TaxPersonal TaxMixed reaction to tax credit plans

Mixed reaction to tax credit plans

The Institute of Directors has said Gordon Brown's plan to simplify tax credits for working families will significantly reduce the red-tape burden on employees, but a senior tax professional has said she is sceptical.

The consultation document entitled New Tax Credits invited responses on its proposals which include a new integrated child credit, a plan to include all income-related child payments into a single tax and a common framework for assessment and payment.

Richard Baron, deputy head of the policy unit at the IoD, was full of praise for the new tax credits, due to be introduced in 2003.

He said they would ensure the burden on employers would not increase. ‘New tax credits will be available to childless employees as well as those with children.’ This means many employees with children would not receive tax credits through the payroll, but be paid by the Revenue.

Baron also praised ‘some other very useful simplifications’ such as only changing the amounts of tax credits once a year instead of twice and always allowing employers 42 days to start payment through the payroll.

The IoD recommended the proposal be extended to allow employees to receive all tax credits directly from the Revenue, instead of via payroll.

But Anne Redston, a tax partner at Big Five firm Ernst & Young, was less enthusiastic. She welcomed the simplification of the child elements of the new package, but said the employer elements were a ‘a complex game plagued by problems of definition’.

‘They extend welfare dependency and undermine independent taxation,’ she said.

In addition, Redston said the credits would subsidise those employers who are paying low wages, and make pay rises less valuable, while the extension of the employment tax credit to low earners without children would creating more red tape for businesses.

She proposed a system which would allow individuals to keep more of what they earn by raising the personal allowance, instead of introducing a system of tax credits.

‘[The personal allowance] is currently less than Pounds 5,000 per annum, so people on the minimum wage pay significant sums in tax and National Insurance, and then they need their income topped up by tax credits.’

The Revenue has ‘invited view on the design and implementation of the new tax credits’ before draft legislation is introduced in Autumn. Plans for a new system of tax credits were introduced by the chancellor in the 2000 budget.

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