Darling Announces Plans To Mitigate Impact Of 10p Tax Rate Removal

by Jason Gorringe, for LawAndTax-News.com, London

24 April 2008

Commenting on Tuesday on the controversy surrounding the forthcoming removal of the 10p lower personal income tax rate, which is expected to have a significant adverse impact on lower income taxpayers unable to receive compensatory benefits via the UK's tax credit regime, the Association of Chartered Certified Accountants suggested, somewhat presciently, as it turned out, that the planned move was not an irreversible one.

Chas Roy Chowdhury, head of taxation at ACCA, expressed the belief that a U-turn is possible, arguing that:

“The Chancellor can change his mind about this issue if he chooses to because reinstatement would not actually be an Exchequer expense."

He added:

“The Government’s current decision has a knock-on effect for personal taxes, tax credits and benefits to the tune of GBP4.6bn for the next three years, according to calculations from the CBI last year in response to 2007’s Budget.”

On Wednesday, in a letter to Chairman of the Treasury Select Committee John McFall, Chancellor Alistair Darling unveiled a package of measures designed to effectively erase the negative impact of the 10p rate's abolition on affected groups, promising that the provisions would be effective from the start of this financial year.

Darling stated in the letter that:

"I said at the weekend that I wanted to return at the Pre-Budget Report and at the Budget to the issue of helping low-income families affected by the personal tax changes announced in 2007."

"On Monday, the Chief Secretary (Yvette Cooper) confirmed that we were taking forward work to look at how we can help families without children alongside the next stage of work to tackle child poverty."

"I therefore welcome the Treasury Committee's decision - announced yesterday - to hold an inquiry into the effect of Budget measures on low-income households. I thought it would be helpful to let you know of the work the Treasury has under way in this area."

He continued:

"The 10p rate was introduced in 1999 as a transitional measure to help low income households. However, as the tax credits system became more developed and more generous, we were better able to target resources on low-income households."

"That enabled us in the Budget in 2007 to simplify the tax system by removing the 10p starting rate of income tax and reducing the basic rate of income tax from 22p to 20p."

The letter went on to add that:

"The removal of the 10p starting rate of income tax will be legislated for in this year's Finance Bill. There are better ways of achieving the purpose of improving the position of those in poverty and to make sure in every decision we take that we help those on low incomes."

"The main two groups we now want to do more to help are, first, other low paid workers without children, and, second, pensioners under 65. We have been actively looking at two ways to help these groups - direct payments or changes to the tax credit system. "

"As I have said, our report and supporting papers will be published in time for the Pre-Budget Report and will focus on the administrative practicalities, costings and speed of implementation."

"For pensioners aged 60-64, whose incomes tend to be more stable, we have put in hand work to see if those households who have lost out from the removal of the 10p starting rate of income tax can be helped through the mechanism that already exists to pay the Winter Fuel Allowance."

"As a sign of the Government's intent, we do not wish to wait unnecessarily until November. Whatever conclusions we come to, all the changes will be backdated to the start of this financial year."

The Chancellor concluded that:

"For other low-paid families currently outside the working tax credit system, while we will examine in our review all practical propositions, our focus is on potential changes to the tax credits system to allow the average losses from the removal of the 10p starting rate of income tax to be offset."

The move is likely to be welcomed by those in the affected groups, and led Labour MP for Birkenhead, and former Minister of Welfare Reform, Frank Field to call off a planned backbench rebellion in a vote to be held on Monday.

However, it has been roundly mocked by the opposition Conservative Party, who have accused both Mr Darling and Prime Minister, Gordon Brown of executing a U-turn on the matter in the face of public criticism.

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