HICBC: How to remove the unfair tax barnacle
The UK income tax system is incredibly complex, yet more baubles and barnacles are added every year. The barnacles provide little benefit to taxpayers or are actively harmful, and costly for HMRC to administer.
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Rebecca Cave is now retired from 35 years in the tax world, including eight years as AccountingWEB's consulting tax editor.
Replies (47)
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If they want to keep the political point whilst fixing, this could be easily done by Introducing a new condition at FA2012, S681B(3)(c) to require P to live with the child.
A simple change to the threshold would take so many people out. If it moved to £150k not £50k it would be a politically expedient way to save face without fully scrapping the charge.
Maybe Labour will restrict Child Benefit to the point where it's no longer necessary to bother with the HICBC anyway.
I'll go a couple of steps further. Set the PA to a proper figure, say £25k. Abolish the 40% tax bracket and bring in a basic rate of say 30%.
Of course the ideal thing is to abolish NI and just have a tax rate that is the same for idividuels and companies.
No ... for sake of simplicity let's say PA = £12.5k, then with " Set the PA to a proper figure, say £25k. Abolish the 40% tax bracket and bring in a basic rate of say 30%":
Earnings of £15k : current tax = £500; prop tax = £0
Earnings of £24k : current tax = £2,300; prop tax = £0
Earnings of £30k : current tax = £3,500; prop tax = £1,500
Earnings of £40k : current tax = £5,500; prop tax = £4,500
Earnings of £50k : current tax = £7,500; prop tax = £7,500
No ... for sake of simplicity let's say PA = £12.5k, then with " Set the PA to a proper figure, say £25k. Abolish the 40% tax bracket and bring in a basic rate of say 30%":
Earnings of £15k : current tax = £500; prop tax = £0
Earnings of £24k : current tax = £2,300; prop tax = £0
Earnings of £30k : current tax = £3,500; prop tax = £1,500
Earnings of £40k : current tax = £5,500; prop tax = £4,500
Earnings of £50k : current tax = £7,500; prop tax = £7,500
And earnings of £100k : current tax = £27,400; prop tax = £22,500...
Whatever system you use the rich will always benefit, unless, of course you tax them out of existence. The idea is that the lower end get the benefit, instead of getting left behind. By the looks of the chart, the savings would be just enough to cover the increase in mortgage interest.
You are quite right with the analysis, and we should be concerned about the impact on HMRC because we as taxpayers are directly on the hook for cost of collection. But the more concerning issue is the drag on economic activity, in part due to the related issue of business cost of compliance, but also because global business will take account of local regulations in deciding where to locate.
And whilst barnacle is a good analogy I much prefer cancer!
This is what happens when government policy - particularly tax policy - is dictated by tomorrow's newspaper headlines. The many obvious flaws in HICBC were pointed out at the time, but short term political expediency always wins out - no matter what the long term consequences.
Interestingly, in the FTT case cited, we learn that the Tribunal has "no jurisdiction to consider fairness." How is that so? In a situation where something is obviously unfair and where the parties involved have merely been carried along unwittingly by the circumstances, then surely the FTT should have the ability to put someone back in a position in which they could or should have been had a different - at the time unrelated - decision been made.
This reflects badly on both the original legislation and the ability or willingness of our judicial system to simply put something right.
the Tribunal has "no jurisdiction to consider fairness." How is that so?
Despite what the press and politicians will say, judges have no option but to follow the law.
Where the law is clear and unambiguous they cannot override it (I believe there have been a very small number of cases where judges have done this but only because the law as written was clearly a mistake but I don't remember any details, there's probably a wikipedia page on it somewhere...)
Only where the law is ambiguous, or there are multiple laws that need to be considered in the whole can judges form a judgement as to what the law intended - they still have to follow the law but they might give more weight to one law over another or one interpretation over another. Parliament is free, of course, to change the law if it doesn't like the way judges are interpreting it.
One of the fairly common "disputes" in the headlines is over Article 31 of the UN convention on refugees where "coming directly" is often interpreted as "not via any other country".
