Plans to stop child benefit next year for families with a higher-rate taxpayer could be “hugely complex”, a tax body has warned.
The Low Incomes Tax Reform Group (LITRG) says the plan could become a tax on marriage.
Claimants, typically mothers, receive £20.30 a week for a first child and £13.40 for each subsequent one.
The government is still trying to decide how to implement its plan, which was first announced in 2010.
“Even if the government solves the potential unfairness of withdrawing child benefit from a claimant immediately he, she, or his or her partner or spouse, becomes a higher rate taxpayer, that will still leave a host of administrative problems to resolve,” says the LITRG, an offshoot of the Chartered Institute of Taxation.
“At worst the new policy could spell the end of independent taxation, or become effectively a new tax on marriage.”
The plan was first announced at the Conservative Party conference in October 2010, though without details of how it would be implemented in 2013.
The aim is to save about £1bn a year from the government’s spending as it seeks to cut the budget deficit and reduce the national debt.
Critics pointed out that it could lead to a household, where one person who earns just above the higher-rate tax threshold (currently £42,475 year), losing their child benefit, while a household where two people each earn just below the threshold would retain it.
Last week, both George Osborne and David Cameron insisted the plan would still go ahead, but in a way that mitigated the “cliff-edge” nature of the suggested benefit withdrawal.
The LITRG argues that whatever approach the government takes, it will be fraught with difficulty because:
- There is no definition of “household” in tax law
- It is impossible to know who is a higher-rate taxpayer until their income for a whole tax year has been assessed
- Child benefit operates entirely outside the tax system
- This would make it very hard for the government to introduce a “tapered” policy whereby it withdraws the benefit gradually – rather than suddenly – as someone’s income rises into the higher-rate tax category.
The LITRG argues that the new system would also undermine the independent taxation of married people, who are responsible for their own taxes and not of their spouses.
“If the proposed withdrawal of child benefit goes ahead, because the computer systems operating child benefit are incompatible with other systems in HMRC, taxpayers and benefit recipients will themselves have to supply income data to HMRC,” the tax experts point out.
“This means that couples will have to be open with one another about their financial affairs, or perhaps face penalties and other sanctions from HMRC.
“Independent taxation will become a thing of the past, at least for child benefit recipients,” the LITRG adds.
Other problems will arise if couples split up during a tax year, while single mothers may be penalised for a new relationship with a higher-rate taxpayer if it means giving up her child benefit.
“These, then, are some of the big questions which Treasury officials will be wrestling with in the next 12 months, before this change takes effect,” LITRG says.
The government has previously threatened that child benefit claimants will be fined if they fail to reveal that they or their partners have become higher-rate taxpayers.