The controversial plan to cut tax credits has been scrapped as the government looks to make up the shortfall through increased tax revenue and additional borrowing.
It was expected that tax credits would be phased out in order to cover £4.4bn in costs to the UK.
However, in today’s (25 November) Autumn Statement and Spending Review, chancellor George Osborne revealed the planned changes to tax credits would be abandoned.
This means the tax credit taper rate and thresholds will remain unchanged.
“The government has had representations that these changes to tax credits should be phased in, and listened to the concerns, heard them and understood them,” he said.
“Because the government has announced today an improvement in the public finances, the simplest thing to do is not to phase these changes in, but to avoid them altogether.”
Mr Osborne added that tax credits are being phased out anyway as the government replaces it with Universal Credit, which is set to be introduced in 2018.
Frank Strachan, head of tax services at Edwin Coe said Osborne’s announcement was a remarkable U-Turn”.
“Having had the Bill defeated by the House of Lords and presumably having seen the level of public concerns raised by the proposed cuts, George Osborne has listened and left the current tax credit system untouched until it is phased out in favour of universal credit.”
George Bull, senior tax partner at Baker Tilly, said: “The political noise surrounding this has of course been deafening with Osborne trying not to use the phrase ‘U-turn’ when he was making ‘U-turn’.
“My reading is that the government, faced with widespread public opposition and the House of Lords defeat, realised that it had two choices:
“Either to tough it out, risking further public disapproval as well as a modest constitutional crisis in the House of Lords; or make a ‘big thing’ out of doing what many regard as ‘the right thing’.”
Bull argued that Osborne has chosen the latter course because today’s revisions to the public finances give him the wiggle room to do so, and because tax credits are being phased out anyway as the government introduces universal credit.
Ray McCann, partner at New Quadrant Partners, said the abandonment of the tax credit cuts will come as a surprise as many expected it to be moderated.
“Nevertheless there remain substantial cuts in the social welfare budget so as always, with such statements, the devil will be in the detail.”
He added: “There are optimistic predictions of tax revenues from a growing economy and the usual clamping down on tax avoidance and evasion we have become accustomed to.”
Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, said: “The Chancellor managed to deliver an Autumn Statement that was filled with good news, but given the lack of wiggle-room he has, it is concerning that much of the spending is based on the assumption of consistently strong growth figures, especially given the downgrade in world growth forecasts by the Office for Budget Responsibility.
“The improved public finance figures have dug the Chancellor out of a big hole regarding tax credits, he’s able to wait for them to phased out through the introduction of universal credit.
“He will be relieved that this avoids another battle with the House of Lords.”
katherine.denham@ft.com