Amusingly it's the same numbered article in the Vienna convention on the Law of Treaties that has something to say about how "coming directly" should be interpreted. (It's the only reason I can remember the numbers without looking it up)
That's not to say that there's no ambiguity, but there are very good reasons why many legal people say the "illegal migration bill" is illegal and, eventually, the courts might end up ruling that way too.
"Where the law is clear and unambiguous they cannot override it"
Actually they can, but there lies the complete unfairness of the whole thing. The GAAR (General Anti-Abuse Rule) allows the over-riding of the law when it couldn't reasonably have been intended to have that result and too little tax is deemed to have been collected, but somewhat perversely it doesn't work both ways and where the courts conclude that too much tax has been collected they can't do the opposite.
It is a situation that should be rectified because the courts do know and recognise injustice in both directions, but politicians have no interest in fixing it.
Client got a letter Monday reminding her to claim CB for her daughter , she stopped claiming 5 years ago due to salary level. Admirable but useless .
Not my area but ... I thought the idea was to encourage people to make the claim EVEN if they reject the money component, because that way you get the NI Credit towards your years of entitlement for SP?
But they are higher rate taxpayers and pay plenty of NI. Cursory glance would tell them that. The debacle re pensions being dependent on NI contributions is ridiculous. I have inherited a couple of clients with huge income tax bills from property rentals but no class 2 contributions so no SP. Fortunately they have ample personal pots
And there you have it ... I'm sure a 'cursory glance' would indeed tell them that.
But such a glance needs to be made (and interpreted) by a human - whereas poorly targeted letters can be issued (at next to no cost) by their beloved automated/digital systems!
The result may be somewhere between irrelevant/unhelpful and confusing for the recipient, but who cares at HMRC if another box has been ticked at minimal cost.
Apologies for being Blunt Rebecca but this headline is really your personal opinion that doesnt have much basis in reality.
The reality if that anyone claiming benefits from the government should have an onus on them to ensure what they claim is correct. If they don't do that then other taxpayers are unfairly funding their freebies they shouldnt have had. They aint been hard done by here end of if they make presumptions ref benefits they have claimed.
Facts are anyone earning over 50k per year and claiming benefits should be grown up enough to take responsibility here - clearly if one person is making the claim its in their remit to decide where said funds go or whether they are best partner to make the claim. Ultimately here the individuals made claims that were not in their best interests overall - but that was their active decision and its more of an issue with "benefit rules" rather than tax - if they dont check whether they are "eligible" to keep funds more the fool them. The tax charge here is solely down to the stupidity of individuals involved
Are we really sayiong no one has personal responsibility ref benefits when they are "overclaimed" or claimed in a manner that does not best suyit with the benefit of hindsight. The issue hear is clearly lack of basic planning by peeps involvl;ved.
I would concede that hmrc do not help the situation by not proactively asking basic questions each year . IMHO anyone making child benefit claim should each year and have to login and answer direct question that confirm facts and avoid situations where they can plead later "i didn't realise i wasnt eligible to keep funds i got - i had no idea that i might need to check what rules are when making claim"
Imho this article would better being rephrased along the lines of harsh realities of claiming benefits. I think most people subsidising other peoples dubious benefit claims would probably agree that peeps should take reposnibility and care when claiming government handouts - rather than being able to get free lunch of keeping stuff on dubious grounds.
Does household erarning 50k really need this bensfit handout in the first place ? they are likley much better off financially than minimum wage worker with no kids - so from fariness point of view there is zero argument to say these peeps need child benefit in then first place ahead of other much lower low earners without the same handout.
Except in this case the person hit with HICBC was not entitled to the benefit, his former partner was. His former partner was, ultimately, the one that received the money and by extension, the benefit.
The problem is created entirely by poor legislation, which both enables on person to appoint a benefit to another, and charges one person to tax in respect of income received by another (A link that was broken in April 1990).
"Except in this case the person hit with HICBC was not entitled to the benefit, his former partner was. His former partner was, ultimately, the one that received the money and by extension, the benefit."
