Wednesday, 16 September 2009

How not to do tax credits

I've mentioned before about tax credits, how one third of claims made end up being overpaid, resulting in the unfortunate recipients having to repay money they thought they were fully entitled to, and have probably already spent, what with being poor and all. In fact, as a further 1/3 are conversely underpaid by the system, what's significant is that the people for whom tax credits actually work as they are supposed to are very much in the minority.

But hey, the system is a nightmare in practice, we all knew that already surely? So let's look at the idea in principle, then. Wealth redistribution, in other words taking money from the rich, who can afford it, and giving it to the poor, who need it, is to my mind a pretty fine idea. And doing it directly and transparently through the tax system seems a pretty fair way to do it, too.

But seriously, if you were asked to come up with a way of doing this, could you have ever designed a more clumsy, inefficient or convoluted system than the one which the Labour government, under Gordon Brown as chancellor, managed to create?

One of the key aims of tax credits, according to the governments own spiel, was to relieve the tax burden on low-paid, but otherwise "hard-working families". Fair enough, it has long seemed unfair that low-income workers, already earning scarcely more than they would receive in unemployment benefits, continue to have their meagre pay further diminished by taxation. This, though is the government's elegant solution to the problem:

First, the employee pays their tax as normal. Then, to claim it back, all you have to do is fill in a complex form detailing how much you earn, to make sure you are eligible for a tax credit. Send this off to HM Revenue (bearing in mind that they already know how much money you earn, because you've just paid tax on it), and if you qualify, they start making payments to you.

However, you're not home and dry yet, because you have to promise to inform the Revenue immediately of any changes to your work situation, because if you start to work more hours, or receive a payrise, then the amount you are eligible to receive may go down (again, bear in mind that they will already know this, because you'll be paying more tax). If you fail to inform them immediately, or sometimes even if you do, you can end up being overpaid. Even if it's not really your fault, or you can't afford it, the Revenue will demand that you repay it, and treats the money owed with the same seriousness as they would unpaid tax.

So, in summary, people have to pay tax, then provide the government with information they already have in order to claim it back. One third of people, some but not all of whom have neglected to inform the government of changes which they were already aware of, will have claimed too much money, and the revenue will then proceed to claim it back from them. Hardly a paragon of efficiency, is it?

Of course, getting the government to even admit that the scheme has failings, let alone do anything to change it, is going to be extraordinarily difficult, given that the minister responsible for the creation of this monstrous system, and it's biggest fan, is Mr G Brown.


  1. Sounds like a job creation scheme to me.

  2. Looking at the HMRC website I see absolutely no reason why any of the things used to determine tax credits can't be in your tax code.

    They already have married couples allowance and disability allowances, the only marginally complex part would be tracking children - but they tend to change considerably less frequently than jobs or partners.

    Having used the tax credit system, it's quite clearly a total and complete waste of time and I don't know a single person out the dozens who've experienced it who would choose it over just increasing tax allowance.

    The only people who wouldn't benefit from the tax allowance would be those who don't do any work, but that could be easily covered by the benefits system rather than tax credits.

    So all in, total waste of time, and once again a way to penalise families with one breadwinner.

  3. Thanks for the comment, and you're exactly right. We already have a system that deducts tax directly from your pay packet before you ever see a penny of it. It could just as easily pay money in to supplement your earnings in the same way.

    Blindingly simple, unless you're the government that is.

    I, however, have a more radical solution to tax credits, which I will try and explain in my next post.