We need your support to keep TheyWorkForYou running and make sure people across the UK can continue to hold their elected representatives to account.Donate to our crowdfunder
I beg to move,
That this House
has considered the high-income child benefit charge.
It is always a great pleasure to serve under your chairmanship, Mr Hollobone.
One might ask why I have brought this debate; it is a fairly obscure area of tax and benefits. I have done so out of the frustration felt by a number of constituents who face the high-income child benefit tax charge and its after-effects and, as a chartered accountant and chartered tax adviser, anything tax-related always rattles my bell. This is a topic of great interest on mumsnet.com and moneysavingexpert.com, which have covered the issue in some depth.
I suppose we must start at the beginning—always a good place to start. Why did we implement this high-income child benefit tax charge, when child benefit had been a universal benefit, enjoyed by all, for very many years? The issue was first raised in October 2010 by the then Chancellor, George Osborne, and it was one of the measures used to try to get some more savings for the Treasury after the simply appalling state of the nation’s affairs that we were left with after the 2010 election.
The legislation was first mooted in the 2012 Budget, and it came into effect on
The charge applies above an adjusted net income of £50,000. Adjusted net income is not the usual measure of what we anticipate to be our taxable profit or income; it is the gross income from all sources, less gift aid and pension contributions. It does not include personal allowance. In very simple terms, if a pay-as-you-earn employee has a gross income of £50,000 before personal allowance, they would start to feel the effects of the high-income child benefit tax charge.
The way it works is that there is a clawback of 1% of child benefit for each £100 of additional income over the £50,000, so by the time someone has an adjusted net income of £60,000, all that child benefit is tapered away. It sounds complicated even trying to lay it out in the simple terms that I have, but one thing that comes out of this is that it is a salutary lesson in how not to withdraw a universal benefit through the tax system. What we have on the statute book, which runs to many tens of pages of tax law, is the truly mad basis of trying to claw back a benefit. It is not related to overall family income, which many people describe as one of the real drawbacks of the system.
Let me give an example. Family income is recognised as the measure for most other Department for Work and Pensions benefits. For instance, there is no withdrawal of child benefit for a couple both earning £50,000—the high-income child benefit tax charge does not apply, even though the family income is a generous £100,000. In another family, in which only one parent is working and earning, say, £60,000, and the other is not working, there would be a full claw-back of the child benefit given. That makes life complicated for people on pay-as-you-earn, who can do nothing about their income, and there is also the issue of fairness. Family businesses, or people in sole trade, perhaps have a greater opportunity for sharing income, splitting income or indeed creating a partnership to split the income down to the golden £50,000, so that there is no loss of child benefit.
I feel that this situation has led to an inherent unfairness in the system, which is one of my concerns. My other concern is the means of collection, and there lies the problem that we have faced. People who recognise that they will not qualify for child benefit can choose simply to disclaim the benefit and not receive it at all. That has been on the rise over the years since the charge has been in place. In 2013, 397,000 people were not claiming the benefit, and the number has now increased to 516,000. That is due to two issues, one of which is fiscal drag—the level has not been raised since January 2013, which is something I will raise later.
Some people are happy and feel that it is to the family advantage to maintain their cash flow—get the money into their bank with the monthly receipt of child benefit, then simply pay it back at the end of the year. Some people do that. However, the real madness in the system—we should have tax systems that make things easier—is that the implementation of these measures forced 500,000 more people into the requirement to fill in a self-assessment tax return. It is a huge bureaucratic cost to taxpayers, and managing the system must also be a significant cost to Her Majesty’s Revenue and Customs. It is the root of the problem of collection.
Many PAYE employees have had never had to touch the tax system or fill in a self-assessment return. Luckily for them, they have been merrily ignorant of anything to do with tax. It is all done at source by their employers—if they have no further complicated tax affairs, they need do no more. The current situation has been a particular hardship for these taxpayers. They might not have spotted the advertising that was fairly extensive at the time. They perhaps received less than £50,000 at the time, but over the years their income has crept over that figure due to wage rises and better business.
I have raised this issue for a couple of my constituents and pursued it with great vigour. I have argued with HMRC that the information about which PAYE employees would face this charge is well known to Government through the real-time information system of payroll that bigger employers have had to implement since April 2012, and was rolled out gradually over time to all employers, even the smaller ones, running a PAYE system. The information was available—primarily to the DWP, so that it can assess whether people in receipt of benefits should not be, but HMRC had access to the system.
