Memorandum submitted by
the Disablement Income Group (TAB 80)
SUMMARY
1. Disability Working Allowance (DWA) has not
succeeded in fulfilling its twin functions of providing an incentive
for disabled people to come off benefits or helping with the work
rehabilitation of disabled workers.
2. The eligibility criteria and conditions of
entitlement have meant that the benefit has had a low take up.
3. DIG has welcomed the announcement of the
Disabled Person's Tax Credit (DPTC) to replace DWA in October
1999.
4. There are a number of points of detail arising
both from the present operation of DWA and from a perspective
on the new tax credit which need to be considered and dealt with
before DWA is transferred to Inland Revenue including:
— reviewing the disability test in
tandem with the review of the all-work test of Incapacity Benefit
so that the DPTC is one of several possible outcomes arising from
a new assessment of employability;
— introducing a common entry point
via the employer for both Working Families Tax Credit (WFTC) and
the DPTC to help preserve confidentiality in relation to a claim;
— offering a direct payment option
for those with negative tax liability;
— establishing an appeals structure
for individuals within the Department for Education and Employment
(DfEE)
— establishing a body under the remit
of DfEE to oversee regulations and policy;
— providing passporting to other benefits
through the DPTC (as is currently the case in DWA);
— building a National Insurance credit
into the DPTC (as in DWA);
— reviewing the relevance of the hours
rules;
— keeping the relationship between
DPTC and the minimum wage under regular review.
EVIDENCE FROM
THE DISABLEMENT
INCOME GROUP
(DIG) FOR
THE SOCIAL
SECURITY COMMITTEE'S
INQUIRY INTO
TAX AND
BENEFITS (DISABLED
PERSONS TAX
CREDIT)
1.0 INTRODUCTION
1.1 The Disablement Income Group (DIG) welcomes
this opportunity to contribute to discussions on the planned Disabled
Persons Tax Credit (DPTC) to replace Disability Working Allowance
(DWA) in October 1999.
1.2 In this submission we will examine the impact
of DWA and the reasons for its unpopularity, look at recent announcements
about the DPTC, and identify the issues which need close attention
before the DPTC is introduced. But we begin with a background
note about the aim and conditions of entitlement to DWA.
2.0 BACKGROUND ON
DISABILITY WORKING
ALLOWANCE
2.1 DWA was introduced in April 1992 as a bridge
between total dependency on benefit and dependency on earnings
alone. The idea was to provide an incentive for disabled people
to come off benefits through topping up low wages or earnings
from self-employment. It also had a rehabilitative function to
meet the needs of people who might not be able to work full-time
because of a disability or could work full-time but at reduced
capacity: who might need a period of rehabilitation at their job;
or who take a lower paid job whilst building up their skills.
2.2 DWA contained an important safeguard for
people who needed to return to Incapacity Benefit (IB) if their
attempt at work was unsuccessful. A two year linking rule meant
they could immediately claim the rate of IB they were receiving
prior to work (as long as the test of incapacity was also satisfied).
2.3 To quality disabled people in work must
be receiving the highest rates of DLA, or have received IB, Severe
Disablement Allowance (SDA) or the Disability Premium of Income
Support (IS), Housing Benefit (HB) or Council Tax Benefit (CTB)
in the eight weeks immediately before starting work.
2.4 The target group for DWA is people whose
disability disadvantages them in getting a job. Initial claims
provide for declaration by the customer that he/she has a physical
or mental disorder which results in such disadvantage. At the
time of subsequent claims, a self-assessment test may be involved.
This is known as a disability test and lists 20 areas of functional
ability. When renewing the claim (6 monthly) the customer is asked
to confirm the disability which places them at a disadvantage
and to name a professional person who can confirm this. Recipients
of DLA at the highest rate or SDA before the claim are passported
through the disability test.
2.5 DWA is means-tested according to both capital
and family net earnings. Payments vary depending on status of
claimants (whether single, couples or with children) and there
are credits for children. An earnings taper deducts 70p for every
£1.00 earned above the threshold. Awards are made for 26
weeks at a time, regardless of any changes in circumstances.
3.0 THE IMPACT
OF DISABILITY
WORKING ALLOWANCE
3.1 In its Note on Disability Working Allowance,
the Department of Social Security (DSS) said: "we expect
that 50,000 people will get DWA at any particular time. It may
well take some time to achieve this figure since DWA will, to
some extent, create its own market by removing an element of insecurity
in the decision to try work and so encouraging people to take
this step earlier than they would if there were no safety net"
(DSS, November 1990).
3.2 The Government's target has not been reached.
Whilst there have been over 86,000 awards since April 1992 the
most recent figures show 14,531 recipients in January 1998.
3.3 Original estimates suggested that most DWA
claimants would have an "income maintenance" qualifying
benefit (QB) rather than DLA; 25 per cent would come from IVB
(now IB); 10 per cent from SDA; 35 per cent means-tested benefits
with Disability Premium; 30 per cent DLA (HC Hansard, 11 December
1990).
