The tax pendulum

Some recent good news is contained in the government?s plans for new tax credits which will replace the working families tax credit from April 2003. Like the existing credits, the new ones will be delivered by employers. But this time the government has thought of a way to control the administrative burden.The number of employees getting tax credits will increase sharply, because the new tax credits will be available to the childless: existing tax credits are only for parents. This could have increased the burden on employers. But the government will structure the new credits so that parents will primarily get the child-related component. This will be paid directly by the Inland Revenue without involving employers. Childless employees will join the employer-based system, but many parents will leave it at the same time.But before we conclude that government thinking is now wholly employer-friendly, we should look at the new rules for mileage allowances paid to employees. From April 2002, an allowance of up to 40p a mile will be free of income tax or national insurance. But the rate will fall to 25p for miles in excess of 10,000.The difficulty is that mileage records are not always captured and processed by employers fast enough to know when the total has reached the maximum 10,000 miles. This is not a problem for income tax, because tax liabilities are worked out after the end of the year. But it is a problem for national insurance, because that must be calculated each and every month.The government announced that it was looking at the problem. The Revenue has now published draft regulations, but they do not help. Employers will still have to monitor mileage month by month. The government has not decided to apply the 40p rate to all mileage. The government has also not decided to use Class 1A national insurance contributions which are, like income tax charges, worked out after the end of the year. We are not out of the woods yet!l Richard Baron is deputy head of the policy unit at the Institute of Directors

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