our quickest win would be to harmonise the married couples allowance at the 75+ level; whilst there is an exchequer cost this would be small and well justified;
· the next stage would be to work towards harmonising the personal allowances; the different rates cause confusion and are not always claimed;
· ideally the clawback would be eliminated – something that causes great confusion and difficulty. This is a longer term win, in that it would most obviously benefit the better off, but it is surely worth consideration, particularly as the subject of the integration of tax and benefits will be brought sharply into focus with the new integrated Pensioners’ Credit. Adoption of these measures would save 22 boxes on the tax calculation guide and simplify notices of coding for older people.
2. Age related married couple’s allowance to be fully transferable
Whilst this quick win does not save so many boxes on the tax return, it rectifies what is really an historical anomaly. Now that there is no standard married couple’s allowance, it is confusing to read on the tax return that you can allocate half or all of the allowance to your husband or wife, only to find when you do the tax calculation that you can only enter £1,000 or £2,000 respectively. The situation is exacerbated if the taxpayer marries during the tax year - the transfer figure becomes a fraction of these two unexplained amounts.
Since there is now no tax advantage (though there can be cash flow advantages) to be had by transferring the married couple’s allowance (the whole relief is given at 10%), and if the allowance proves to be surplus to requirements it can be transferred anyway, there seems little point in retaining this restriction.
There is no loss to the Exchequer in enacting this change.
3. Abolish restriction of married couple’s allowance in the year of marriage
There cannot be many taxpaying couples marrying with one aged 66 or over so we do not see this involving much tax loss to the Exchequer. By way of comparison, the new children’s tax credit does not have any in-year restriction. This change would bring the remaining age-related married couple’s allowance in line. The full allowance is given in the year in which a marriage ends. It seems a little unnecessary to retain the quite complex restriction on page 14 of the standard tax calculation guide.
4. Accrued Income Scheme
The Accrued Income Scheme is, we submit, over complex and little understood by taxpayers. The Inland Revenue is not immune from getting the rules wrong.
Whilst we understand the anti-avoidance rationale for the AIS, we would question whether the rules still serve to prevent significant avoidance. Ideally, the AIS should be abolished. We accept that this would require some study to see if a simpler mechanism can be devised to prevent any avoidance that the Revenue were concerned about.
At a minimum, the £5,000 de minimus limit needs to be raised substantially. To put this into context, at today’s interest rates, this amount produces tax of £60 over a half year for apportionment. A limit of £100,000 is indicated.
On the surface, there would be an Exchequer cost to raising the AIS threshold. We suggest that in practice this would be minimal, given the amounts involved at today’s interest rates, the regularity at which the issue is missed and the saving in administrative costs. As noted, we can accept that complete abolition would require further study.
5. Children’s Tax Credit and the new Baby Tax Credit
The Revenue leaflet CTCR/1 begins by describing Children’s Tax Credit as a reduction in income tax of £520. We suggest that this way of identifying the tax relief is retained for all purposes and for the new Baby Tax Credit as well (the figure being in that case £1,040). Continuing to refer to these ‘credits’ as ‘allowances at 10%’ is only a source of confusion and will inevitably result in more calculation boxes on the tax return for 2001/2002 and 2002/2003. The higher rate restriction can easily be expressed as £1 for every £15 rather than £2 for every £3 (as in the Revenue’s own leaflet) and adopting a common form of expression could make the relief easier to understand. In calling the relief a “Tax Credit” there is already tacit recognition that it is not like the personal allowance.
In the same way the Married Couples Allowance would be better expressed as a Married Couples Tax Credit.
Areas of longer term study (Items 6 – 10)
6. Simplifying Income tax rates
The reasons for as many as five different income tax rates are both accidental and political.
With the gradual reduction in the basic rate over the last six years we now have a savings rate and a basic rate which are only two percentage points apart. One 21% rate would be so much simpler. This would delete 12 boxes from the standard tax calculation guide and save a lot of confusion on the setting off of income tax reliefs and the point at which the higher rate band is chargeable on savings income.
Of course, a really “big win” would be achieved by abolishing the 10% starter rate and using the money saved to bring the basic rate in line with the savings rate at 20%. The low paid could be helped more by an increase in the personal allowance. We realise that the 10% rate is of major political significance but the complexity it brings to the tax system cannot be ignored.
We also have to point the difficulties and confusion that the 10% and 32.5% dividend tax rates cause.
7. Pensions
We now have three different forms of ‘personal’ pension schemes running collaterally, retirement annuities, personal pension plans and stakeholder pensions, each with their own set of rules. Employer schemes add a fourth scheme.
We acknowledge that the long term nature of pensions contracts make it difficult to make changes. But we think that there is scope for a proper study of how the various schemes can be streamlined.
8. Taxability of Social Security Benefits
The fact that jobseeker’s allowance is taxable whereas jobfinder’s grant is not, maternity pay is taxable whereas maternity allowance is not, widow’s pension is taxable whereas widow’s payment is not, incapacity benefit is taxable whereas disability allowance is not etc. etc. is a constant source of confusion and uncertainty. The fact that the state pension is taxable comes as a surprise to many and adds to complexity when PAYE has to cope with an employer’s pension as well. We feel that ideally all state benefits would have the same tax treatment, grossing up if necessary as compensation if all become taxable. This is clearly a complex area but the current situation seems to produce complexity to no useful end.
9. Aligning definitions of income for all tax, National Insurance and social security purposes
We have outlined in previous submissions the need to align the measure of income for tax and National Insurance. We reiterate this, but will not repeat the detail here.
The need for alignment now extends to the field of tax credits including those which are ‘rebadged’ welfare payments. The aligning should be in the area of basis of assessment as well as measure of income and should cover the measure of income for all social security benefits as above. It does, after all, seem illogical to have different definitions of income for PAYE, NIC and WFTC.
10. Rationalisation of Capital Gains Tax
The continual amendments to this tax mean that we now have the following possible complications to consider before calculating an individual’s taxable capital profit:
Exemption of pre 6.4.65 gain
Exemption of pre 31.3.82 gain
Indexation of gains, but not losses, to 5.4.98 only
Tapering of gains, but not losses, at different rates, and at different occasions of charge
Interaction of losses, exemptions and reliefs with all the above
To this can be added the complexities arising from the share identification rules. A radical overhaul is called for. We feel that at a minimum the pre-1965 gains rules could be abolished, with automatic revaluation to April 1965. However, a bolder step would be to rebase completely, without reference back to old rules, to 1982 or better still to 1998.
Chartered Institute of Taxation
June 2001 