I have failed to agree with HMRC’s stance on this. It claims that the arm of Government dealing with the DWP has got no relevance to their arm, which deals with tax. The data has not been shared, even though the arms of Government had the information at their fingertips and could have advised people that they were potentially falling foul of the system. In my arguments to HMRC on behalf of my constituents, I argued for extra-statutory concession A19, which is often used when HMRC makes a mistake—often with the elderly. I saw this very regularly when I was one of the volunteers for Tax Help for Older People in Kent. HMRC has had the information and applied the wrong code across different pensions. Three years later, an assessment turns up. Extra-statutory concession A19 makes HMRC give up that tax if it has been in receipt of information but has not used it properly.
Of the constituents who have been found not to have done what they should have done—registered to do a self-assessment return, possibly for the first time in their life—they have been, well, not happy, but comfortable enough, even given what ESC A19 says: that they should pay the money back. They are quite happy with that. However, many of these people have faced a tax-geared penalty under section 97 of, and schedule 24 to, the Finance Act 2007. That penalty has generally been at the lowest rate of 15% under the careless but prompted regime, under HMRC’s fines regime. However, they have also faced statutory interest, which is currently at 3.75%. Many people understand that, if they have been in receipt of child benefit for a few years and should not have been, they should pay it back, but they feel particularly aggrieved about a 15% penalty and the statutory interest.
I argued with HMRC, for my constituents, that the suspended penalty regime, under paragraphs 1 and 14 of schedule 24 to the Finance Act 2007, should be the equitable solution. This is a procedure by which HMRC, with discretion, is allowed to put those penalties on hold and effectively say, “If you are good taxpayers for the next couple of years, this will disappear”; the penalty is then discharged. HMRC responded to me with, I must say, an innovative obtuseness that I rarely see. It responded that schedule 41 of the Finance Act 2008 applies, as the taxpayer had failed to notify, in accordance with section 7 of the Taxes Management Act 1970. They had failed to notify, so that penalty suspension, which is allowed for other taxpayers, does not apply. The taxpayer is also in some difficulty should they wish to go to the first-tier tribunal as well, which would always result in failure on a statutory basis.
I think the pressure of mumsnet.com, moneysavingexpert.com and, hopefully, myself has made HMRC use a degree of discretion, under its ability to interpret “carelessness”, which is always a vague term. My thought of carelessness might be different from yours, Mr Chairman. However, HMRC has gone back and reassessed many penalty assessments. Over the time of this new charge, there have been 97,405 penalties across 37,406 customers. As ever, thanks to the Library for pulling out that type of detail for me. The charge has raised £15 million of penalties, which is not a vast sum. A recent review—I think the Daily Mail was very much behind this, with pressure from some of its readers—shows that, of those 35,000 cases involving a failure to notify, a penalty of 15% had been charged because a reasonable excuse was not accepted. HMRC has actually recanted on that and allowed quite a number of thousands—6,000, I believe—of these penalties to be waived, with £1.8 million of penalty refunds.
As part of its work, HMRC has designed a helpful flow diagram showing two events for which penalties could be refunded. The first is for when income has increased from below £50,000 to above £50,000 since the start of the high-income child benefit tax regime, and the second is for when a taxpayer has started a new relationship, since the introduction of the charge, with a new partner who is in receipt of child benefit. Those are the two cases for which HMRC has given in and agreed to the suspension of penalties, and that is to be very much applauded.
What do people do when they have a new child and make a claim? If they know that their income is over the limit, they may not bother at all—they might think, “We just won’t get involved.” For other families there is the CH2 form, which I will mention in more detail shortly. As I have laid out thus far, we have dragged half a million people into the self-assessment net. We have raised penalties under a system that I do not agree is reasonable on statutory grounds. We are learning a lesson: should we seek to withdraw universal benefits in some other field—that suggestion is not on the Conservative agenda, but it is raised from time to time, for example with winter fuel allowance—this has to be a salutary lesson in how never to use the tax system to withdraw benefits.
I will conclude by addressing five areas, which might take a little time. We have fiscal drag, because the thresholds at which the full benefit is withdrawn—namely £50,000 and £60,000—have applied unchanged for six years. We now find that as wages rise, more people are dragged annually into self-assessment. Since its inception in 2013, 370,000 more families have to fill in a self-assessment return.
I am very surprised that the House did not pick up at the time on the fact that the system completely blows away the independent status of taxation for couples. Even up to 1990, women were deemed to be the chattels of their husbands, and there was a single tax return. In 1990, that was thankfully blown away, having been overdue for a long time. I think the groundwork was laid by Geoffrey Howe and seen through by Lord Lamont. After that date, people were treated as they should be for tax: as individuals.
