Childcare and the tax system - fascinating thread title! - but I'm genuinely interested

[SardineQueen]

I've recently become self employed and have found that I can deduct pretty much anything to do with my work from my tax bill, bar childcare costs. Given that childcare is pretty much a fundamental to working, if you have children, easily as much so as petrol or car insurance or a printer cartridge or whatever it might be, why is it not allowed as a business cost? (Sorry if have the jargon wrong).

This is also linked to what I thought at the time of the MP expense scandals. They were claiming legitimately for all sorts of things - cars houses duck houses decorating you name it. There was a female MP though who got told off for claiming for her nanny. Claiming for her cleaner, or gardener would have been fine. But not the nanny, and no-one in the papers seemed to question this rule. Surely in terms of enabling a woman to work (or enabling both parents to work if we want to put it properly!!!), a nanny or other childcare is absolutely essential. But it's not allowed.

Does anyone know WHY?

My guess is tradition, systems being set up to serve men, and possibly expense.

Has anyone ever questioned these rules, and if so does anyone know what the official response is? Because when you look at it without the filter of current practice on, it is totally illogical. It makes no sense.

[karmakameleon]

Himalaya, I've done tax returns and know what a pain it is, but to add a box for childcare probably wouldn't cause most self employed people too much trouble. Much less trouble that trying to claim WTC.

For employed people, the childcare voucher scheme is essentially a way of giving employees tax deducable childcare with a cap. Although it's being phased out for cost reasons, I think it was an efficient scheme that a lot of people used. The one down side was that not all employers provided it but you could easily ensure they did with legislation.

Increasing child benefit would be a great idea too, but I doubt very much that any government would have the appetite to increase it to levels that would pay for full time childcare for those that want it.

[Himalaya]

Tootooposh -- I'm not against a universal benefit that goes to all parents, including Dennis Thatcher etc... But I do think one that gives the higher paid more is not good use of funds. Giving parents a tax free allowance for each child, as long as you didn't raise the boundary for higher rate taxes would benefit everyone by the same amount (or at least everyone earning above the new limit, which of course isn't everyone at all ..) . But expensable childcare is a blank check for boarding school fees, the most expensive nannies etc... I don't think you can solve this by ruling out boarding fees - for some parents with jobs that involve a lot of travel that can be the best childcare. The point is there is a lot of deadweight cost if everyone who already sends their kids to boarding school now get 40% of the boarding fees paid by the taxpayer, as does everyone who can comfortably afford their nanny already, plus all the self employed people who will just employ their SAHP OHs as a childcare business expense and take a tax payout.

I think Child Benefit was originally conceived as an additional tax free allowance for families with children. But then they decided to do effectively the same thing but give the money directly to the main childcarer rather than hide it in the main earners pay.

Karma - if you think the WTC forms are hard, you should try doing a self employment tax return...if you want simple and fair I would give higher child benefit. Then parents can decide to use it to help pay for childcare or help pay for time off.

I do agree that it is hugely important that women don't automatically give up their careers when they have children. but unless expectations are changed that childcare/ organising childcare/paying for childcare/ doing the pickups, dropoffs and sick days is an equal responsibility I think subsidised childcare aimed at getting women into work will just get them into the mummy-track ghetto of flexible low paid jobs.

[WorkingItOutAsIGo]

Tootooposh well, I think I am right because I am actually old enough to remember it - it was a long time ago - and in fact what I really remember is how annoyed I was by it. I am happy to accept my memory might be wrong but I do think I remember it. Interesting your notes from France on outcomes.

And no, Himalaya it was much earlier than the free nursery places - by then I had children but when the childcare one went I didnt.

Obviously all taxation decisions are choices and the need is to balance fairness with creating the right incentives, and I am no expert in this at all, but simply since I couldnt work without childcare, it seems to me to be an essential personal (not business) expense of being able to work. It has obviously been a nice luxury over the last few years to benefit from some taxation savings with childcare vouchers, but nonetheless I write a cheque to the taxman every quarter out of already taxed income for nearly £3000 for my nanny's tax and national insurance, and of course her salary also comes out of my already taxed income. So given my nanny costs me something like £40,000 in total, that's actually £80,000 of my gross income accounted for before I step out of the door to go to the office to earn it.

I love my job, and am privileged enough to be well-paid and so working makes financial sense, but I am paying dearly for the ability to work and I think that is unfair as I couldnt do it without this expense.

[karmakameleon]

Interesting, everyone remembers the mortgage interest tax relief and the married couples allowance, but I've never heard of the childcare one before. Does anyone know what it was called so I can get more info?

I'm not surprised that WTC are underclaimed. I tried to look it up in response to SQ's question about the WTC thresholds and I was bamboozled by all the tables and different options. It must be a huge burden to understand what you are entitled to.

[kickassangel]

also - the help with childcare was cut by the tories at the same as tax relief on mortgages, and the married couples tax exemption.

so, if you were married with a family & a house, then you suddenly lost 3 lots of help within a year or so (just going on memory, so willing to be proved wrong), making it far harder to start/sustain a young family. it shouldn't have affected women more than men, but guess what?

[tootooposh]

working I am not sure you are right about that. Childcare has never been tax deductible - the Thatcher hypothesis sounds like an urban myth. A couple of points:

• A left wing government in france, about 10 years ago, made all domestic staff tax deductible as a way of INCREASING employment. This was very effective and had a secondary benefit of helping working women with nanny pay (but not nursery fees). It was calculated that the total tax take of the govt did not reduce as a result due to the extra tax paid by extra (declared) employees.
  