I wouldnt really agree with this statement - its clear that the person themselves was making the claim - the fact that they chose to send their claim to their ex partners bank account doesnt change they fact it was "their claim" and they chose where the funds went. If they had not claimed something they should not have claimed (or should have ensured was paid back) they wouldnt be in this position - end of - would you not agree?
Note there is no certainty ex partner would have been entitled to keep teh money either they may have had high earningh new partner. Dont really see why its should be job of sa to get involved in the faulty benefits claim position. I thoroughly back the view that this person claimed was high earner so should repay end of as they claimed something they should have known they couldnt keep.
"which both enables on person to appoint a benefit to another, and charges one person to tax in respect of income received by another (A link that was broken in April 1990)."
- well means tested benefits for couples/kids should rightly factor in both persons - more the fool them if they were no longer together but kept on claiming like they did.
I would agree if would be preferable for adjustments not to be done via sa but facts are sa catches up with peeps who would trouser cash and get away with it if they were not within sa until such time as other methods are available. Ref proving income sa seems the most logical starting point.
If I remember rightly, this legislation was introduced by the Liberals in the Coalition Government to spite the Tories for not agreeing to boundary changes that would have been beneficial to the Liberals.
It was not even introduced at the tax year end/start but came into force at some random date in January, such was the spite of those Liberals, and Legislation introduced under those circumstances is bound to be faulty.
Needless to say (my opinion) a party that wishes to Govern in such a petty way will never get my vote.
What annoyed me was that it undermined the right to individual taxation. It took years for women to win the right not to have to disclose their income to their husband.
And why should a couple with two children be able to earn £100k, but a lone parent with two children can only earn £50k? Quite discriminatory as most single parents are women.
spilly
"What annoyed me was that it undermined the right to individual taxation. It took years for women to win the right not to have to disclose their income to their husband."
IMHO you are missing the point that child benefit is a means tested benefit - the tax charge is simply the mechanism to repay the means tested benefit peeps were not entitled too. No one is forced to claim a benefit they will not be eligible too.
Its ridiculous to say a couple with very decent joint income shouldnt have any responsibility for working out whether they as a couple were eligible for this means tested benefit in the fisrt place. As you are probably fully aware there are protections in place with regard to not having to disclose income to partners too - so there are safeguards in that respect.
I would agree the system could and should probably have been worked better not using sa - but IMHO as with any means tested benefits - the receipients should take adult repsonsibility for the claims they make - virtually all the peeps moaning about repayment have probably claimed without doing adequate checks -alebit hmrc should deffo have got all claimaints to confirm their understanding of the new rules when they changed - not doing so has allowed the chancer brigade to pretend they didnt know what they did actually know or not make reasonable checks in that regard.
I have never claimed child benefit but compared to other means tested benefits like tax credits and universal credit i suspect its still easier than other benefits to meet ones obligations.
But he was entitled to the CB because he paid maintenance at least equal to the CB (Its in the judgement) and he made the claim in the first place. Just because he thought he was being clever by having it paid to the sprog's mother's account (who's income was probably small), to try and avoid the HICBC, doesn't change the fact he was entitled to the CB.
Did he ‘think he was being clever’ or is it much more likely that in fact he filled the paperwork in whilst the mother was recovering from childbirth, got it paid into her account, then when they split up five years later and he’d never seen the cash in that time he didn’t think ‘he’ was claiming it?
I can’t see how anyone can be anything other than sympathetic to the guy. The fact he’s paying child support for his kids whilst not getting the CHB even seems to have somehow worked against him.
I have a client who every year when he gets his SATR comments on the HICBC and how his ex still gets hers for the child they had together, whereas he has to pay the CHB for his second child back, even though by the time his kaintenance is taken to account his ex almost certainly ends up with more cash than he does….
I've been happily married for nearly 25 years. We have never had a joint account. Only time it was a problem was when there was an adjustment on costs for the purchase of our second house and a cheque in our joint names was sent out.So they were married but didn't have a joint account?