The system blows that away because one partner now needs to ask the other, “What do you earn, because I need to determine whether it is you or I who pays the high income child benefit tax charge?” The partner in receipt of the child benefit might not be the one paying the charge; it always falls on the higher earner. Whereas before there was decent independence and secrecy between partners should they so wish, that was blown away by the legislation, and I do not feel that could ever be right.
Subsequent tax legislation has also had an unusual and, I think, unforeseen impact, including, particularly, on buy-to-let property. At the start of my speech, I mentioned the concept of adjusted net income, which is income from PAYE, rents, dividends and whatever else one might receive. Changes to buy-to-let allowability of mortgage interest, however, have had an unforeseen impact. Years ago, rental income less expenses and mortgage interest would give a net figure, which would form the top end of the tax return and be part of the creation of the relevant net income. With the gradual restriction of the allowability of mortgage interest—I will not expand on whether that is right, wrong or indifferent—the tax return looks different. Net relevant income for rental purposes does not include the deduction for mortgage interest, which now comes at the bottom part of the tax return. Instantly, the net relevant income at the top part of the tax return is now bigger for many people with mortgage interest, even though the net effect for cash flow and everything else might be the same. There is now some relief for mortgage interest at the bottom part of the tax return, by way of a credit of tax.
I did not see the full shortcomings of that piece of legislation at the time, even though, at that Budget statement some years ago, I raised concerns about changing the whole deductibility regime, which is fundamental to tax. That legislation has caused another group of families, who are doing nothing particularly exotic, to be dragged into the high income child benefit tax charge, as their income has pitched into the £50,000-plus bracket because of the deductibility of mortgage interest, even though nothing has changed.
A real concern shared by all hon. Members in the Chamber is that of the Women Against State Pension Inequality Campaign. They have been active because they have an axe to grind and I think that many of us have sympathy with some of what they have to say. We are potentially building another problem for the future—thankfully, I might be long gone from this place before it has to be solved.
Earlier I described what people might do when they have a new baby. If they have earnings of more than £60,000, they might think, “I just can’t be bothered to fill in the form. I’m not going to get anything; why would I bother?” The CH2 form is not unreasonable or too complex—it is actually quite free flowing and easy to understand—but a lot of people do not bother at all.
The other choice they have, by filling in form CH2, is to take the child benefit and then pay it back annually through their self-assessment return, or to register for a nil award so that they are in receipt of child benefit but at nil value. That is really important for those who do not follow that route. They do not want the hassle of a self-assessment return, so they decide to do nothing. The partner in that relationship, who is perhaps not working, will not be building up a national insurance record, because if someone fills in form CH2 and decides not to take any child benefit, they will at least be crediting up a national insurance contribution under class 3. My concern is that people do not know that this is there for them and are saying, as many of us do, “I can’t be bothered to fill in another form. I don’t think I will get anything. I won’t do it.”
We are potentially building up a problem of people—let us be frank, it is probably predominantly women—who will find in the future that they do not have the national insurance record that they thought they had. When they get their DWP statement with details of the award they will receive with the new state pension some six months before retirement age, they will find it is rather less than they thought.
We have to ask ourselves why we have dragged 1.2 million families into the system—and that figure is rising, due to fiscal drag and the measures for buy-to-let property mortgage interest. It is worth mentioning the perversities in the whole tax calculation. I do not know how Parliament missed that. I was not here in 2013, but had I been I might have spotted it. It is an unusual situation, but when dealing with tax systems, I think it best to flex the edges to find out where the problems are.
This is an extreme case, but it is catered for on the gov.uk website: in 2019-20 a family with 10 children—there are not too many of those around—would be in receipt of £7,500 of child benefit. Anyone earning £50,000, including a self-employed person, would be in receipt of £7,500 in child benefit, but if they had the opportunity of a great new contract to get their income up to £60,000, under this system they would have to pay back that entire £7,500. In my view, tax lost—tax paid—and benefit lost are the same thing. What lands in someone’s bank account is the same thing, whether that is through losing benefit or paying more tax. In effect, therefore, for that extreme example of a family, there would be a 75% clawback charge, because they would pay back the £7,500 child benefit owing to that £10,000 in additional income.
That is not where the matter ends, of course. People who earn £50,000 are higher-rate taxpayers, paying 40% tax and, if employed, 2% national insurance. We therefore have the perversity, which I am sure is not always seen, of a 117% tax charge and benefit loss. For that extra £10,000, that taxpayer will actually be worse off by £11,700. There should not be such perversities in the tax system.
I like a debate to end with a solution, but there is no easy solution to this one—I grant the Financial Secretary that great problem. I would like to extend the penalty suspension to all, because I think HMRC has been rather obtuse about this one. If people start to do the right thing, past penalties should be suspended and, if they do the right thing for the following two years, those penalties should disappear.
