UK Government Accused Over Tax Credit Treatment

by Robert Lee, Tax-News.com, London

22 February 2002

The UK Government has clashed with the Office for National Statistics (ONS) over the treatment of tax credits announced by Chancellor Gordon Brown in his November pre-budget statement.

In April, the Chancellor plans to introduce a system of new tax credits in order to simplify the distribution of benefits to the country's poorest citizens. These are set to include a child tax credit and a new working tax credit. However, the Government and the ONS have fallen out over the treatment of the credits in terms of assessment of public spending.

The Government wants to classify the credits as effective tax cuts, rather than as social security spending, when they are introduced. However, the ONS has pointed out that this allows it to claim that it has reduced the tax burden in the UK, while actually not cutting taxes at all. According to reports, if all of the forthcoming tax credits are categorised in this way, £4 billion of government spending could be reclassified as tax repayments, thus seemingly reducing the tax burden as a proportion of GDP by around 0.5%.

The Office for National Statistics outlined a compromise on Wednesday, in a move closer to the position that the Government has taken during previous discussions on the subject of classification. It suggested that the tax credits should be: 'classified as negative taxation where credits are less than the tax liability of the household, and as public expenditure where credits exceed the liability.'

If the Government follows this approach - which experts feel is unlikely - it would still be able to reclassify an estimated £1 billion of public spending as tax cuts.

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