Trouble in store for the post

Where's the windfall tax gone?

It is easily forgotten, but five years ago the high street banks were strong-armed by the government into pumping £200m into the Post Office. The cash, payable over five years, was intended to help plug the Post Office's gap in revenue when benefits payments were paid directly into bank accounts.

The post office network lost £400m in revenue, its biggest single source of income, when over-the-counter payments were eradicated in 2003. Filling the gap was half the problem. Creating accounts into which 4 million benefits claimants could receive their money was the other.

The money coughed up by the banks was supposedly used to create a post office based account so simple that it could not even be used for direct debits. It was a central plank of the government's plans for financial inclusion. The banks were also obliged to establish basic accounts, slightly more sophisticated than the post office version, aimed at benefit recipients. This week's decision by the department for work and pensions not to renew the post office card account contract with the Post Office raises concerns about the future of its 14,000-strong branch network. But it raises two other questions. First, what are the government's ambitions for so-called financial inclusion? John McFall, chairman of the Treasury select committee, begins an inquiry on this subject next week. He could start by calling a couple of ministers given that the government was virtually silent on the issue.

Second, the banks regarded the £200m as a windfall tax in disguise. They paid up without complaint for fear of something worse, but one or two feel that even money extracted with menaces should be spent wisely. It's a fair point.

A bad idea

With politicians and consumer groups rightly fretting about the record levels of personal debt racked up by credit-hungry Brits, it takes a brave (or foolish) man to tell MPs that banks and building societies are too cautious and should let homebuyers wade far deeper into debt.

But that was what the boss of one of Britain's biggest mortgage lenders told an all-party parliamentary group on debt at a House of Commons seminar this week. The traditional "income multiple" used by mortgage lenders is 3-3.5 x single income (or 2.5-2.75 x joint income). But at this week's seminar, which concentrated on the plight of first-time buyers, Stephen Knight, executive chairman of GMAC-RFC - a substantial lender which offers its mortgages through IFAs - argued that 5 x income should be the "benchmark" for those with good credit scores.

Bigger loans, he said, were the only answer to bridge the yawning house price-to-average earnings gap and simple income multiples are no longer sophisticated enough to determine responsible levels of lending. Now we have clever credit profiling and scoring techniques, he said, lenders can better assess who will be able to pay and who will not.

It may be argued that five times income isn't completely barmy for first time buyers with good job prospects who take long fixed rate deals. But there are two reasons why Mr Knight's special pleadings should be ignored.

First, state-of-the-science credit scoring techniques didn't stop Barclaycard's bad debt levels soaring by 42% in the first six months of this year. Much of that increase was a result of the higher rates and utility bills which hit homebuyers so hard. Second, unlike homebuyers in the rest of European and the US, Brits still prefer short-term fixed and discounted rate deals from which they can walk away easily. Until that changes, it is wholly inappropriate and utterly irresponsible for any major mortgage lender to suggest fill-your-boots levels of home loan debt.

Islands mystery

We wrote here earlier this week about the flood of companies, from Tesco and Asda to Dollond & Aitchison, operating mail order operations from the Channel Islands to take advantage of a tax loophole. Goods worth under £18 and posted from there are exempt from UK VAT, the islands being considered as being outside the EU for tax purposes.

The biggest trade is in CDs, DVDs, books and contact lenses, but we were intrigued by local reports of Apple's plans to set up business on the islands. Could 79p-a-shot music downloads be behind it? No, declares HM Revenue & Customs, where a diligent official points out that the £18 threshold applies only to goods and not to services. Downloads count as an electronically provided services, in the tax man's eyes, so iTunes will not qualify.

We are left to wonder why Apple wants to be on the Channel Islands. All very mysterious.