Redefine 'couple' for tax purposes, HMRC told

Couples who are not married nor in a civil partnership but that are equally committed risk falling through the cracks of the tax system, due to its failure to define them consistently.

Such is the headline finding of a report from the Low Incomes Tax Reform Group, which says the UK’s tax and benefits system has “struggled to keep up” with the modern couple.

The LITRG idealises about a “single, consistent and clear definition of couple status” to cut complexity, quash anomalies and remove unfairness for unmarried, non-civil partner couples.

The recently introduced Marriage Couple Allowance for example, which can cut tax bills for some lower paid contractors, is reserved for couples who have legal proof of their wedding.

Couples who live together as if married, or as civil partners, are treated in the same way as married couples for other benefits but not the MCA. Even for those it can help; the allowance is “untidy”.

“Only a proportion of the MCA is available in the year of marriage while the full allowance is available in the year of separation,” added the LITRG, calling for a review of all ‘couple’ tax laws.

Unlike the MCA, there is no requirement of the couple having to live together in the Settlement Provisions, formerly S660, which caught IT contractor company Arctic Systems.

Statements and guidance from the tax authority about the rules are ”not easy for the lay reader to follow” and although there is some basic information on GOV.UK, it is “scant”.

“There is little helpful information on these income tax provisions,” said the LITRG, reflecting on its findings of s624 of ITTOIA.

“It would be difficult for the taxpayer to know that the rules might apply at all, let alone how they might make a decision to include such income on their tax return.”

As a result, the group’s report concludes there can be “little certainty that couples are applying it [the settlement legislation] in a similar manner to each other, not least because “even simple cases are open to interpretation.”

At Chapter 4.1.3, the LITRG’s report adds: “The application of the legislation appears uncertain.

“While the guidance clearly points to relationships other than married couples being potential targets, and indeed that might be read into the legislation, practically it would be difficult for a taxpayer or indeed their adviser to identify all such circumstances – and it would seem that HMRC might face even more difficulties.”

In addition, given that the “widely drawn” 1930s legislation ceases to apply to married couples once a separation takes place, there is, “as with other provisions,” the possibility of a dispute in connection with the date of separation, the group said.

As to those ‘other provisions’, the report points to tax credit regulations for those who are married but recently separated. This is just one of many tax complexities it says that such couples face.  

"There are separate rules that apply to them for eligibility for the new marriage allowance; how long they can continue to transfer assets between them free of capital gains tax and how long transfers between them are exempt from inheritance tax," said Anthony Thomas, chairman of the LITRG.

"It may also be difficult for them to ‘prove’ a date of separation to determine when they could make separate claims for tax credits.”

He also took issue with the “non-availability of bereavement support” for unmarried non-civil partner couples on the death of their partner.

“[This is] deeply unfair, affecting, as it does, the children of the couple who have no control over their parents’ marital status,” said Mr Thomas. “This should be rectified”.

Except for this immediate change (and the legislative review), better guidance from the taxman was hailed as the answer. But the LITRG also acknowledges the complexity that his guidance would need to cut through in order to succeed.

And the current problem is that such complexity can lead to mistakes on claims forms, which can have “devastating financial consequences” for couples.

“Although two individuals may be clear as to whether or not they are a couple, the authorities may not agree with them and may decide to investigate their status,”  added Mr Thomas .

“[For the couple, this represents] a compliance nightmare which is exacerbated by the inadequacy of official information accessible to ordinary taxpayers.”

The group is pressing from for some sort of formal ‘registration’ process with HM Revenue & Customs and the Department for Work and Pensions.

The process would allow taxpayers to make an official declaration that they have formed (or separated) a couple, and have decided to enter into (or separate from) a committed relationship with each other, without forming a marriage or civil partnership.