UK tax policy and the corporate tax base: a public consultation

I think we can probably expect the Treasury committee’s inquiry into UK tax policy and the corporate tax base to be more informative and fruitful than the public accounts committee’s inquiry into “corporate tax deals”.

The Treasury committee has invited submissions by 31 March. In the meantime here is the transcript of the Treasury committee’s first evidence session, held on 2 February.

See also: Taxing multinationals: BEPS outputs and the ‘digital economy’

Childcare support – an update

This note on the importance of clear guidance on the interaction between tax-free childcare and other means of support is extracted from my recent update for Tax Adviser:

“The new childcare support landscape will be complex and we have stressed the importance of providing users with guidance that not only explains the rules of each scheme but also gives enough information for users to choose between schemes. Research published by HMRC has found ‘very strong support’ for an online calculator. However, parents – particularly those in two-parent households – often assumed they would be ineligible for [tax-free childcare]. This suggests that HMRC faces a challenge in raising awareness among parents.”

The Low Incomes Tax Reform Group provides regular technical updates for the magazine. Read more on the Tax Adviser website.

Taxing multinationals: BEPS outputs and the ‘digital economy’

“We aim to solve this problem in the next two years,” OECD tax director Pascal Saint-Amans said in 2013, a month before presenting to G20 ministers an action plan to tackle  “base erosion and profit shifting” (BEPS).

Very little has been said in mainstream media about the impact of the BEPS project’s “final reports”, published last October. The rules governing taxation of multinationals will change, but they cannot be changed in a hurry, nor retrospectively. Campaigners have said for a long time that only fundamental reform will do.

Sol Picciotto noted last week that the OECD’s task force on the digital economy had “recognised that digitalisation means that [multinationals] have come ‘closer to the economist’s conception of a single firm operating in a co-ordinated fashion to maximise opportunities in a global economy’”. He added:

“[The task force] also accepted that this entails a ‘substantial rewrite of the rules for attribution of profits’. The report canvassed several possibilities … However, it could not agree even to recommend any of these, and left it to states to decide. Meantime, the task force will continue, aiming to produce a report in 2020. Plainly, we cannot wait that long.”

The OECD report Addressing the tax challenges of the digital economy said that work will continue following “completion of the other follow-up work on the BEPS project”, and the future work will be based on a mandate to be “developed during 2016”. It added that “a report reflecting the outcome of the continued work in relation to the digital economy should be produced by 2020”.

So the UK’s Treasury committee inquiry into tax policy and the “shrinking” corporate tax base is welcome. We can expect some more clarity than we have seen in some of the recent press reports, and some useful analysis of the possibilities for reform. The problem is even more urgent than it was in 2013, but the solution has to be the right one.

Treasury committee inquiry: Taxing multinationals and making tax digital

It may seem odd to put these two issues together but MPs on the Treasury committee have launched very wide-ranging inquiry into the UK’s tax system.

The committee has invited submissions on the making of tax policy, the problem of the shrinking corporate tax base and the administration of tax. This last item will address two key questions:

  • Has the merger of the Inland Revenue and Customs and Excise been a success, and have there been too many subsequent reorganisations within HMRC?
  • Are the plans for “making tax digital” adequately designed and acceptable?

MPs debated at length this week a petition, calling on the government to “scrap plans forcing self employed & small business to do 4 tax returns yearly”, which now has more than 110,000 signatures.

The government’s response to the petition was that

“Making Tax Digital will not mean ‘four tax returns a year’. Quarterly updates will largely be a matter of checking data generated from record keeping software or apps and clicking ‘send’.”

During the debate Chris Leslie, the former shadow chancellor, suggested that “people could be doing these things five times a year – there would be one big final return and these updates along the way”. He asked:

“Are we getting rid of the annual tax return or not?”

It was a good question because we have been told that we can expect “the end of the tax return”.

David Gauke, financial secretary, replied:

“The traditional annual tax return, we can get rid of. What I am saying is that, rather than starting largely from scratch and pulling all the information together, businesses that need to make adjustments at the end of the year will have already done much of that work. Now, as I say, the tax system remains an annual system, and one needs to be able to look at the year as a whole for things such as capital allowances. However, it is worth bearing it in mind that the capital expenditure of the vast majority – something like 98% – of businesses would fall within the annual investment allowance of £200,000, so that is not necessarily too much of an issue for them.”

There will be much uncertainty for small businesses during what will be a very long consultation period.

What is the ‘level’ of child tax credit?

A Labour peer took issue last week with a statement that under the government’s proposed cuts to tax credits from April 2016, “a family with children who are in receipt of child tax credits would receive those tax credits elements at the same rate of payment as currently applies in respect of those children”.

