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In a new report, the Low Incomes Tax Reform Group (LITRG) has called for greater clarity around how couples are dealt with in the tax and tax credits systems.

Background

Deciding when and whether two individuals become a couple or stop being a couple can be difficult – and indeed the two individuals may not always agree. Even if they can agree, the authorities may not agree with them, leading in the worst cases to protracted compliance investigations.

The tax and benefit systems in the UK use various tests to determine ‘couple status’ – but the test can vary depending on which tax or benefit is being examined. The LITRG report examines the issues and makes recommendations including a call for more and better guidance from the departments concerned.

The report also examines aspects of the tax and welfare systems where a definition of ‘couple’ that differs from the norm can lead to unfairness – such as the restriction of bereavement benefits to families where the parents happened to be married or civil partners, when the children of unmarried couples may be just as much in need of help from the State following the loss of one parent.

Main recommendations

• Improved guidance from both HM Revenue & Customs (HMRC) and the Department for Work and Pensions (DWP);
• A wide-ranging review of legislation and practice to achieve consistency in the definition and treatment of couples for different tax and benefit purposes;
• The extension of bereavement support to parents who lose a de facto spouse.

Tax and benefits systems struggle to keep up with changes in society

Society has changed dramatically over the last few decades. There are now many couples who are not married (nor in a civil partnership), but whose relationships are equally committed. Unfortunately, the UK tax and benefits systems have struggled to keep up with this change.

Complexity

Couples are faced with a high degree of complexity in the tax system. For example, in the case of a married couple recently separated, there are separate rules that apply to them for eligibility for the new marriage allowance, how long they can continue to transfer assets between them free of capital gains tax and how long transfers between them are exempt from inheritance tax. It may also be difficult for them to “prove” a date of separation to determine when they could make separate claims for tax credits.

Complexity can lead to mistakes on claims forms and this can have devastating financial consequences. Although two individuals may be clear as to whether or not they are a couple, the authorities may not agree with them and may decide to investigate their status, a compliance nightmare which is exacerbated by the inadequacy of official information accessible to ordinary taxpayers.

Proposal for a ‘registration’ process

The LITRG believes it is possible to have some formal ‘registration’ process with HMRC and the DWP to make an official declaration that a couple has been formed (or separated) to provide some certainty for couples where two individuals have made a clear decision to enter into (or separate from) a committed relationship with each other, without forming a marriage or civil partnership. [To be clear, LITRG’s proposed ‘registration’ process for a couple to declare their status is based on a couple declaring their status for the purposes of the law as it currently stands, rather than for, say, an unmarried couple to be treated as if they were married.]

Bereavement

LITRG highlights bereavement support as an area of real concern. The non-availability of bereavement support for couples who are unmarried or not in a civil partnership on the death of their partner is deeply unfair, affecting, as it does, the children of the couple who have no control over their parents’ marital status. This should be rectified by extending the benefit to those parents who lose a de facto spouse.

Need for clarity

The tax position for couples is already confusing and disjointed; on future changes in legislation, LITRG recommends that the Government remains conscious of avoiding further complexity.

Useful link

LITRG report: Couples in the tax and related welfare systems – a call for greater clarity