Is child benefit reform a backdoor crackdown on tax dodging?

You will have read a fair bit about the child benefit changes by now. We’ll be looking at them again in the magazine this week (out on Friday).

But one aspect of it keeps striking me as slightly odd: the number of people that everyone says will now have to fill in tax self-assessment forms as a result of the change. According to the Institute for Fiscal Studies (IFS), the total number of families affected will be 1,134,000 (820,000 will lose all their benefit and 320,000 will lose part of it). Of those, the IFS says, something in the region of 500,000 families will now have to go through the “administrative complexities” of self assessment. Others put it higher. 

But here’s the thing: I can’t see how that many people can be getting away with not filling in a self-assessment form in the first place. You have to fill in a self-assessment form by law if you are self employed, if you earn over £100,000, if you are a company director, or if you are a Lloyd’s name or member.

It is also the case that all income is taxable. If you earn £50,000 a year, you have already used up any income allowances you might have, so every penny from any other source attracts tax. Any income from your bank accounts (even the 34p from the miserable interest rate there might be on your current account) is taxable. Any income from investments held outside an Individual Savings Account (Isa) or SIPP (Self-Invested Personal Pension) is taxable. Any income from property is taxable.

It seems amazing, surely, that there could be 500,000 people in the UK with earnings between £50,000 and £100,000 earning not one penny in non-PAYE income.

Now it is possible to be earning interest, property or dividend income and – as long as it is less than £10,000 a year – to have it taxed somehow via your tax code, rather than via self assessment. But I have no idea how this works and I have never ever heard it mentioned by anyone (except for HMRC here). And if you think self assessment is an “administrative complexity” just think about the nightmare it would be trying to adjust your tax code every year to take into account changing interest payments and dividend fluctuations.

My point is this: there are a huge number of people in the UK who are higher-rate tax payers but who, intentionally or not, are evading higher-rate tax on their non-PAYE income by not declaring it on a self assessment form.

The changes to child benefit payments have the interesting side effect of making them either give up their benefit completely, or bring their other income into the net via self assessment. The general opinion is that the changes are a shambolic disaster. But look at it like this and they are devilishly clever. I’m impressed.