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.