There's little credit in family tax plan

Politics sometimes needs a bit of give and take. Looking at the billsirectors. going through parliament, we can see that the government is very good at both.

First the good news. The legislation to transfer the Contributions Agency to the Inland Revenue is at last going through, with only a few weeks to spare before the deadline of 1 April. Even better, Alistair Darling has said that responsibility for National Insurance policy will go over to the Revenue at the same time.

This is tremendous. Views differ on whether National Insurance is a genuine contribution, just another tax or something in between. But National Insurance and income tax are applied at the same time and in the same place: the payroll. They need to be administered together. Just as important, policy on them must be made and kept consistent. The best way to do this is to have one department running both.

The news is not quite as good as I would like. There is no sign that where National Insurance applies to benefits in kind, the government will allow it to be worked out for a year at a time (like income tax) rather than weekly or monthly: but the Revenue staff is best placed to make that final push.

We should also look at the powers awarded to inspectors of taxes in relation to National Insurance. They are the same powers as Contributions Agency inspectors have now – combined with existing Revenue powers, they make a formidable armoury.

We must not take this lying down: a full review of the Revenue’s total powers, and of the balance between state and citizen, is urgently needed.

The review of powers should cover all of the Revenue’s growing empire.

From 1 April, the Revenue will be policing the national minimum wage.

From next year, it will be collecting student loan repayments. Also from next year, it will provide the contact point for employers paying the working families tax credit (WFTC), the replacement for family credit.

Here comes the take, the really bad news, also on its way through parliament.

The government will not actually make employers pay the cost of the WFTC.

But they will come pretty close to it.

Employers will pay WFTC out of the money that they deduct from other employees each pay day in income tax and National Insurance. Instead of hanging on to that money for between two and six weeks from pay day until it has to go to the Revenue, they will have to pay some of it out straight away. A lot of businesses have to keep a very careful watch on their cash flow as it is. But the response in the booklet that the Revenue published in December is: ‘Employers will need to review their budgeting procedures’.

In other words: ‘It’s your problem, mate!’

An employer who will actually be out of pocket, paying out more in WFTC than the total tax and National Insurance, will be able to get a cash advance to help him: but he will have to work out the figures three weeks in advance if he is to get the money on time. The WFTC may be fixed that far in advance, but the tax and National Insurance certainly will not be if there are casual workers or widely fluctuating overtime.

The Revenue realises the difficulties, and it has clearly thought long and hard about how to minimise the burden. But there is only so much that it can do. The problem is with the basic policy. Taxation and benefit payments simply do not make happy bedfellows, even if the benefit is called a ‘tax credit’.

So why has the government chosen to go ahead with this policy? It is part of the strategy to get people back to work, partly by making it clear that money from the state is closely tied to work.

We can see that strategy in the new rule that someone who can work must attend interviews or lose their benefits. The interviews rule is a real incentive. But paying WFTC through the pay packet is mere window dressing of a benefit that is only available to people in work anyway.

Small wonder that the Institute for Fiscal Studies estimates that it will add at most 45,000 people to the labour pool. Big wonder that the government is persisting with it.