Memorandum submitted by The Institute
of Chartered Accountants in England and Wales
INTRODUCTION
1. On 28 October 2005 the Treasury Sub-Committee
of the House of Commons announced an enquiry into Child Trust
Funds. This is the response of the Tax Faculty of the Institute
of Chartered Accountants in England and Wales to this request
for written evidence.
SUMMARY OF
KEY POINTS
Financial education
2. We believe that one of the laudable principles
behind the CTF is to encourage saving. It is not enough merely
to give money in the hope that the person will save: indeed the
result may be exactly the opposite. The Government has recognised
that it is important to couple this proposal with education on
the value and importance of saving. Any such financial education
must necessarily include education about the UK tax system. The
current complexity of the system with its plethora of rates, allowances
and credits makes this a gargantuan task. Indeed, a more basic
understanding of how investments work is needed to manage a CTF
account: What are Equities? What is interest and how is it calculated?
How does the charging system work? Why is a CTF account better
than an ordinary savings account? Will the money in the CTF affect
the parents' claim for benefits, or the child's claim once they
are older? Why can't the child get the money until aged 18 when
they can open an ISA from 16.
Reliance on Tax Credit system
3. We are concerned at the extent to which
the award of the additional CTF amount is reliant upon the Tax
Credits (TC) system. We have already seen how complex Tax Credits
have become and how easily mistakes are made.
4. In this respect, CTFs are most at risk
where parents do not claim Tax Credits in time for their children
to receive their full cash entitlement or where the household
income is changed following an enquiry.
5. In 1999 the Tax Faculty produced a paper
"Towards a Better Tax System" (set out in the Appendix)
in which we put forward Ten Tenets against which all new legislation
should be judged. CTFs fail both on the grounds of simplicity
and certainty. We believe that this is not because of the CTF
rules themselves, but rather because of the Tax Credit rules on
which they have been overlaid.
SPECIFIC COMMENTS
Qualifying for a CTF account and New Tax Credits
Protective claims
6. The basic entitlement to a CTF account
is linked to entitlement to child benefit. Section 9(5) Child
Trust Funds Act 2004 stipulates that the further amount (of £250)
will only be available to children in families entitled to Child
Tax Credit (CTC) and with a household income no greater than the
CTC threshold for fast taper tax credits for the year in which
the child benefit commencement date fell.
7. In order to ensure that children will
not potentially lose this entitlement it is necessary for parents
to consider making a protective tax credits claim. For example,
Mr A runs his own business preparing accounts to 31 March 2006.
Mrs A does not work but looks after their children. They have
a baby on 1 January 2006. They have never previously claimed tax
credits as their income averaged £80,000. In March 2006,
the business suffers a disaster wiping out all profits for the
year.
8. Not only will the family suffer a loss
of many months' tax credits, but it is possible that they may
not manage to claim their tax credits within the necessary three
months (that is, within three months of the end of 2005-06, in
order to establish a tax credit entitlement for that year). The
new baby will lose out in 18 years time as a result.
9. The Tax Faculty has raised the problem
of the interaction of the three-month back-dating rule and the
annualised award of tax credits repeatedly during discussions
on tax credits. The CTF rules base the new system on the problematic
and highly complex TC system. We suggest that it is important
to think again on this point.
Qualifying for a CTF account—Definition
of household
10. One of the complicating factors of the
TC system is the need to use annual income where the make-up of
the household changes during the year.
11. The TC claim position on the date of
the child's birth is relevant when considering the additional
payment. This can be difficult to establish in practice and is
a further reason for not retaining the link between the new CTF
system and the TC rules.
Tax credit enquiries
12. A TC enquiry could result in the withdrawal
or the increase of the TC award. Consideration must be given to
the impact of this on the eligibility to the higher CTF payment.
We are particularly concerned that an increased award may not
send an automatic link to the CTF payment system because of the
different tax years involved and the unreliability of the TC computer
system. The CTF computer system is still too new for us to comment
on its reliability.
Other issues
CTF Maturity
13. The CTF account is to be transferred
into a tax-effective savings scheme on maturity. Assuming that
the child and relatives have contributed the maximum sums, an
amount in excess of £22,000 would be available. We should
welcome clarification on the nature and extent of the anticipated
"tax effective" savings scheme. Will there be a cap?
14. Although not relevant for 16 years,
consideration should also be given to the nature of the individual
identification evidence, which will be required for 16 and 17
year olds to manage their accounts, and then for 18 year olds
to gain access to the funds on maturity. Many teenagers do not
hold a passport nor a driving licence. If we are all to be issued
with identity cards in the future, then from what age will these
apply?
Managing the account
15. Interaction implies two way involvement.
We wonder how the Government's link with the school curriculum
will enable children to have a real impact on their investment.
It is likely to be parents who will manage the account and who
are therefore most in need of education. Education for parents
needs to happen now. According to the Nationwide Building Society
over one million CTF vouchers issued to parents have not been
used. See: http://www.nationwide.co.uk/mediacentre/PressRelease—this.asp?ID=732.
Children under 18 who are parents
16. In these situations, the grandparents
will be in a position to make decisions about their own children's
CTF accounts, but not that of their grandchildren. Rather than
HMRC having sole responsibility, it would be easier if it could
be possible for a claim to be made to pass responsibility to the
grandparents (where they are in agreement) until the "young
parent" reaches 18.
Tax treatment of CTF accounts
17. We welcome the exemption of these accounts
from the parental settlement rules and suggest that this should
also be extended to funds in feeder accounts.
18. We would welcome clarification on how
the inheritance tax exemptions would be applied to these accounts.
For example, is the date of the gift when funds are placed into
a feeder account or when they are place into the CTF. This is
particularly relevant to the application of the inheritance tax
exemption for normal expenditure out of income, s 21, IHTA 1984.
19. There should be a statutory commitment
that the £1,200 annual limit should be raised annually in
line with inflation.
Annual statements
20. Approximately nine million taxpayers
currently receive self assessment Statements of Account from HMRC.
Six million families receive tax credit award notices. Neither
of these was developed with the needs of the customer in mind,
but those of the issuer took priority. HMRC accepted this, and
are re-designing both the Statement of Account and the Award Notice.
We trust that lessons will be learned from this so that from the
start, Annual Statements for CTF accounts will be more user-friendly
and relevant to their audience.
21. We understand from earlier consultation
that parents and children will be able to opt to receive these
statements electronically. This implies that both will receive
a statement, otherwise "both" cannot request this option.
Children frequently change email accounts and it will be easy
to lose track of statements sent in this way to dead accounts.
WHO WE
ARE
22. The Institute is the largest accountancy
body in Europe, with more than 123,000 members. Three thousand
new members qualify each year. The prestigious qualifications
offered by the Institute are recognised around the world and allow
members to call themselves Chartered Accountants and to use the
designatory letters ACA or FCA.
23. The Institute operates under a Royal
Charter, working in the public interest. It is regulated by the
Department of Trade and Industry (DTI) through the Accountancy
Foundation. Its primary objectives are to educate and train Chartered
Accountants, to maintain high standards for professional conduct
among members, to provide services to its members and students,
and to advance the theory and practice of accountancy (which includes
taxation).
24. The Tax Faculty is the focus for tax
within the Institute. It is responsible for technical tax submissions
on behalf of the Institute as a whole and it also provides various
tax services including the monthly newsletter "TAXline"
to more than 11,000 members of the Institute who pay an additional
subscription.
November 2005
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