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Jill Kirby

Jill Kirby: How to avoid further child benefit chaos

“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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