Malcolm Kyle

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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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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