Roger Cockfield – Confusion over tax credits

The fact that employers will, from October, be responsible for makingnies to bear the cost of administering the working families tax credit, says Roger Cockfield. welfare payments under the Working Families Tax Credit scheme amounts to the partial privatisation of the social security system.

Employers will not only have to operate the system but will need to modify their cash-flow budgets to take account of what can be substantial payments. For example, a couple with four children, paying childcare costs of #7,800 per year, where the wife earns #,3000 and the husband earns #6,000, will receive WFTC of #10,610. The husband’s employer will be paying 66% more in WFTC than pay for each pay period. This will cause a major problem for those industries with large numbers of low-paid employees such as the hotel sector.

The Tax Credits Bill presented to the House of Commons in December does not provide any compensation or payment for the additional work and will penalise those employers that fail to operate it.

Article 1 of Protocol 1 of the Convention on Human Rights states: ‘Every natural or legal person is entitled to the peaceful enjoyment of his possessions.

No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

‘The preceding provisions shall not, however, in any way, mitigate the right of a state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest, or to secure the payment of taxes or other contributions or penalties’.

The obligation to operate WFTC amounts to a deprivation of property.

Part 2 of Article 1 is a clear exception for the payment of taxes, such as PAYE, and collection of national insurance contributions. Part 2 is only necessary as the payment of taxes is not covered by the public interest exception in Part 1. It is arguable that this Part 2 exception does not apply to the payment of welfare benefits.

The next question to ask is whether the WFTC is a tax or a benefit. Calling a benefit a tax credit does not, in my opinion, change its nature. I would apply the duck test. If it looks like a duck and quacks like a duck, then it is a duck whatever name it is called.

Firms might like to keep a record of the cost of operating WFTC so that when there is a successful challenge under Article 1 in the High Court, they are able to submit invoices to the Inland Revenue.

Roger Cockfield is reader in taxation at De Montfort University.

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