Lord McKenzie suggested this was not a “true and fair view”, and added: “What is paid in terms of tax credits reflects not only the various elements – the building blocks – but the net effect of applying the income threshold and the taper. The former has been dramatically lowered and the taper accelerated.”

Responding, Lord Ashton said Lord McKenzie was referring to “a television programme with David Dimbleby”.

(This was the BBC Question Time Election Leaders Special in which Dimbleby asked David Cameron about “child benefit”, “child credit” and “tax credits”. Full Fact examined in July that interview and others, and whether there was a pre-election pledge not to cut child tax credit.)

Back to last week’s short debate. Lord Ashton added: “The award has not changed. It is £2,780 and it was before.”

And at PMQs two weeks ago the prime minister said: “What I said at the election was that the basic level of child tax credits would stay the same, and, at £2,780 per child, it has stayed exactly the same.”

Regulations fix the “maximum rate” of child tax credit. This maximum rate includes an individual element for each child, which is normally £2,780. But the rules fixing the actual rate of child tax credit apply (with some exceptions) a deduction based on the claimant’s income (joint income in the case of a couple). For this purpose an income threshold and the rate of taper are also set out in regulations.

The amending regulations rejected by the Lords last month would have reduced the income threshold, and increased the rate of taper, from April 2016. The impact of those changes would have been to hit some claimants and their families hard, as illustrated by the Institute for Fiscal Studies, the Resolution Foundation and others including the CIOT’s Low Incomes Tax Reform Group. (I work for LITRG and have contributed to recent briefings including this one for MPs on the tax credits reforms.)

The table below illustrates how Ben, in LITRG’s example 1, would have seen his tax credits award reduced by £42 a week under the summer budget proposals . Ben is married with one child. He works full time and he and his wife have a joint income of £20,000.

Ben 2015/16 2016/17
Working tax credit £ £
Basic 1,960 1,960
Couple 2,010 2,010
30 hours 810 810
Child tax credit
Family 545 545
Child 2,780 2,780
Maximum elements 8,105 8,105
Income 20,000 20,000
Threshold 6,420 3,850
Excess 13,580 16,150
Taper rate 41% 48%
Taper amount 5,568 7,752
Tax credit award 2,537 353
Reduction 2,184

Clearly, the £2,780 figure is only part of the story.

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Softening the impact of tax credit cuts

There is a “growing expectation” that the chancellor will announce measures to soften the impact of the April 2016 tax credits cuts in his autumn statement next month, according to a Guardian report which has been cited in The Times.

I hope we will see a softening of the blow. Many tax credits claimants will not benefit from the increase in the income tax personal allowance, the national living wage, or the planned increase in provision of free childcare, which ministers insist should be considered as part of a package of welfare reform.

Unfortunately, the autumn statement will not happen until 25 November and it will be a huge task for HMRC to tell claimants precisely how their provisional awards of tax credits for 2016/17 will be affected.

As the House of Lords prepares to debate on Monday three motions to “decline to approve” or “decline to consider” the April 2016 cuts, there’s a useful account of last week’s developments in today’s The Week in Westminster on BBC Radio 4.

The two-child limit set to apply from April 2017 is in the Welfare Reform and Work Bill, which MPs will debate again on Tuesday.

Tax credit cuts under scrutiny

There is “growing internal Conservative unease” over the tax credits cuts, the Times has reported today. Anger and uncertainty over the impact of the cuts planned for April 2016 and April 2017 have been reflected in recent debates in parliament, including:

The regulations must be approved by both Houses of Parliament, and on 26 October the House of Lords will debate a “motion to regret”. A Lords committee has complained that the explanatory note accompanying the regulations in September “contained minimal information”:

“Soon after the draft Regulations were laid, we requested additional information from HMRC, about why the Government had not published an impact assessment, and whether the Government had prepared some other assessment of the effect of the changes proposed.”

Last week George Osborne sent an impact assessment to the committee, whose report added:

“The Chancellor’s letter of 12 October 2015 and the enclosed Impact Assessment shed more light on the effects of the proposed changes than was provided by the Explanatory Memorandum laid on 7 September. When it considers the draft Regulations, the House will wish to reach a view on the adequacy of the information about their impact with which we have been provided.”

An Opposition day debate on the cuts will be held on Tuesday, 20 October, and it has been reported that the Commons work and pensions committee, chaired by Frank Field, will launch an inquiry into the overall impact into the cuts.

The public bill committee’s consideration of the Welfare Reform and Work Bill will continue on 20 October, and the Bill will go to the Lords once it has completed its Commons stages.