Article on the Budget by Robin Williamson, senior technical editor with Croner.CCH and a member of the Low Incomes Tax Reform Group, published in the April 2001 issue of "Tax Adviser".More cash, more complexity
The Low Incomes Tax Reform Group welcomed the Chancellor's announcements, both in the Pre-Budget report and in the Budget, to put more cash into the pockets of those in society who need it most. We were however disappointed that many of the complexities in the tax and benefits system were not seen as important enough to tackle. Indeed in some ways Budget Day's announcements merely made the tax system more complex for a range of pensioners and others on low incomes.
The tenor of this year’s Budget, as probably befits a pre-election announcement, was political. There was no shortage of ringing soundbites: ‘targeted tax cuts to reward work and enterprise and help families, savers and pensioners’ were repeatedly announced in the multitude of press releases and Budget notes that appeared on HM Treasury’s website shortly after the speech. Most had already been foreshadowed, some more than once, in previous Budgets and Pre-Budget reports.
Announcing the same measure over and over again is one way of driving home the message that a tax cut, or a benefit, is available. And few would argue with the urgent need to eradicate child and pensioner poverty, and to abolish the poverty and unemployment traps, through reform of the tax and benefits systems. But the lessons of the last two years are that more needs to be done than simply making help available: it also needs to be made accessible.
Workers, families and children
When the working families’ tax credit (WFTC) was first announced, its generosity meant that it was to be targeted at 1.4m families, as against the 800,000 who received its precursor, family credit, at its peak. Today, according to Treasury figures, the total number of families claiming WFTC has evened out at around 1.1 million, 300,000 short of the original estimate. The disabled person’s tax credit (DPTC) now benefits some 25,000 disabled workers, which is 37 per cent higher than those who claimed disability working allowance in July 1999, but is still a low level of take-up.
Back in October 1999, when the welfare-to-work tax credits were introduced, the Low Incomes Tax Reform Group (LITRG) argued that a good scheme was in danger of being undermined by too much bureaucracy, and this would put people off claiming the payments to which they were entitled. To what extent is the shortfall in take-up attributable to that? It would be interesting to know the Government’s view.
To illustrate the point, let us focus for a moment on children’s tax credit (CTC), due to start in April. As Anne Redston succinctly showed in the March 2001 issue of Tax Adviser (p. 30), this has all sorts of needless complications. To secure the credit when it is due, employees must fill in a form before the start of the tax year, while the self-employed must claim it in their self-assessment after the end of the year (although they may get a reduction in their payment on account). Eligibility is based on current year’s income, therefore in most cases has to be estimated, and corrected promptly if circumstances change. We are told repeatedly that the credit will now be worth £10 a week, and – from next year – £20 to a family within a year of a child’s birth. But if the family is claiming WFTC/DPTC, the actual value will probably be much lower because of the interaction between it and the WFTC/DPTC taper rules, as Anne explained. It could sink as low as £4.50 a week, or less if housing benefit and council tax benefit are brought into the equation. This is a point on which the Revenue are silent in their official literature, yet it means that the poorest gain far less out of the CTC than many better-off families. Perhaps predictably, take-up of this strangely regressive benefit is currently well below expectations.
While the Government’s ‘targeted tax cuts’ are genuinely intended to help the needier people in society, the complexity of the administration is such that ordinary claimants, who are usually unrepresented, need advice on how to secure their entitlements. Tax advisers are already being urged to gear themselves up to helping clients with their CTC claims. It would be instructive to know how many tax advisers have found themselves assisting with a WFTC application on behalf of a client alongside a self-assessment return.
At the root of many of the anomalies inherent in the current structure of tax credits is the confusion between different units of assessment. While tax liabilities are assessed on the individual, social security benefits focus on the family. In the tax credits world, these two concepts are confused, as for example in the CTC’s treatment of single-earner couples where one is a higher-rate taxpayer, as against two-earner couples where neither is. On the one hand, a couple shares the CTC. On the other, if one partner in the couple has a higher-rate liability, that partner’s income determines whether the couple is eligible for the CTC, irrespective of the other’s income.
