Working Tax Credit and working hours ploys

I am no expert on Working Tax Credit (WTC), and I know that many who were on Incapacity Benefit and even Disability Living Allowance have been pronounced “fit to work”, some say unfairly, in the last two or three years.

Word on the street is that you can get your sixteen or thirty hours work to be entitled to WTC by being self-employed selling through Kleeneze catalogues, or maybe selling lottery tickets for charities. How you can prove your working hours from that, I don’t know, but maybe neither HMRC nor DWP care.

Are my sources correct? Have you heard anything about this? Does it matter?

State Pensions, PAYE and unfairness

Not all the taxpayers I look after have high incomes. From time to time I help pensioners and others whose means are quite small.

It may surprise many, but there are some people whose only taxable income is from the UK State Pension. Quite often it is enhanced by the additional State Pension, previously known as the State Earnings Related Pension Scheme (SERPS) and the State Second Pension. This does not mean that those pensioners are living the high life. Their total income might well be no more than £11,000 or £12,000 a year, but that is more than the current Age Allowance of £10,500, frozen by the Chancellor, George Osborne. That means that those pensioners have a tax liability.

Quite a few new pensioners with higher State Pensions are unaware that they have a liability to tax. In fact many are unaware that State Pensions are taxable at all. In the past year or so, I have come across such individuals who have suddenly found themselves with unexpected tax demands and on one occasion a demand for four years’ tax all at once.

I took on the poor chap who had paid HMRC for four years’ tax, and found that actually he owed nothing because HMRC had overlooked his entitlement to the Married Couples Allowance. This actually eliminated his supposed liabilities, but he died before I got the tax back. His widow received the payment.

However, there are others who are receiving tax demands on their State (and only) Pensions out of the blue, and still do have a tax liability. Surely it would be less painful to bring taxable state benefits into PAYE and ensure that no one receives any unexpected shocks? After all, these are by definition people on low incomes, and it cannot be expected that they will have any savings out of which they pay tax. Generally they spend what they receive at that income level, and who can blame them?

Better still, why not exempt from tax any amounts of State Pension in excess of the Age Allowance or Personal Allowance as applicable. After all, these pensioners have done their bit.

What do you think?

Fair Tax and the real world

There has been a lot of talk about Fair Tax and self-appointed parties have even persuaded an august professional institute to buy into their plan. It sounds a bit like clothing manufacturers getting the Woolmark (remember that) for a fee of course. The Woolmark was a guarantee of Merino wool. A Fair Tax Mark would be no guarantee of anything.

The question is, what level of tax is fair? We are talking about corporation (company) tax of course. All the criticism, mainly aimed at multinational companies, is about the level of corporation tax they pay. Now it is true that they might have more flexibility than smaller businesses to arrange to pay a lower level of corporation tax in the UK by transferring profit to other jurisdictions. 

At the same time, there are rules on transfer pricing which apply to large companies and in which HMRC take a keen interest. All businesses need to reinvest, and to encourage this there are quite generous allowances against tax that can be claimed (because the Treasury wants them to) which means that taxable profit might be lower than accounting profit.

However, I do not want to get too technical. I will leave that to others. The government is reducing the main rate of corporation tax to 20% on taxable profit for all companies, large and small, from 1^st April 2015. The previous administration was also intent on reducing the rate, and that is because Government perceives that with a low tax regime on profits, overseas businesses will want to invest more in the UK. It all makes sense to me.

My next point is one already made by Ben Saunders who has helpfully extracted from HMRC's accounts for 2012-13 the following figures which show that corporation tax is only the fourth largest revenue raiser anyway:

1. Income tax – £150.9bn
2. National Insurance – £101.7bn
3. VAT – £101bn
4. Corporation tax – £39.2bn

Do read Ben's piece, in which he points out that in the UK, most businesses are not companies anyway.

So the Government does not regard raising money through corporation tax as their biggest priority, and there is a reason for this quite apart from the question of competing for business against foreign competition. That reason is that corporation tax is not the only tax that companies pay.

Who actually pays all the income tax recovered under PAYE from company employees? It is the companies that employ them. Who pays the National Insurance? The employees think they pay their share, because it in on their payslips, but actually it comes out of company bank accounts.

Therefore it is ridiculous to have a measure of one tax to be regarded as “fair” and to ignore all the other tax revenue generated.

We can take this one step further. Large companies as well as small ones and other businesses contribute to raising the level of employment. In fact in the UK there are more people employed than there have ever been before. If people are employed they are drawing far less in benefits and therefore saving the Treasury even more money which they would have to cough up if those employees had no work and were sitting at home.

Do not talk to me about Fair Tax. The economy is very complicated, and the tax regime as a whole is a sort of steering mechanism. It is crude and sometimes not very responsive, but to extract one element is disingenuous, particularly where that element of potential low tax on profits is an important attraction for investment.