Child Benefit and the competence of government

Child Benefit FormLast Wednesday, George Osborne, the Chancellor of the Exchequer, presented his “Autumn Statement” to parliament. He is probably quite pleased with its reception, blaming the Eurozone and managing to get one over Ed Balls in one day. This is much better than the reception he got last year when he introduced the idea that Child Benefit would be withdrawn where one parent is on higher rate tax.

Now this was particularly stupid because it broke two cardinal rules of taxation – first that an individual’s tax affairs are private and second that you shouldn’t be taxed on money you haven’t received. It was also discriminatory because the benefit is usually paid to the mother on behalf of the child and was a small cushion of comfort to her – womens’ groups have understandably complained.

Consider the case of an estranged or divorced couple with a child where the lower earner (the mother, say) is on basic rate but the other is on higher rate. This means that Child Benefit would be withdrawn but either that the mother would be aware of this and therefore of the father’s income bracket or, if the benefit was in fact paid to the mother, the clawback would be applied to the father when he had not received the money. It is not difficult to construct all sorts of scenarios where bitterness and accusation would make a bad situation worse because money is a common conflict in such situations.

This is of course apart from the iniquity that two parents just below the high rate threshold would still receive Child Benefit but if one parent only worked and earned just £1 over the threshold, there would be a substantial loss of income to the family unit. Some commentators consider it to be illegal under European law where one parent was a migrant worker, a view rejected by the Treasury but then it would, wouldn’t it?

We know a number of people with 4 children and with such a brood it is entirely likely that one of the parents is in fact at home full time. I think in all these cases the earning parent will be on higher rate tax – they would probably need to be – and losing their Child Benefit would have been massive taxation.

Child in a tunnelIn the event, Osborne relented a little by changing the levels in the budget so that Child Benefit would be withdrawn progressively where one parent had income between £50k and £60k rather than a cliff-edge when the parent tripped over the higher rate tax threshold. In this income range, there is an effective tax rate not of 42% (the standard higher rate plus the NI) but, for families with 4 children, of 73.5%. Do the sums if you don’t believe me.

For different numbers of children, families will be taxed at the following marginal rates (including 2% National Insurance applicable to higher rate taxpayers) if one parent earns between £50k and £60k:

 

Number of children 1 2 3 4 5 6 7 8 9 10
Marginal tax rate % 52.6 59.5 66.5 73.5 80.4 87.4 94.4 101.3 108.3 115.3

Yes, those careless enough to have 8 or more children will be taxed at over 100% – they will take home less for every extra pound they earn! Now I don’t know how many families this is and it is impossible to extract immediately from the Office of  National Statistics website. But even with 2 children the marginal tax rate is 60% and remember the stink about 83% tax in the 1970s? Some members of the coalition are being sniffy about President Hollande’s 75% top rate in France. Do I smell the whiff of hypocrisy?

Now to the implementation. Child Benefit is due to be changed with effect from January 7th 2013 and forms have been sent in October to all claimants. If neither parent earns more than £50k, then there should be nothing to do – ignore the form completely. If one parent earns more than £60k and does not want to fill out a Self-Assessment form, the clear option is to own up and stop receiving the benefit.

If one parent earns between £50k and £60k and wants to continue to receive Child Benefit, they will need to register for Self Assessment – there is a warning of penalties if you don’t, although it is not clear what they wil be. And the opportunity to fill in the Self Assessment on paper has been missed so everyone will have to do it online – it was due by 6th October.

But who should register? The form, sent to the claimant, says “You will have to register for Self Assessment”. But logically it should be the one earning more than £50k. Should it be both? What if either earnings vary? What if the claimant does not know how much the other parent earns? What if earnings go down? What if both parents earn between £50k and £60k? How does HMRC calculate the clawback? It seems to me that the only option is to continue to receive it and everyone fill in Self Assessment forms to ensure you don’t lose out. Hang the cost, complication to HMRC, pointless paperwork, clawback and so on. What a way to run a country!

In a nutshell, it is a mess. It was messily thought out and messily implemented. Did no-one in the Treasury do some simple sums? Did Osborne, in his anxiety to slash every possible cost without thinking, not give it a moment’s thought? Did he ignore warnings from officials? Was he quaffing at Chequers? Or what? You can see why he gets called our part-time or work-experience Chancellor, can’t you? It’s clearly not good enough.

We grumble and moan about taxes but no-one really minds taxation that pays for services but it has to be fair, seen to be fair and efficiently administered. The withdrawl of Child Benefit meets none of these and will be resented for a long time. This will haunt George Osborne while many multinationals pay next to no Corporation Tax and avoid paying UK VAT on goods traded online in the UK by locating themselves elsewhere.

Osborne should have thought a bit more.

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