Unit of Assessment

  63. A major difficulty with integration of the tax and benefit systems as far as the unit of assessment is concerned is that means-tested benefits are assessed on the family unit, unlike many other social security benefits which are individualised, as is the tax system. Where tax liabilities or benefit entitlements are functions of income, the tax and benefit systems must be clear about whose income is to be measured ­ the individual, the family unit or the household. If assessment units other than the individual are to be used, complications arise concerning whether the definition of the family unit should include cohabiting couples as well as married couples.[110] The effects of different units of assessment might ultimately affect peoples' decisions to live together, marry, have children and comply with the tax and benefit system. Many of the submissions we have received have drawn attention to the different units of assessment currently used and the issues involved in any attempt to create a common definition.[111]

  64. If a fully integrated tax and benefit system with a seamless link between taxes paid and benefits received is desired, the use of more than one unit of assessment would create complications that would reduce the degree of integration in the system. According to Electronic Data Systems, it would be possible to have different units of assessment in an integrated system, if the technical support was sufficiently robust; a set of universal definitions would however make life simpler.[112]

Pure individual assessment of taxes and benefits

  65. Under individual assessment, both tax payments due and benefit entitlement would be assessed on individual income. The advantages of individual assessment could include:

-  Each adult in society would be treated identically by the tax and benefit system.

-  Each adult would receive the same gain in income from taking a job.

-  Family structure would be irrelevant to the system and the authorities need never intrude into the circumstances of each family.

-  For workless households, an individual tax and benefit system would make it easier for one partner to take a job because only the individual benefit associated with that adult is withdrawn from their gross incomes.

The Association of Friendly Societies believed that the tax, benefit and social security systems should operate on the basis that the individual is the assessment unit.[113]

  66. There are problems associated with individual assessment of taxes and benefits:

-  State support for poor individuals would be very poorly targeted on poverty.

-  Exchequer costs would be high relative to a family based system of the same generosity.

-  Individual benefits could discourage potential secondary earners e.g. spouses, from taking employment. Secondary earners would receive state support if they left the labour market. -  Families with different numbers of workers or different patterns of earnings levels would not be treated equally.

-  Individual assessment of a progressive taxation system would allow rich individuals to shift asset income from one partner to another to minimise overall tax bills.

Pure family/household assessment of taxes and benefits

  67. The alternative single unit of assessment would base the tax and benefit system around the family unit. This would involve assessing tax due and benefit entitlement on family income. Family-based assessment could have the following advantages:

-  The tax system would treat all families with the same demographic structure and the same total income equally, regardless of the number of earners in the family or household unit.

-  As state support would be available only to poor families, a family based system could involve much lower Exchequer cost and be much better targeted on the alleviation of poverty.

-  In a progressive tax system, as second earners' incomes were added to those of primary earners the total tax take would rise and tax rates would be lower.

-  Couples would not be able to reorganise asset holdings to minimise tax bills.

  68. There would be disadvantages to having a tax and benefit system assessed at the family/household level:

-  Individuals in couples would not be treated equally. Their tax bills would depend on their partner's income.

-  The unemployment trap for primary workers would be higher as total family out of work support was deducted from their gross earnings.

-  Depending on the structure and treatment of secondary and personal allowances, secondary earners could be faced with taxation on the first pound of their earnings.

-  Taxation and benefits at the family level would be more complicated to administer and enforce than at the individual level.

The hybrid system in the UK

  69. The problems associated with single units of assessment throughout the tax and benefit systems have led to the development of tax and benefit systems based on different units of assessment across different taxes and benefits and even within taxes and benefits. Table 5 shows a simplified account of the units of assessment used in income-related elements of the UK tax and benefit system.

Table 5: The relationship between the unit of assessment and the major UK income-related taxes and benefits.

Level of assessment		Element of UK tax and benefit system
Individual level	Income Tax National Insurance Contributions Job Seekers Allowance	Rates, bands and personal allowances All elements Contributory element
Family level (based on marriage)	Income Tax	Married couples' allowance
Family level (based on cohabiting)	Income Tax Family Credit Job Seekers Allowance Income Support Housing Benefit Council Tax Benefit	Additional persons allowance (if children present) Needs assessment Income test Needs assessment of non-contributory element Income test of non-contributory element Needs assessment Income test except for mortgage interest payments Needs assessment Main benefit needs assessment
Household level	Income Support Housing Benefit Council Tax Benefit	Income test for mortgage interest elements Income test Second adult rebates Income test for main benefit Income test for second adult rebates

Source: Institute for Fiscal Studies, 1997 (not published).

  70. In essence the UK system employs family or household assessment in the income-related benefit system and individual assessment in the direct tax system. The traditional unit of assessment in the UK for means­tested benefits has been the family or household unit. On the taxation side, the UK system has evolved to be based primarily on individual income. The memorandum from Electronic Data Systems described the current system in these terms:

    "If there is an underlying principle in a fragmented system such as the one in operation in the UK, it is that each benefit is designed to implement as precisely as possible the policy intent that created it. If that means a unique definition of the assessment unit - so be it."[114]

  71. The current hybrid system of assessment units in UK taxes and benefits potentially has the following advantages:

-  Relative to pure individual assessment or pure family / household assessment, the UK hybrid tends to encourage two­earner couples because secondary earners neither are entitled to benefit if they do not work nor are taxed on the first pound of income.

-  The system of income-related benefits is cheap and well targeted to poverty alleviation

-  There is equal treatment of the majority of individuals who are outside the income-related benefit system.

-  The administration of taxation does not require intrusive investigation of family structure.

  72. The unit of assessment in the UK system also creates its own concerns:

-  The system potentially generates disincentives to work for partners of unemployed people. As the assessment unit in income-related benefits is the household it means that unemployed individuals in workless families must gain a job offer paying enough to be greater than all of the family's benefits to beat the unemployment trap.

-  The UK tax and income-related benefit system is very complicated and this risks failing to deliver the support intended to poor families when take-up of benefit is low.

-  Society risks discriminating against low income households. Arranging the tax and benefit systems so that the poor are assessed as a family unit, whilst the majority of families are treated as individuals, means the tax and means-tested benefits systems intrude much more closely into their lives and might give low income families stronger financial incentives to defraud the system rather than to improve their circumstances.