crichton

WEALTHY tax dodgers face a “ruthless” crackdown over the next four years that will raise more than £7billion for the Treasury.

The get-tough measure was unveiled at the Lib Dem conference by Treasury Secretary Danny Alexander.

It’s his bid to reassure party activists that the government coalition is committed to fairness.

Alexander said an extra £900million will go to HM Revenue & Customs over the next four years to tackle “morally indefensible” tax avoidance and evasion.

That will pay for a team of investigators to track down money hidden in offshore accounts and to run more thorough checks on tax returns put in by people making more than £150,000.

There will also be investment in cyber crime specialists to protect the taxman’s electronic systems from attack and more detection technology designed to prevent alcohol and tobacco smuggling.

Alexander also criticised those who use legal tax dodges to cut their tax bills.

He said: “To those who hire accountants to dream up a clever new tax dodge, I say this, Think again. We are all in this together – and that means you, too.”

The move overshadowed a subtle signal from Lib Dem leaders that they were preparing to means test universal benefits like the pensioners winter fuel allowance and child benefit.

In the clearest signal yet that the better off could be stripped of their universal welfare payments, Nick Clegg said he would be happy to give up his family’s £2450-a-year child benefit.

The Deputy Prime Minister said it was right that those who were “not so much in need” should share in the pain of deficit-reduction measures.

Critics have accused ministers of targeting the most vulnerable with benefit cuts as Chancellor George Osborne seeks massive contributions from the “out of control” welfare budget for next month’s spending review.

Asked if he was prepared to give up state help for his three young sons, he said: “Certainly.

“I think we just need to look in the round at a benefits system which has too many people who are dependent on benefits in the long run who should be encouraged to work. And it provides benefits to people who don’t necessarily feel that acute need in the first place.

“It would be unfair to only deal with those benefits which only go to people on very low means.

“You have to also, because that’s the fair thing to do, look at benefits that go high up the income scale to people who maybe are not so much in need and that’s what we’re doing.”

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By James Chapman in ThisisMoney.co.uk
15 September 2010

Millions of families will see their child benefit scrapped and younger pensioners will lose winter fuel payments under drastic Government proposals.

The coalition is considering reducing from 19 to 16 the age at which child benefit is available, a move that would save taxpayers up to £3bn a year, according to official sources.

The age threshold for the winter fuel allowance, meanwhile, could be raised from 60 to 70.

Ministers are understood to be reluctant to make the benefits system even more complicated by introducing means-testing for universal benefits.

Changes to age limits, however, would be simple to implement and would save billions of pounds as the coalition battles to plug the massive black hole in the public finances left by Labour.

The moves are likely to be condemned by the Opposition, which has set its face against almost all the deficit reduction measures outlined by the Government

David Cameron yesterday told Cabinet colleagues it was time to take on the claims of lobby groups and vested interests portraying the ‘worst case scenario’.

The Prime Minister ordered ministers to mount more robust challenges to union leaders and police chiefs who are claiming that cuts will have a catastrophic effect. Treasury sources insisted that ‘no decisions whatsoever’ have been taken on a comprehensive review of public spending to be unveiled next month.

But senior ministers are understood to be arguing that child benefit, which costs the taxpayer £11bn a year, should no longer be made available for older teenagers.

It is paid to every family until a child is 19 if he or she is in full-time education.

Even the wealthiest parents get the £20.30 a week for their first child and £13.40 for all further children.

Poorer parents are eligible for payments worth up to £100,000 in both child benefit and tax credits by the time a child is 19.

Stopping payments when children reach 16 would save around £3bn from the £11bn annual child allowance bill.

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