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Child benefit is set to be progressively withdrawn from households where someone earns at least £50,000 at the rate of 1% for every £100 above this threshold.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.

Simplicity

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.”

Independent taxation

A key issue here is around independent taxation. People will be able to find out from HMRC if their partners receive child benefit, and force partners to share their financial information with each other, breaching key tax confidentiality principles that have become embedded within the system.

Rebecca Benneyworth highlighted this issue: “So how do you know whether you are due to pay a tax charge when you live as man and wife with someone who does not disclose their income to you? How will HMRC know who should be in this tax charge? They don't necessarily know who you live with or whether they receive child benefit, and the taxpayer can't know because he doesn't know how much his wife's income is.

“By trying to effectively draw this money back through the tax system, the situation they've created is in my view impossible to work because it depends on knowledge of income, which you have no right to gain.

“Phoning up HMRC to find out is just a non-starter. Imagine someone who has split up or is trying to sort their tax out from a previous year and they're already in an acrimonious divorce - the consequences of one being able to ring up HMRC and being able to find out the income of the other, is a explosive.”

The execution here is clearly not simple, and the ease of compliance will depend on how HMRC choose to collect the data and how they use it.

Fairness

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).”

Heaton added: “The tension caused by removing a social security benefit by means of the tax system, where the rules are fundamentally different,  promises to test the government’s and HMRC’s ability to manage.

“Tax credit policing has been a notorious challenge, but policing the HICBC with 1.2m family units (which won’t be the same group this week as next week’s 1.2m) who can potentially get it wrong will be even more of a challenge.”

Efficiency & certainty

The new HICBC is set to bring an additional half million people into Self Assessment.

The impact on efficiency is compounded with the extra tax returns and correspondence that will be required.

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.”

There’s also the issue of affecting the PAYE codes of 1.2m families and coping with more than 14,000 births per week.

David Heaton said this looks like a “fail” and that the novel introduction of a new tax charge on 7 January rather than at the end of the tax year will add to the burden.

“HMRC is to write this autumn to those who will be affected, although how they can possibly know with any certainty who is currently cohabiting with whom, and might therefore be liable, is anybody’s guess,” he said.

With many fluid households and low job security plus fluctuating incomes, it’s not clear whether the HICBC applies until after the end of the year.

Heaton added: “On the other hand, it seems certain that two one-parent families will think twice about sharing their lives under one roof if the higher earner is to pay for the child benefit of the children of the other co-habitee.”

The new legislation does not require extra information on returns before the next tax year and as such the charge for January to March will not be included in PAYE codes this year.

Solution

Summarising the concerns of many within the profession, Rebecca Benneyworth said the new measures were “unworkable”, and urged the government to think again before pushing ahead with this new charge. Several AccountingWEB members advocated abolising child benefit all together, while David Heaton suggested it could be simplified by limiting the existing system to the first two or three children, as used to be the case.

However Benneyworth argued: “The obvious solution is to say that if it is to be a means-tested benefit in the future, then it becomes part of the child tax credit system. Because that is means tested, so it's just subsumed within tax credits rather than remaining a separate benefit. That's politically sensitive, because at the moment it is allegedly available to all, but once it's means tested the only sensible thing to do is to put it with everything else that is means tested.”

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.”

Further reading:

HMRC: Child Benefit: Income Tax Charge for Those on Higher Incomes