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A difficult balancing act for any government is to make cuts in HMRC without killing the goose that is laying the golden eggs. LITRG reports on yesterday’s Spending Review.

Protection of the vulnerable

The Chancellor said in Parliament yesterday that one of his priorities was the protection of the vulnerable. So we have looked at the proposed settlement for HMRC and tried to assess the impact upon the most vulnerable of their “customers”.

It was interesting that there was no announcement of the “giving” parts of HMRC (for example, child benefit and tax credits) being transferred across to the Department for Work and Pensions. We think that was a wise decision as such mergers/transfers are costly and over time both will be absorbed into the Universal Credit.

But the government did decide to give HMRC more funds in order to collect more. There are two sides to this coin. HMRC provide frontline help to millions of their customers who need it to get their tax and tax credits affairs correct. Cuts in support can therefore have a dramatic effect on the most vulnerable customers.

Further changes to tax credits (and child benefit)

The withdrawal of child benefit from households with a higher rate taxpayer, effective from January 2013, has enabled the government to increase further the child element of child tax credit:

• An extra £30 in 2011/12
• A further £50 in 2012/13

Against that:

• The basic element of working tax credit (WTC) will be frozen at £1,920 per annum for the next three years;
• Similarly, the 30-hour element will be frozen at £790 per annum for the same period;
• Thereafter, both those elements will be raised annually by the increase in the Consumer Prices Index (CPI), not the higher measure of the Retail Prices index (RPI) that has been used hitherto;
• Up to now, couples with children have been able to qualify for WTC if at least one of them works 16 hours a week or more, but from April 2012 it will be necessary for them to work at least 24 hours a week between them, with one working at least 16 hours;
• And the childcare tax credit, which is part of the WTC, will from April 2011 provide support to the extent of 70% of eligible childcare costs, not 80% as has been the case since 2006.

With the gradual introduction of the Universal Credit, the Government have made plain their intention to ensure that work really does pay more than staying on benefits. But it is hard to see how this can be achieved while the principal in-work welfare benefit, WTC, is being subjected to such reductions.

Finally on tax credits, plans were announced to link the proposed new PAYE system, whereby a central computer can keep a real time record of changes in individuals’ earnings, to tax credits, thereby relieving claimants in PAYE of the burden of constantly reporting such changes to HMRC. We see a major obstacle in that the measurement of income for tax and tax credits purposes, while following a similar pattern, are subtly different in a number of detailed ways. We do not see, therefore, that it will be possible to update tax credits income simply by means of a link to a centralised PAYE database. Careful manual intervention will be needed to reconcile the two sets of records, tax and tax credits.

It was unhelpful to the general simplification of PAYE that the child benefit claw-back from higher rate taxpayers is to be done via PAYE rather than via the child tax credit alternative option.

The Chancellor said that he did not propose to make any further cutbacks to child benefit.

Back office savings

HMRC will save a third in “corporate services and back office support functions”, will “improve and tailor services for taxpayers” whilst achieving “efficiency savings of 25% through enhanced use of technology” all whilst “rationalising the HMRC estate”.

Hidden in these words may be reduced services for the vulnerable. We could see the end of:

1. Home visits by HMRC
2. Enquiry centres
3. Hard copy leaflets
4. High profile educational campaigns (unless with a fraud message).

We would also anticipate reduced staff training, an increase to the centralisation of functions reliant on computerisation and more “one size fits all” approaches (which are usually disadvantageous to the vulnerable). We can also see that thousands of job losses are implicit in the figures. We expect these job losses to be at the “helping the public” end of the spectrum rather than the “chasing the cheats” roles.

Error and fraud

We have already noted in our earlier article  that we believe that the linking of error and fraud is unhelpful and will inevitably portray vulnerable people who make innocent errors as blameworthy. We think the targets set for fraud/error/avoidance/evasion collections are too optimistic and this may drive a target culture back into HMRC which may put the unrepresented at a disadvantage if they are not aware of either the law or their rights.

Similarly we see that more debt collection is to be passed to the private sector which operates on a commission basis. Not calculated to protect the most vulnerable customers.

What next?

We are promised a more detailed plan in the next few weeks which may put a little flesh on the bare bones that we have at the moment. The jury is out.

Useful links

Further information about the Spending Review can be found on the HM Treasury website.