House of Commons - Treasury - Written Evidence

Select Committee on Treasury Written Evidence

Memorandum submitted by Roger Cockfield

I set out on a separate sheet my representations, which can be summarised as follows. To solve the present tax credit fiasco use an extended version of the PAYE system, so that WTC and CTC are included in calculating the weekly tax tables. Thus benefits are automatically adjusted on a weekly basis as earnings fluctuate. The code number would reflect the family structure. Provided the correct code has been issued, the total benefits paid during the year will equal the benefits due for that year. The cost of the £2,500 dead zone would be removed as no longer necessary.

I have been working on the integration of income tax, social security and national insurance contributions for a number of years. I gave a paper on this at the ATAX Conference in Sydney in 2000. I also submitted written evidence to the Social Security Select Committee, which was published in their 7th Report on Pensioner poverty, 2000 at pages 134-137. I have been cited as an expert on tax/benefits in House of Commons debates on a number of occasions. My highly critical article on the proposed WFTC was published in Tolley's "Practical NIC" October 1998. Their editorial comment was "WFTC seems a recipe for a stunning PAYE administrative headache". Prior to retirement, I was Reader in Taxation at De Montfort University.

SUMMARY

To solve the present tax credit fiasco use an extended version of the PAYE system, so that WTC and CTC are included in calculating the weekly tax tables. Thus benefits are automatically adjusted on a weekly basis as earnings fluctuate. The code number would reflect the family structure. Provided the correct code has been issued, the total benefits paid during the year will equal the benefits due for that year. The cost of the £2,500 dead zone would be removed as no longer necessary. Abbreviations at end.

FACTORS THAT CHANGE

The three factors that change are:

1. Family structure

2. Wage levels

3. Amount of chidcare

The factor that changes the most is fluctuations in wage levels ( including moving job and being out of work) which determine the amount of the 37% claw-back of WTC/CTC.

EXTENDED TAX TABLES

Let us look at Table 1.3a on page 41 of DWP's "Tax Benefit Model Tables April 2005". These concern a Lone Parent with two children under 11 paying no childcare costs. For wages between £160 per week and £440 per week, the marginal deduction rate [MDR] or marginal effective rate of tax is 70%.

Suppose HMRC pay the LP £114.97 [being the total of WTC £39.51 and CTC £75.46 at the £160 gross earnings point]. The correct deduction due is 70% of the excess over £160. Using extended tax tables, the weekly amount of WTC/CTC would be correctly adjusted. This takes care of any wage increase/ decrease within a fairly broad range.

The MDR of 70% is made up of NIC 11% plus Basic Rate income tax 22% plus WTC/CTC taper rate of 37%.

Once modified to remove the impact of HB/CTB, Table 1.3a could be used by the employer as extended tax tables to cover the whole range of wages from £77.60 per week right up to £900 per week. To start at £77.60 per week, HMRC would need to pay the LP £137.13 [being the total of WTC £61.67 and CTC £75.46 at the £77.60 gross earnings point].

MOVING BETWEEN EMPLOYERS

Moving between employers would involve the familiar P45 procedure.

UNEMPLOYMENT

The next problem is how to deal with the individual becoming unemployed. One option is for HMRC to pay £195.97 to the LP being the level of benefit income on IS/JSA(IB). The employer would then deduct £30.44 from the opening gross earnings figure of £77.60, and pay £47.16 to the LP. This would bring the LP's net income up to the level shown in Table 1.3a (after removing the HB/CTB amounts). Any earnings above the opening figure would be dealt with using the extended tax tables. When the employee left, no further action is required by the employer beyond the P45 procedure, benefits payable by HMRC are already at the unemployed level.

HOUSING BENEFIT/COUNCIL TAX BENEFIT

There is also the option of using one set of tables to adjust HB/CTB on a weekly cumulative basis. Determination of amount of qualifying rent and council tax could remain with the local authority. How much of the rent and council tax should be paid and then withdrawn through extended tax tables is open to debate.

CHILDCARE COSTS

One problem is linking childcare costs to fluctuations in wages so that the taper can operate. Another is how to trigger withdrawal of the relief if childcare facilities stop being used. A possible solution might be to operate childcare relief along the lines of MIRAS: this would mean that the subsidy is paid direct to the childcare provider by HMRC.

Option 1

All claimants pay 30% to the nursery. The nursery claims the balance of 70% on a rolling three month basis:

19th Month 1 Provisional payment

19th Month 2 Return of payments actually recived

19th Month 3 Balance of payment for month 1 made or overpayment deducted from provisional advance for month 3.

Option 2

As above but claimants pay varying percentages [30, 40, 50, 60% etc] of childcare costs to the nursery. The percentages would be estimated by HMRC to reflect the estimated taper withdrawal.

COMPUTER SYSTEM

A local system, based on readily available spreadsheet programs, would improve communication and understanding by recipients. Many HMRC/DWP's calculations of benefits and tax credits are difficult to understand let alone follow. Very few people can work out the impact on their benefits and tax credits position if they save an extra £1,000.



© Parliamentary copyright 2006	Prepared 6 June 2006