The easier option would be to restore the universality of child benefit. Nothing is simpler than that—everyone gets it without means testing or complication—but the Government and the Treasury understandably want to claw back that benefit from people in receipt of higher income. A complicated solution—or, rather, a politically difficult one—would be to reduce the personal allowance for those with children. They would get their full child benefit but pay a little more in tax. At least that could be coded out—they need not worry about the self-assessment system—and for the PAYE taxpayer with simple affairs, things would be just as they are. However, that would be a difficult way to do it.
It would be simpler, perhaps, to make a higher universal child benefit payment, which this year is £20.70 for the first child and £13.70 for subsequent children, subject to the benefits cap. Any increased child benefit, however, should be made a taxable benefit. Therefore, through coding, the Government could claw back 20% from a basic rate taxpayer, and 40% from a 40% taxpayer. For those with complicated tax affairs, adding the layer of clawing back the high income child benefit tax charge is no great difficulty. Something similar happens already. The retired have a simple coding adjustment for private pensions to reflect the level of their state pension.
We need a new and elegant solution, and to learn the lesson that whenever Governments in future claw back benefit, they should not do it in this way, through the tax system. It has created bureaucracy and angst, and I am worried that normal, law-abiding taxpayers now feel that they have done something very wrong because of those levels of penalties. That is my appeal to the Financial Secretary.
The debate can go on until 7.30 pm. I am obliged to call the first of the Front-Bench spokespeople at no later than seven minutes past 7 o’clock. The guideline limits are five minutes for the SNP, five minutes for Her Majesty’s Opposition and 10 minutes for the Minister to respond. Mr Mackinlay will then have three minutes at the end to sum up the debate. Until 7.7 pm, therefore, we will still be in Back-Bench time. I see that Mr Jim Shannon wishes to contribute.
Thank you, Mr Hollobone. It is always a pleasure to serve under your chairmanship.
I thank Craig Mackinlay for setting the scene with such detail, informationally and correctly. I am here not because I feature in Westminster Hall so regularly but because the issue is important to me and my constituents. I deal with it regularly in my office.
The hon. Gentleman set the scene well with examples of what has happened to his constituents. I would mirror those examples, and I will express similar concerns. It is unfortunate that more Members are not present for the debate, but obviously there are enticements elsewhere and reasons for people’s attention to be committed to the main Chamber. That does not detract in any way from the importance of this issue. I am pleased, as always, to see the Minister in his place. We look forward to hearing his comprehensive response.
The child benefit payments issue is of great concern to many of my constituents. Although many might not qualify for good reason, I will give examples of those who probably should qualify but for the paperwork, the potential penalties for getting it wrong and then having to catch up. That applies not just to child benefit but to tax credits—people fill in a form, their circumstances change in the year and they find themselves owing money back. Tax credits are not the subject of this debate, of course, but I make that comment about what puts people off. When a system is going well, it is marvellous, but when it goes wrong, it can be a real stinker.
Child benefit makes a difference to many families in my constituency. From the outset, I must say that I am an advocate of the current threshold and the importance of having that system. I know of many women who gave up their jobs or went part-time to mind their child and therefore rely almost entirely on the wage of their partner. The weekly child benefit supplement helps with the day-to-day bills that need to be paid. Without that, households would simply not function. The Government might argue that that is not the purpose of the child benefit system, but I think that its purpose is to enable parents to look after their children in whatever way they feel is right.
I am concerned about some cases in which one partner is just over the threshold and has to start to do self-assessments. I know of a few cases in which couples earn well below the £99,000 that they could earn when taken together—for example, one partner on £50,000 and the other on £15,000—but decide to forfeit their child benefit. Over-cautious, and in fear and trepidation, they would rather that than face the hassle and possibly do the paperwork incorrectly. That is wrong—people losing the benefit rather than have the hassle. I am therefore keen to endorse what the hon. Member for South Thanet said and to seek ministerial guidance on how we can help such people.
Something is wrong with a system that sets out to help people genuinely, sincerely and honestly, but fails those who could qualify. How do we enable those people to fit into the system? Some might say that they can afford to live on what they have, but as they put it to me, “We are firmly middle class.” Over the past few years in this House, I have often said that one of the categories of people to suffer greatly in society, because of everything that has happened during recent times, is the lower middle class—the ones not far enough up to qualify. For that squeezed bunch of people, the child benefit system is there to help, but unfortunately it does not. One constituent said:
“we are firmly middle class. We will never be able to afford to pay all our bills and also help our children with buying a car, or tools for their trade, or books for university”— or student grants—
“so we attempt to save from child benefit so there is money for the child when they need it.”