I'm not buying it.
Given how much of a pain banks are with opening new accounts these days, it would not surprise me if this was actually quite common now.
Whether its fair or not, I find it incredible that a couple who paid themselves nearly £200k a year kicked up such a fuss, no doubt at huge cost, over a bill for a grand.
Just shut up and pay it!!
The more money you have, the greedier you get. Just look at our wonderful government front bench!
Higher earners should not be needing and certainly should not be entitled to Child Benefit anyway. If one or other high earning parent is getting clobbered, so what? A simpler way of doing it would be to withdraw it altogether from households with an income over £50K (I'm feeling generous), as it should be there to help lower earning families, and should be means tested as such.
Is £50k a sufficiently ‘high earned’ for that thought? This threshold has not changed since the tax was introduced. How is that fair?
Far too many cliff edges and thresholds in our system that just encourage people to artificially restrict income to avoid punitive effective rates of tax. Why remove entitlement to tax free childcare for earners over £100k? If you want growth, surely you want them and entrepreneurs to work so that they pay lots of tax. Why withdraw CB over £50k? Why have a 60% rate over £100k? It's high time that we had a straightforward higher rate of tax combined with a higher personal allowance and removed these ridiculous rules. Unfortunately with no OTS and the Government not listening, we're stuck with it.
Quite agree, its the jealousy approach. Higher earners must be seen to pay more tax. Very few BR tax payers have any concept about the restriction of the PA over £100k and the punitive rates that then apply.
I expect Rebecca has nothing to do with sub editor
Successive governments have ignored the sage advice of Louis XIV's finance minister, Jean-Baptiste Colbert, who said "The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing."
Unfortunately, we now use taxation as a tool for social engineering. At least we pretend to. Taxes are justified on the grounds that they will discourage us from doing something that's bad for us (smoking, drinking), or bad for the environment (driving), or expensive for the NHS (sugar). It's time to get back to the honesty of Jean-Baptiste.
It has always struck me as grossly unfair where a family with a husband earning £80,000 with a wife who stays at home to raise their two children is £16k a year worse off than a similar 4 person household where both parents work earning £40000 each.
No one has mentioned the unfairness of the HICBC for people with rental property.
Take the case of someone on a very ordinary salary of, say, £32,000, and a rental income of £22,000 from one or two properties. That person could very easily be making a rental loss at the moment, because interest rates have risen so far. For the purposes of calculating HICBC, however, he or she is treated as having a gross income of £54,000. No deductions are allowed from the rental income, so the "high income" person earning £32,000 will lose 40% of their child benefit.
How does this make any sense?
it does to me, what is the net equity in the home and in the rental properties? it sounds as if its substantial. if a property owner buys with too much leverage why should they qualify for additional benefits as I expect their properties to have also increased in value? I do however accept that the rules for CB need amending to be fairer but probably not in cases such as this.
its conscious decision by the government not to support people on higher income or who are professional landlords to get the full tax relief. Thats not particularly unfair very few of these peeps are forced into "borrowing money" to be a landlord - there is also the alternative of a company.
Peeps are struggling to buy homes at the bottom end so not giving incentives to the well to do to "borrow to buy" and hoover up available properties its a great thing imho.
Facts are these well off peeps have access to the funding where low earners who could afford a mortage payment arent oftenn able to get financing away. So anything that helps those peeps imho is good.
Note rental income attracts no NI charge so in some respects yopu probably wnat to be happy that the rate of tax on rental income is probably not at 30%.
also tax aint always fair -
I am not against individual landlords far from it they serve a purpose but historically the tax perks on offer to btl owners compared to sole traders was waaay generous.
'The UK income tax system is incredibly complex, yet more baubles and barnacles are added every year. The barnacles provide little benefit to taxpayers or are actively harmful, and costly for HMRC to administer.'
Basically MP's are terrified to put up Income tax, Vat,IHT, CGT (taxes every Joe public has to pay) so they introduce 1,001 stealthy barmy taxes.