Published:

“Excruciatingly
difficult” is how
Nick Clegg describes
the new tax charge
intended to recoup
child benefit payments from
households in which
someone earns more
than £50,000 a year.
This week HMRC is
sending out one million
letters as the
first step in its
quest to find those
households and recover
all or part of
their child benefit. Each
day brings a new
headline warning of
the difficulties  in implementing
this controversial policy;
yesterday the Daily
Telegraph's front page said it could be illegal
under
European law. The fact that many
journalists will be
affected by the
new charge means the
headlines will continue to
run. The Institute
for Chartered Accountants,
having repeatedly warned that
the system will be
unworkable, is
predicting chaos at HMRC.

A quick run through the details shows why that prediction is
likely to be realised. Around 500,000 people currently
taxed under PAYE will
have to start filling
in self-assessment forms.
Two main problems then
ensue, which might be summarised as income
fluidity and family
fluidity. For those
with earnings close to
the £50,000 threshold, several decisions
must be faced: such as whether
to avoid the charge
by making pension payments,
postponing a bonus,
or refusing a pay
increase.


In cases where
income is certain, consistent
and above £60,000, this first
set of  difficulties will not arise and
the charge might seem simple
to administer. But
that will only be
true where family structure
is equally certain and
consistent. If, for
example, a higher
rate male taxpayer moves
in with a woman
who claims child benefit
in respect of children
who are not his,
he must nevertheless
repay to the taxman
the benefit she has
received whilst he is living with her. It's
not clear what will
happen if he lives
with her for part
of the week; possibly
he will be expected
to make a pro-rata
payment.

If he spends
weekends with his
own children, and his
former partner gets child
benefit, will he
repay part of that
as well? That might
depend on whether his
ex partner has a
new partner who earns
more than £50,000, in
which case the new
partner will probably
be responsible for
repaying her benefit, instead of the
children's father. Does anyone really
think that HMRC will be able to track all this closely enough to recoup the
right level of payment? Certainly married couples will suffer the greatest
penalty, as they will be unable to duck these questions.

In making this new charge, the Treasury
is not only breaching
the principle of independent
taxation, it is
also introducing into
the tax system the
uncertainties, anomalies
and disincentives currently
afflicting welfare assessments.
The government's best hope
is that families will
opt out of child
benefit entirely,
rather than face up
to the form-filling
required to enable
them to keep all
or part of the
money. However, accountants and
financial journalists
are advising parents to
continue to opt
in, to guard against
the difficulty of rejoining
the system later later
if their circumstances
change. By staying opted in, mothers who take time out to look after
their children will also be sure of maintaining their National
Insurance records, as
the basis for their state
pensions.

The coalition
is justifying the child benefit tax
charge on the grounds
that it will help
pay off the national
debt. But chasing down
the repayments will be
such an expensive
exercise that the
predicted £2billion
of savings are unlikely
to be achieved. The Chancellor will therefore have to look
elsewhere for cuts to the welfare budget. Last week Iain Duncan Smith
obligingly came forward to float a
new proposal for cutting child benefit
: the two-child limit
for jobless households.

Rather than receiving extra payments
for every new baby, under this proposal out of work claimants could be told
that the welfare system would only pay for the first two children. The Work and
Pensions Secretary made the point that most working parents have to decide
whether they can afford to have another child, but a parent who is wholly
dependent on the state will be free of such constraints.  Child benefit, tax credits, housing benefit
and other forms of means-tested support all increase when another child is
added to the family, offsetting the costs of having more children.

This latest idea is unlikely to reach
the statute books any time soon, as the Liberal Democrats have already declared
they will block the move. But if such a policy were to be implemented by a
future Conservative government, there are obvious lessons to be learnt from the
current child benefit  withdrawal chaos.

First, reforms should encourage work
and aspiration. Marginal rates created by the new child benefit tax charge are
a serious disincentive to working harder and earning more. All means-tested
payments suffer the same disadvantage: working harder doesn't make you better
off, unless you can achieve a big enough pay hike to lift you beyond the scope
of  means-testing altogether.

There are two ways to avoid this disincentive
effect: by making benefits universal (as child benefit has been until now) or
by turning them into tax allowances. Stopping child benefit for jobless
households would obviously put pressure on them to take a job. But a better way  to incentivise work might be to offer tax
allowances to set against wages, like those outlined in
this column
two weeks ago.

Secondly, any reforms should encourage
marriage and couple stability. Universal benefits are neutral on this point,
but at least they do not penalise family formation. The child benefit tax
charge will, as I have explained, penalise marriage, just as the tax credit system
already does. By contrast, child tax allowances could be made capable of being
transferred or pooled between married parents. This would not only support
marriage but would also help to remove the bias against one-earner families.

Last but not least, reform to
child-based benefits should be simple and transparent.  Child tax allowances to set against income
would be straightforward to administer and easily understood. They would have
the additional merit of taking many low paid earners out of tax altogether,
following the trajectory already set by the coalition government.

The letters being sent out by HMRC this
week signal the end of universal child benefit. If the Conservatives decide to
follow up this botched policy with further reforms, for example by removing
child benefit from the workless poor, they must not make the same mistakes
again. Instead of trying to implement back-of-the envelope announcements, the
Treasury should reflect on the incentives and penalties which flow from such
decisions, and design policies to reward work and family stability.

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