Also in France, very simply your personal tax allowance is increased according to how many children you have. This is MUCH better than WTC as all benefit (that's why Labour shied away from it as they didn't want RICH people to get tax breaks even if that were cheaper for the govt - Himalaya, does it really bother you that someone like Dennis Thatcher would get a benefit if the system were the cheapest and most effective?? Isn't that purely class envy? I expect he paid a shedload of tax anyway) and running it costs next to nothing, whereas at the moment WTC is both underclaimed and very expensive.

[kickassangel]

karma - no idea how long it's been like that, only lived here a few years, but it seems to be long standing.

himalaya - the last labor govt brought in free nursery places, about 5 years ago, i think.

[Himalaya]

Workingitoutasyougo - dridn't they take it away the same time they put in place free nursery places for 3 and 4 year olds?

Not defending the Tories for taking away the tax benefit and not replacing it with something more targetted for working parents, but the fact that Dennis Thatcher would have had 40% of their nannies salary as a kick-back from the state shows why it's not the best policy.

[karmakameleon]

Why am I not surprised?

Presumably she did some deep, well thought out analysis and found that people were paying for childcare regardless of whether they worked or not so it wasn't really a business related expense. Maybe.

[WorkingItOutAsIGo]

It was changed by Margaret Thatcher - so our first female Prime Minister. who had childcare paid by her millionaire husband, took this tax deduction away from all other working women.

I don't remember what the argument for it was at the time but I remember being horrified by it, even though at the time I didnt have DCs.

[Bramshott]

A chauffeur is tax deductible though, so all you need to do is employ a chauffeur instead of a nanny and have them drive your kids round all day !

[Stropperella]

Someone has started a petition here

[SardineQueen]

That's very interesting working. I have no idea! I'm sure you will tell us though.

Do you know the reasoning why it was changed as well?

[WorkingItOutAsIGo]

To add another point - several people are questioning why the UK tax system is set up this way with the implicit assumption being it always has been. It hasn't. Childcare costs used to be tax deductible when I were a lass, and do you know who changed it?

Can you think which government, which Prime Minister, thought it was a bad idea to help women work?

[karmakameleon]

kickassangel, I didn't know that. Has it always been deductable or was the change made recently? And if it was recent, do you know what prompted it?

[karmakameleon]

The principle that you pay tax on your profits not on your revenues is basic. It's not progressive or regressive its just how tax is calculated.

[kickassangel]

just to throw in a random comment - in the US, childcare IS tax deductible.

[kickassangel]

just to throw in a random comment - in the US, childcare IS tax deductible.

[Himalaya]

Karma - that was what I was trying to answer.... 

The principle that you pay tax on your profits not on your revenues is basic. It's not progressive or regressive its just how tax is calculated. So legitimate business expenses are paid for out of gross revenues. An office cleaner is a business expense, a household cleaner isn't.

Childcare isn't a business expense, it's a household expense so it comes out of taxable earnings. Imagine a couple with two separate businesses. Which business is liable for their childcare expenses? Presumably you could say either or 50/50 it's up to them? I can't think of any other business expense that would work like that between two completely unrelated businesses - it points to the fact that it's a household expense.

So then if you say it's a good idea anyway, not because it fits the principle of business expense (really, it doesn't!) but because it solves the problem we all acknowledge of women dropping out of the workforce to their own detriment. Then the question of regressiveness comes in. And ithink it makes it bad policy.

Say there are two women - one earns 30k brfore tax and pays out -15K on childcare, the other earns 65k and pays out 15k, who needs more help from the taxpayer?

If you make childcare expensivke for tax purposes (very back of an envelope, illustrative,..)

The lower paid woman gets 3k tax benefit and clears 13k, after tax and childcare 
The higher paid woman gets 6k tax benefit and clears 33k after tax and childcare.

That just seems like a bad way of directing limited public funds to women for whom childcare expenses are the on factor keeping them out of work

[karmakameleon]

Himalaya, sorry if I wasn't clear. My last post was not about whether the cleaner is business related expense or not. It's more to do with the fact that you argue that allowing childcare is regressive. I can see that, but allowing cleaning is also regressive but that doesn't seem to bother you. I'm wondering why not?

[Himalaya]

Ah, sorry SQ, Karma that's me going around in circles there

[SardineQueen]

Karma is the person who has been talking about the cleaner example again, not me, BTW. I was out earlier

[SardineQueen]

I suppose I simply feel that for women a lot of pressures are at play of which the end result is that they take a huge financial hit (and potentially self-esteem and other things linked in) when they have children. Which men don't. (Generalisations obviously).

I think that doing something about childcare costs would be a great help in this area and would open up a lot more choices for women and be generally beneficial.

I don't think that putting the onus on individual women to sort out their own affairs and if they don't or can't saying tough you've done it wrong is helpful. The pressures on women to conform to a certain way of living when they have children is very strong and a lot of women don't actually want to change their lives that way but find there are no alternatives.

Seeing assistance with childcare as an individual welfare benefits issue vs seeing it as an issue for women across society as a whole. I see it as the latter and I think that the different views on this thread are pretty incompatible.

[Himalaya]

SQ - I think people have pretty clearly argued why your house cleaner or your childminder it is not a business expense. Where your office cleaner is a business expense. If your office is in your house the distinction is harder to see but the principle is clear.

Then there is a separate question about whether it is a good idea for the govt to use the tax mechanism in this way to achieve social policy ends, which is a possibility as they do it for other things - i wouldnt rule it out, but to decide whether it is the best solution you have to weigh it up against other ways of reaching those objectives (e.g. Raising the WTC earnings limits) to see which is more efficient at achieving those ends (less regressive, less dead weight costs).

[Himalaya]

SQ - I feel like we are going around in circles. Saying that one particular solution is not the right solution is not the same thing as saying there isn't a problem .