They use that system with the clear and singular purpose of benefiting their children. That is an example from my office; the hon. Gentleman referred to similar examples, and I suspect that once I sit down, other hon. Members will do too. I fear that the self-assessment mechanism precludes their getting that money and, in the long term, that that disadvantages the child and the family. But that is not its purpose, so the system must improve.
HMRC issued around 97,500 penalty assessments to around 37,500 customers, amounting to almost £15 million. When people consider the penalties, the self-assessment and the amount of money, they must think, “I’m not going through that. I don’t want to get it wrong inadvertently.” People do not set out to get it wrong, but they start the process, get it wrong through no fault of their own and end up with a large bill. Those figures show that some people are paying very large bills. Although it is not the Government’s intention, people decide not to pursue their claim.
I believe there is a different way of ensuring that high earners can have access to what they are entitled to. People whom the Government say are entitled should apply. How do we help those who are entitled? Every year, the Government tell us that so much money is returned to the Treasury because it is not taken up. It could be all kinds of benefits, not just child benefit: attendance allowance, personal independence payments, employment and support allowance, community care grants or pension credit—all the things that people may qualify for. If the money is not used, it goes back. I always say to the person, “You know something? You’ve worked hard all your days. You’ve paid your national insurance stamp; you’ve paid your tax every year; you’re a contributor to society. If you qualify for something, for goodness’ sake, apply for it.” It is important that we encourage people to do that.
Some people feel that they need to see an accountant. That is fine for those who have an accountant for their business. For those who are employed with a set wage and cautious of the penalty notices, if they make overtures to an accountant to see what they can do for them, there is a cost factor that can be off-putting. People are looking at whether they can be better off; they do not want to pay a cost for something that may lead to nothing. What has been done to enable those who would qualify to receive their money?
I will conclude, and well in advance of the end of the speaking time that you indicated, Mr Hollobone. Will the Minister indicate how we can streamline the process, bearing in mind that families are entitled to this benefit? I see families who are entitled to something but do not pursue it because they are uncertain, cautious or worried that it may disadvantage them somewhere down the line. While the money may not necessarily go on nappies or similar, it does go to providing for children, which is what the Government are determined to do.
The Minister has committed to ensuring that everyone who wants the benefit can apply for it, but in my constituency, that of the hon. Member for South Thanet and the constituencies of other hon. Members, there are many examples of people who do not pursue it because of the uncertainty. The current system is overly onerous and off-putting. I believe we can and must do better.
It is a pleasure to serve with you in the chair, Mr Hollobone. I thank Craig Mackinlay for bringing this debate on an important issue that highlights a real gap between the Government’s intention and their delivery, which is failing a lot of people. He laid out the limitations of the policy, which was headline-grabbing but has proven to be almost entirely ineffective and bureaucratic. It takes a benefit that ought to be one of the simplest—child benefit, paid to help children as an important universal benefit—and whittles away at it until it becomes a complex bureaucratic system that people will find difficult to access.
Organisations such as the Women’s Budget Group have long argued that the UK Government’s approach to balancing the books is gendered and does not stand up to the most rudimental scrutiny from an equality perspective. This policy is a key example of that. Budgets and spending reviews come and go, but we are yet to see any real strategic direction in tackling gender inequality. The hon. Member for South Thanet mentioned that it removes the independence of individuals in the tax system. In doing so, it sets the scene for universal credit, which also removes independence by treating people as a household rather than individuals, and damages women’s financial ability in a relationship. In many cases, women are left in the grips of financial coercive control, and they do not have the financial ability to get out of an abusive relationship.
Looking at this policy, it is no surprise that women, particularly mothers, are disproportionately affected. The UK Government have failed to make it clear to stay-at-home mums that even if they are not eligible to receive child benefit, they should still claim it and subsequently fill in a self-assessment tax return and pay the money back, in order to receive those national insurance contributions. This is not an intuitive process; in fact, it is quite the opposite. Self-assessment is complex and stressful. As Jim Shannon said, people get lost in the complexity of the system. They are worried about getting it wrong, and they might have to get accountants involved. That should not be the case for something as simple and basic as child benefit—the money should follow the child.
When I was elected, I knew vaguely about the child benefit process. I panicked, phoned up and cancelled the child benefit I had previously received when I was a local government councillor earning considerably less than I do now. If MPs are led to panic, what chance does anyone else have? It is absurdly convoluted and beyond the reasonable expectation that most people would have of such a system. It is a very concerning prospect that this policy could store up significant problems for the future, as the hon. Member for South Thanet set out. Many of my constituents are suffering now from previous derelictions of duty in long-term pension planning. We have all heard horror stories of the Women Against State Pension Inequality Campaign; women were not told that their pensions had changed until 14 years after the policy was introduced. There is every chance that a new generation of women will run into similar problems.