3.4 The January DWA Quarterly tables show that
nearly 64 per cent of claimants qualified because they were in
receipt of DLA.
3.5 The main reasons for being refused DWA are
that the claimant has no qualifying benefit, is not in paid work,
or (together with a partner) has an income higher than the level
at which DWA would become payable.
3.6 The QB rules are one of the most significant
barriers to receiving DWA. These rules pose a particular problem
for people who leave IB and sign on for Job Seekers Allowance
(JSA) for more than eight weeks and only after that time find
a job. Unless also receiving DLA, they will not be eligible for
DWA.
3.7 Since in well over half of new awards in
the four years to October 1996 the main qualifying benefit was
DLA, it may be assumed rather less than half of new claimants
were returning to work after a period out of work (Thornton, Helping
disabled people to work: a cross-national study of social security
and employment provisions, SSAC, 1997).
3.8 Although numbers of claimants have grown
in recent times, take-up of DWA remains low (between a fifth and
a quarter). This compares badly with Family Credit, the take-up
of which is 70 per cent. Even so, it has been observed that the
onus is on the Government to seek to ensure that as many families
as are entitled receive the new Working Families Tax Credit (Budget
Paper no 3, 1998). We would argue that with potential take-up
of the DPTC at 20 per cent to 25 per cent, active encouragement
from the Government is essential here, too.
3.9 DWA does seem to have helped some people
who were in work already (although the extent to which they would
have stayed anyway is unclear). Some two thirds who claimed in
1993 were still in work over two years later (Rowlingson and Berthoud,
Disability, benefits and employment, DSS Research report
no 54, 1996). The average duration of a DWA claim is now just
over 18 months—that is three periods of 26 weeks. There
are significant numbers who subsequently leave their DWA job because
of ill-health or a problem related to their disability and people
moving from incapacity benefits seem to be a vulnerable group
(Arthur and Zarb, Evaluation of the 1995 changes to DWA,
DSS in-house report no 25, 1997).
3.10 DWA's significance has been in particularly
helping single men. It seems especially to have helped those living
with parents or relatives, such as those with learning disabilities
perhaps in sheltered workshops or supported employment.
3.11 DSS research into the take-up of DWA in
sheltered workshops and supported placements (Zarb, Jackson and
Taylor, Helping disabled workers, DSS Research report no
57, 1996) found that 8 per cent of the 23,000 people in supported
employment received DWA and that an additional 20 per cent were
eligible but did not receive it (mainly in workshops). Whilst
most DWA claimants qualified because of DLA, of the remainder
moving from other QBs twice as many moved from SDA than IB, suggesting
that DWA is performing a limited role in supporting SDA claimants
move into work, as well as those on DLA only who are already in
work. Rowlingson and Berthoud also found that single people living
with parents and receiving only DLA had one of the highest rates
of economic activity.
3.12 Zarb et al identified a number of
reasons for not claiming DWA including low awareness of and a
lack of understanding about the benefit, the complexity of the
claim process and, especially, the DWA claim forms and guidance
notes (Zarb et al, 1996).
3.13 DWA as an incentive to work seems to have
had limited success. A great majority of claimants had not heard
of DWA until after they had started work and were not influenced
by the incentive (Rowlingson and Berthoud, 1996).
3.14 More recent restrictions in benefit rules
may be having an impact on DWA take-up also. The stricter tests
of entitlement to out-of-work benefits introduced in 1995 reduced
the scope of DWA, by disqualifying the less severely disabled
people who might have been closest to its reach (Berthoud, Disability
benefits: a review of the issues and options for reform, Rowntree,
1998).
3.15 As far as helping disabled people move
into, and stay, in work, DWA has had little impact. In 1993 of
the 1.6 million disabled people who were, or had been on disability
benefits, only 425,000 and some attachment to work. Of these only
60,000 were working 16 hours a week or more. Of these only 17,500
people were eligible for DWA and only 3,500 were receiving it.
Only 200 people had been encouraged into work by the benefit (Rowlingson
and Berthoud, 1996).
3.16 The easements to DWA in 1994-95, for example
the child care disregard, remission of NHS charges for people
with savings of £8,000 or less, and the new premium for people
working 30 hours or more did not result in a marked increase in
take-up. Problems of accessibility remained.
3.17 All the evidence pointed to the need for
major reform to improve the effectiveness of DWA, especially in
the context of the Government's initiatives in its Welfare to
Work programme.
4.0 BUILDING ON
DWA: THE NEW
DISABLED PERSON'S
TAX CREDIT
4.1 DIG welcomed the announcement in the Budget
in March, 1998 of the new Disabled Persons Tax Credit (DPTC).
