Child benefit: Where George got it wrong
Over the past week the profession has torn apart the Chancellor’s plans to change the rules for child benefit.
This article summarises the key issues and offers advice from the AccountingWEB community to help George Osborne out of the latest tax pit he’s dug himself into.
For many the Chancellor’s High Income Child Benefit Charge (HICBC) announcement last month violated all the principles the government laid down a year ago – simplification, fairness, efficiency and certainty.
Child benefit is set to be progressively withdrawn from households where someone earns at least £50,000 at the rate of 1% for every £100 above this threshold.
This has thrown up a number of anomalies, meaning that a two-income couple can earn £99,000 a year and keep all their benefit, while a single-income couple on £60,000 loses it all.
AccountingWEB member anthonydyer said the new measure would create “anti-simplification”, which goes against what we've been led to expect: “Didn't we all see the problems coming when Child and Working Tax Credits were put in place? Well, I see the same and worse happening now. The administrative cost of all those extra tax returns and calls to HMRC for explanation are going to cost a fortune in admin."
David Heaton of Baker Tilly said in the firm's tax brief this week that the concept of the charge is simple, but HMRC will "have to deal with week-to-week issues, such as broken marriages, temporary and semi-permanent cohabitation, children moving between separated parents, children of the same relationship living with different parents, polygamous overseas marriages, mistakes about whether a woman can elect out of receiving child benefit, and more.”
The new measures mean that two parents who each earn £50,000 keep all of their child benefit, despite how many children they have.
However Benneyworth flagged up the "very aggressive" marginal tax rates that would result in her Budget Analysis Report.
Heaton concurred, pointing out that fairness diminishes with the increasing size of the family. For a family with one child that’s a marginal tax rate of 52.6% (instead of 42%); with three children it’s 66.5%; five children 80.4%; and eight children 101.3%.
Benneyworth said: “For the next year or so in any event families with five or more children will still be getting child tax credit at £50,000. This puts the rate for five kids up a bit and the rest up by 41% in each case. Marginal rates run up to 150% with a very large family (nine or more).”
On an administrative level, Benneyworth said: “I understand that somewhere around 4.5m letters will be sent to those with income of more than £50,000 to establish how many of them live with someone in receipt of child benefit or are in receipt of child benefit themselves. That's quite a lot of letters and quite a lot of cost. Then you have to follow up the no replies - quite high I suspect. Then you have to match the records. Then you have to check who is the higher earning of the two, but using net adjusted income, which you can't do unless you bring the whole lot into Self Assessment.”
She also pledged that if the government did not relent, she would “spend a day chained to the railings outside the House of Parliament” to drive home the point.
She added: “My real concern is the damage this is going to do to the integrity of the tax system. It's not so much about whether it should or shouldn't be done, I think taxpayers will feel it is unfair because somebody is going to pay tax on some money they've never had because their partner had it, and it also means you lose confidentiality. I think there's huge damage to the integrity of the tax system.”