The child benefit form that is issued to parents is not particularly simple. It includes a statement that claiming child benefit can help to protect someone’s state pension, but it is not clear enough what that actually means and what the future implications will be. The Treasury believes that 200,000 parents may be affected. It fails to make it clear that a non-working parent—usually the mother—should be the one to fill out the benefit form in order to build up those credits. It has been suggested that an easy short-term fix would be to change the form, but we need to look at long-term solutions. Would the Minister consider a review of the policy in the round, to actively look for cases of error where people may have unknowingly built up a gap in their pension contributions? We need to alert those affected. The Government have a duty to make sure that people get the money back, because they have not been clear enough.
It has been suggested that a claim should be triggered automatically when a birth is registered; that may be worth exploring in more detail. Will the Minister make an interim change to the wording on the form, and order a longer term review of this whole bourach of a process? Most parents will say that when they have a newborn baby in their arms, the last thing they want to do is fill in an extensive form about incomes. Of course, incomes will change—sometimes dramatically—over the course of a child’s life. Those kinds of things have happened again and again, and now we have the effect on the economy of the chaos of Brexit coming in.
As I mentioned, it is a distressing thought, but the reality for many women is that their partners seek to exercise financial control over them. That small amount of money can be incredibly important to a woman making plans to leave an abusive relationship, so child benefit must not be removed by making it more difficult to access. The higher earning person in that household—often the father—may say, “Don’t you worry about it; you stay at home and I’ll earn the money. You don’t need to worry about this”, which removes the woman’s chance of being financially independent. The notion that a woman has to know her partner’s intimate financial details is quite unusual. My husband and I have separate bank accounts. I have no idea what he earns, but I was expected to phone up and give intimate details to someone over the phone. That will be all the more difficult for a woman in a situation of financial coercive control, and it will give the male parent a huge amount of control.
The Minister must look at this in significant detail. He must try to assess the issues and put them right before we end up with another situation like that of the WASPI women. We cannot have another situation in which women are disproportionately affected by an ill-thought-through Government policy from Westminster.
It is a pleasure to speak in this debate with you in the Chair, Mr Hollobone. I congratulate Craig Mackinlay on securing the debate, which has been very good and detailed. I will not repeat all the points he made, or indeed all those made by the hon. Members for Strangford (Jim Shannon) and for Glasgow Central (Alison Thewliss), because I agree with very many of them, but I want to underline some of the questions that I hope the Minister is able to answer, or at least some of the issues that his Department needs strenuously to take on board.
As was rightly mentioned, new research on the high-income child benefit charge indicates that much larger numbers of people are being drawn into the system than were initially. The Institute for Fiscal Studies indicated that since the £50,000 threshold has not shifted upwards, about 36% more people—370,000 more families— will lose child benefit in 2019-20 than in 2013-14. The system is now also interacting with changed tax systems for other sources of income, such as the system for those who eventually rely on rental income.
The Labour party has consistently objected to the removal of the universal nature of child benefit. Clearly, however, there are also practical reasons why the high-income charge is unfit. It has added unnecessary complications, many of which we have already heard about, and it has had a significant impact by requiring up to around half a million people to engage in self-assessment, which is not an easy process.
The hon. Member for South Thanet mentioned that about 6,000 cases of supposed over-claiming of child benefit have been written off by HMRC, which has handed out refunds of about £1.8 million. It would be helpful to hear from the Minister what work is being undertaken to ensure that all those who might benefit from some kind of refund of additional charges levied because of alleged over-claiming—I am not sure I like that term, to be honest—are aware of that.
I hope the Minister also deals with the suggestion the hon. Gentleman rightly made that the real-time information system could proactively be used to try to identify those who might be in danger of falling into this kind of trap. I am concerned to see yet again what appears to be a lack of co-ordination on what are often viewed as Department for Work and Pensions responsibilities but in practice are delivered by HMRC or in some other way by the Treasury. I was concerned just before the recess that the Minister’s Department did not seem to want to take responsibility for the clawing back of alleged overpayments of working tax credit from universal credit. It said that was a DWP issue. It is not; it is a Treasury issue. Yet again, we have a lack of co-ordination. That needs to be dealt with.