Yet more anomalies are due to inconsistent definitions of income as between income tax and tax credits. For example, capital allowances and losses have to be written back into the computation for the WFTC/DPTC claimant, which obliges the self-employed to do two sets of calculations: one for self-assessment, another for tax credits. The particularly low level of take-up among the self-employed is hardly surprising.
If excessive bureaucracy is a burden on the working age claimant, it is doubly so for the pensioner. As John Andrews, quoted in The Times on Thursday 8 March, made clear, pensioners should be able to expect a quiet time at the twilight of their lives. ‘The Chancellor has not brought that possibility any nearer.’
The extension of the ten per cent starting rate band was heralded as a measure which left only one-third of pensioners still paying tax. In fact it is beneficial only to basic (though not higher) rate taxpayers. It will not help non-taxpayers, nor those who currently pay tax at only ten per cent, nor those whose only income comprises dividends.
One administrative consequence is that there will be more people with tax deducted from savings at 20 per cent who will have to reclaim the ten per cent overpayment. This is no straightforward matter for unrepresented pensioners. Widening the ten per cent band may also increase the problems of those taxpayers who will have paid insufficient tax to cover gift aid payments.
The ‘new tax credits’ and the pension credit
With the WFTC and the CTC passing away, yielding place to a ‘new generation of tax credits’, it becomes increasingly urgent that Government should address the problems of complexity that have bedevilled take-up hitherto.
In 2003, the child premiums in income support and jobseeker’s allowance will merge with the CTC and the child tax credits in WFTC to form an ‘integrated child credit’ which will be paid to families with children, whether or not in work. At the same time, the basic credits in the WFTC will be floated off into a new ‘employment tax credit’ for those in work, whether or not they have children.
The broad thrust of these reforms is outlined in ‘Tackling Poverty and Making Work Pay – Tax Credits for the 21st Century’, which is the sixth in the series ‘The Modernisation of Britain’s Tax and Benefit System’, HM Treasury, March 2000. While it is not designated as a consultation paper, the Government apparently expects people to respond to it as though it were. It concentrates on describing the philosophical basis for the credits, and broad objectives, rather than giving any operational details (we hope we shall see some of those in a paper that is due out in the summer).
The pension credit, due in 2003, is an innovative idea to help pensioners whose income is just too high for them to qualify for the minimum income guarantee (MIG), but still comparatively low. It will assist those who currently feel penalised because they have put a little by in order not to be a burden on the state. The idea of the pension credit is to recognise an additional income source, over and above state support, by paying out an extra 60p for each £1 of savings income, part-time earnings, or retirement pension, over and above the level of the MIG. As income rises, the credit will begin to taper away, until it finally disappears at a level of £135 a week for an individual, £200 for a couple. This is not a tax credit as such, but rather a benefit, and the proposals are set out in a DSS document, The Pension Credit: a consultation paper, November 2000, Cm 4900, available on the DSS website.
Both the Treasury and the DSS recognise the need to integrate the tax and benefits systems more closely in order to target help more effectively on the low paid. This thinking is evident in both papers cited above. Is it achievable in the time left?
- For the Government to achieve its aim of ensuring that ‘people are not having to provide the same information to several agencies simultaneously in order to access the support to which they are entitled’, the Revenue and DSS systems need to be made compatible. This will probably involve a complete overhaul of both.
- The inconsistencies with the existing tax credits must be addressed, as must differences between structures of income tax and social security benefits. It should not be necessary for claimants of tax credits to do two sets of calculations, one for tax purposes and one for credits, because the definitions of income are mutually inconsistent.
- Fresh legislation must be drafted which will be accessible to all, claimants and advisers, and sets out entitlements and obligations in clear, intelligible terms.
- In advance of the pension credit, the DSS are to institute a new public service to provide pension and benefits services to their older customers. The Inland Revenue should likewise appoint a ‘pensioners’ champion’ with a remit to address all the issues affecting older customers.
- The DPTC has not yet been mentioned in any of the literature on the new credits. There must be a proper focus on the needs of the disabled in work, rather than – as hitherto – DPTC announcements following those on WFTC as an afterthought.
The Government have done well in delivering extra cash through the tax and benefits system to ‘tackle poverty and make work pay’. For their second term, they should address the other side of the equation, and make that cash more easily accessible, and with less hassle, than has been the case up to now.
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April 2001 by