UK Tax Credits To Go

by Robert Lee, Tax-News.com, London

Friday, July 30, 2010

Iain Duncan-Smith, the Secretary of State for Work and Pensions in the UK coalition government, is expected to formally unveil today (July 30) plans for a radical overhaul of the benefits system which could see low income tax credits swept aside in favour of a benefits model which provides more incentives for people to move into employment.

The tax credits system, administered by HM Revenue and Customs, was introduced by the Labour government as one of their flagship policies to boost the incomes of the low paid. But it has been frequently criticized for being inefficient, costly and prone to fraud.

Under proposals being considered by the Work and Pensions department, tax credits would be merged into a new 'universal' benefit that would taper off when an individual moved from benefits into work, depending on their pay. This would remove the high marginal tax rates that the unemployed currently face when they take low paid jobs and lose a number of benefits as a result, which often means that some people are financially better off by remaining unemployed.

Duncan Smith told the BBC that years of piecemeal reform under the Labour administration had made the tax and benefits system unwieldy and complex. "The system we are talking about will make the benefit system much simpler. It will make it easier to understand. They will be able, for themselves, to calculate how going to work, or doing extra hours in work, will pay," he said.

According to HMRC, nine out of ten people currently qualify for tax credits, and while tax credits have been cited by former Labour ministers as one of the party's most significant achievements in alleviating poverty during its 13-year reign, the system has been beset by problems from its inception. Flaws in the tax credit computer system led to billions of pounds worth of over-payments, some of which could not be reclaimed because misunderstanding of the system led to the destruction of more than a million tax records. Furthermore, many tax credit recipients were mistakenly identified as having been overpaid credits and ordered to pay back money that they didn't owe.

In 2008/9 the level of fraud and error in the tax credits system was estimated to be running at GBP2bn.