The high-income charge increases the complexity of the already incredibly complex tax system HMRC is expected to deal with, and having to deal with appeals arising from the charge increases the enormous burden that HMRC staff already face. We all know that HMRC has been cut more than any other European nation’s tax department aside from that of Greece, which I suspect is not an example we would want to follow. We see the burden on HMRC staff increasing all the time, not least given the prospect of a no-deal Brexit—we could hardly have ignored that at the beginning of the debate, given the noise from outside. Will the Minister say what resource HMRC is being given to deal with that?
I share the concerns about the impact of the high-income charge on families with sole earners, which was rightly emphasised by the hon. Member for Strangford and others. I also share the concerns about the impact of the charge on independence. It is part of what we might call a triple whammy of a whole range of measures, including what we have seen in relation to universal credit.
This debate has echoed many of the issues with childcare tax credits, where there has been a lot of confusion about things such as the relationship between parents’ incomes and who loses out as a result. The hon. Gentleman described how families often use child benefit to create an asset for their children. That has become increasingly important and relevant, as of course we no longer have the child trust fund.
It is important that the Minister explains what is being done to deal with the long-term problem of people inadvertently becoming unable to accrue state pension credits because they do not qualify for national insurance contributions or indicate that they want to be part of the system. Obviously, that disproportionately discriminates against women. There is already a huge gender pension gap. What are the Government doing to ensure that those who might be caught by this issue are not? I absolutely agree, having been through that process myself—I suppose I should declare an interest in that regard—that its impact is not obvious. There is no clear indication that it will result in a big reduction in a person’s retirement income.
It would also be useful to understand any possible disincentive effects of this measure. I am not sure that the case the hon. Member for South Thanet mentioned is as unlikely as all that. I remember from my childhood a family up the road who suddenly, very sadly, dropped down to a sole earner. They had nine children, and the father, as the sole earner, had to bring them up. What will the impact be in such cases if there is suddenly this kind of cliff edge? We have seen the impact of cliff edges with the overall family benefit cap. We are in danger of replicating that here.
I hope the Minister answers those questions. Obviously, I hope the whole high-income child benefit charge is abandoned. I do not expect him to make quite as dramatic an announcement here, but I hope he rules out any reduction in the availability of other universal benefits, given the kinds of issues we have discussed and the impact on equity.
It is a great pleasure to serve in this reconvened Parliament under your chairmanship, Mr Hollobone. I thank my hon. Friend Craig Mackinlay very much for calling this debate and drawing attention to this important issue, and for his thought-provoking and expert speech, which very much reflected his professional experience as well as his political commitments. I very much welcome that. He raised a lot of issues, and a wide range of issues were raised by the hon. Members for Strangford (Jim Shannon), for Glasgow Central (Alison Thewliss) and for Oxford East (Anneliese Dodds). I will come to all those. Let me address some of them in my opening remarks and then come to the specific questions that were raised.
As you will know, Mr Hollobone, child benefit was introduced in 1977. It has always been, and it remains, a universal benefit payable to individuals who are responsible for what is referred to as a qualifying child or children. Before 2013, there had been significant growth in the use of the benefit—rightly and importantly so; of course, that is why benefits exist—but it was recognised that, at a time of austerity, there was an anomaly, in that more than £1 billion a year was being spent in child benefit on higher-rate taxpayers. That was felt to be not merely imprudent from a financial standpoint but morally problematic. It would mean, as it were, taxing working people on low incomes to pay for the child benefit of those who earned considerably more.
If it is true that, as the hon. Member for Oxford East said, it is now Labour policy to remove the high-income child benefit charge—she was perfectly clear about it, so I think it is true, but she is welcome to correct me if it is not—the Labour party needs to ask itself whether it thinks it appropriate to tax the wider population, including working people on low incomes, to pay the child benefit of those who earn considerably more. We also note that the cost to the Exchequer of such a policy is of the order of £1 billion to £1.5 billion.
I am grateful to the Minister for giving away. He is well aware that we opposed the measure at the time, as we did many other elements of the Government’s programme. We also criticised the tax cuts given at the same time to the highest earners and to profitable corporations, which in their magnitude over time were more substantial than what we are talking about now.
That is an ingenious attempt to link two issues that, in and of themselves, are not connected. One can have a policy on high income tax earners and the payment of child benefit to them and one can have an entirely separate policy about other aspects of the tax system. The question remains whether it is morally appropriate to give the benefit to those people, and the judgment in 2013 was that it was not the right thing to do. That was an important consideration.
If the hon. Lady is concerned about the wider picture, I remind her that—I think I am right in saying this—the top 1% of taxpayers pay a higher percentage of tax now than at any other point in our history.
I am keen to press on. If the hon. Lady wants to make another intervention, we will lose time that I can use to respond to other questions.
The judgment made in 2013 was that it was appropriate to claw back some of the money paid to people on higher incomes and that everyone should make a fair contribution to removing the deficit while supporting those on the lowest incomes. I think that was the right judgment. Of course, for a minority of claimants where either they or their partner earn more than £50,000 in adjusted net income, there is a requirement to pay the tax charge or to opt out of receiving child benefit payments and therefore not pay the charge.
It is a fair criticism, made eloquently by my hon. Friend the Member for South Thanet and others from across the House, that the charge does not take into account overall household incomes, so it is possible—and it does happen—that a single parent earning more than £50,000 is liable to the charge while a couple each earning up to £50,000 is not. That is because, as he said, the charge is a tax, calculated in accordance with the principles of individual taxation at the individual level alongside other tax policy. Here we have one of those difficult decisions for the Government about what is the right thing to do. The judgment made in 2013 was that it was better to take that approach than to base a charge on household incomes, because that would require HMRC to assess annually both household composition and the incomes of everyone in the 8 million or so households eligible for child benefit, which would effectively introduce a new means test, creating a substantial administrative burden on both the state and families. That is the dilemma.
The effect of the charge is to introduce a high marginal tax rate. That is an unattractive aspect of the policy; we should be clear about that. If I may say so, it is not a salutary lesson in how not to withdraw a benefit, because the alternatives of not levying the charge at all or levying it on a cliff edge rather than by gradual withdrawal are worse. It is open to others to take the view that one of the alternatives is better, and my hon. Friend may do so, but not subject to the fiscal constraints in which we have operated.
A series of questions were raised about HMRC communications. As my hon. Friend recognised, the Revenue and Customs took considerable steps to raise awareness of the higher income child benefit charge. It wrote to about 800,000 affected families when the charge was introduced. It also ran a high-profile advertising media campaign and included a prominent message about the charge in 2 million letters to pay-as-you-earn-only higher rate taxpayers. There was a considerable communication process.
Today, to respond to the question from the hon. Member for Strangford, information on the charge is included in packs for new parents telling them how to claim child benefit. The front page of the child benefit application form includes a prominent message about the charge to help people make a decision on whether they should claim and be paid child benefit, about the importance of claiming even if they do not receive payments, and about the important issue of eligibility, which was rightly highlighted in the debate. Guidelines are available online formally through gov.uk and through innumerable organisations and groups.
As my hon. Friend the Member for South Thanet mentioned, individuals who pay the charge need to make a self-assessment tax return and may face a failure to notify penalty if they do not. I think he will know that HMRC announced a review of cases where a failure to notify penalty was issued for three tax years. It reviewed 35,000 cases and responded by reviewing the amount for over 6,000 people.
There are many other points to cover in the short time that remains. My hon. Friend said that 500,000 people have been forced into self-assessment. I am happy to write to him on that. As he will be aware, the current number paying the charge through tax returns is 293,000. Of course, there are some 40 million people in pay-as-you-earn. He also said that the charge has dragged 1.2 million people into the system. I am not quite sure about that, but if he wants to contact me, I will be happy to assist him further.
The hon. Member for Glasgow Central said that the charge is a gendered policy. I do not think that is true at all, and many other aspects of Government policy do not reflect anything like that position, as she will be aware. For example, there is extensive work in supporting women as entrepreneurs and women in business.
I really cannot; I have two seconds left.
The hon. Member for Oxford East mentioned fiscal drag. That is an important issue, but I do not think she is right that the charge has removed the universal nature of child benefit; it merely allows for a charge against it.
I am delighted to have the final say. I thank hon. Members who attended the debate. There were contributions from Jim Shannon, as ever, as well as the hon. Members for Glasgow Central (Alison Thewliss) and for Oxford East (Annelise Dodds). We spar regularly on tax matters across whichever Chamber we are in, but I think we are broadly in agreement that the system is complex, that it could have been made easier and that there are problems that need to be solved.
I am pleased to receive a degree of assurance from the Financial Secretary to the Treasury. He accepted that the charge was a measure of its time, when urgent measures were needed to respond to the state of the country’s finances. It has not been part of my argument that such a clawback should not exist. My observation has been that, if we are to have methods of clawback, we need to design systems that are more elegant than this one. I hope he will pass on to HMRC my issues regarding the penalty regime. Perhaps this can be the last of it, with people made aware that, yes, if they do wrong in the future, a penalty regime may apply. However, I would like to see a softer touch, given the modest amounts involved, for those stuck in cases at the moment.
Question put and agreed to.
That this House
has considered the high income child benefit charge.