4.2 The Treasury press release of 17 March 1998
indicated that the DPTC would be more generous than DWA, providing
for
— a lower taper of 55 per cent (down
from 70 per cent);
— higher earnings thresholds for couples
of £90 (presently £77.15) and for single people £70
(presently £57.85);
— meeting 70 per cent of eligible child
care costs.
4.3 The Government subsequently indicated that
it is presently considering ways to ensure the DPTC can be made
more effective and attractive than DWA (HC Hansard, WA, 11 June
1998).
4.4 The Social Security Committee had ealrier
drawn attention to the problems associated with in-work benefits:
"We believe that the very low number of
DWA awards made to date reflects both the economic situation and
the complexities of in-work benefits. It is clearly very difficult
for many disabled people to move from receipt of benefits paid
because of incapacity for work to a benefit designed to top-up
a wage, because of the difficulties in determining whether the
transition will be financially worthwhile" (SCC, Third Report,
1993).
4.5 DIG believes that the DPTC presents opportunities
for improvement on the previous system, but is concerned that
the new credit should be transparently better than DWA.
4.6 The changes to the tapers and thresholds
in the Budget will mean that many people will receive more from
the DPTC than they would have from DWA. They will keep more of
their rising earnings and people with children will be better
off.
4.7 However, will this be enough to eliminate
the problems associated with DWA? What further considerations
are necessary to ensure that the DPTC succeeds where DWA has not?
5.0 DPTC: HOW DO
CLAIMANTS QUALIFY?
5.1 The disability test
5.1.1 There is common ground between the existing
disability test and the all-work test (AWT) of IB. The Government's
Green paper has indicated:
"While we will keep the current system for
existing claimants, we are examining the scope for a more effective
test for future claimants which assesses the scale of their employability,
recognising that capacity for work is a continuum." (A new
contract for welfare, 1998)
5.1.2 DIG itself has already advocated employability
as a mechanism for reviewing claimants, though piloting employability
assessments and individual action plans (Howard, Investing in
disabled people: a strategy from welfare to work, DIG, 1997).
It seems sensible and logical therefore that the disability test
associated with the DPTC should be one of several possible outcomes
arising form the new assessment of employability. This would give
the DPTC a far more significant role in retention of employees
once they became disabled than has been the case with DWA. To
qualify for DWA whilst in work, someone has to receive DLA. As
this takes three months, access to DWA for someone who becomes
disabled whilst in work can be extremely difficult. As one of
several outcomes from an employability assessment, the DPTC could
replace lost earnings where the individual had to reduce their
hours of work because of a disability.
5.1.3 Where people are assessed as needing a
period away from work because of a disability, the concept of
disability leave as an alternative to sick leave has been piloted
by the Royal National Institute for the Blind (RNIB). As disability
leave does not necessarily involve "sickness" absence,
and as it may be unpaid, DIG has suggested the introduction fo
a Retention Allowance (RA) modelled on Statutory Sick Pay (SSP).
A payment of SSP could be converted into RA where a period of
leave is identified as part of a plan to retain someone in work.
DIG suggest that, unlike SSP, the RA should be fully re-imbursed
to the employer as an incentive to retain employees.
5.2 Partner's earnings
5.2.1 In as much as this can be a disqualifier
or significantly reduce the level of award of DWA, the provision
of an earnings disregard in the new DPTC would do much both to
improve take-up and the value of the credit. A disregard of at
least £25 a week against a partner's income or earnings would
increase the incentive effect of the DPTC.
6.0 THE ADMINISTRATION
OF DPTC
6.1 Confidentiality
6.1.1 Under the present arrangements for DWA
employers do not know that employees have a disadvantage in getting
a job. The forms used with employers in connection with DWA do
not say what the benefit is for. The employer's task is simply
to verify hours and earnings. Some mechanism for preserving confidentiality
should be built in to the new system otherwise there could be
a disincentive in claiming for people who have particular sensitivities—for
example a non-too sympathetic employer, or a hidden condition
they as claimants would rather remain hidden. A common entry point
via the employer for both the Working Families Tax Credit (WFTC)
and the DPTC might help to eliminate this risk.
6.2 Negative tax liability
6.2.1 Where a tax credit exceeds earnings Inland
Revenue (IR) or the employer would have to pay a refund. DWA claimants
earn less and tend to receive a higher award in relation to their
earnings than Family Credit (FC) claimants. Thus DWA/DPTC claimants
have a greater likelihood of having a negative tax liability than
FC/WFTC claimants. Paying the credit in these circumstances in
a lump sum may be unhelpful to the claimant, although in cases
of self-employment this may be unavoidable. For those who are
employees the involvement of an employer could potentially undermine
any confidentiality built into the system in relation to disclosure
of a disabling condition. A direct payment option would help get
round this problem.
6.3 Appeals and scrutiny
6.3.1 On matters of taxation, DIG suggests that
the existing rights of appeal to the tax inspector and to tax
commissioners should apply to the WFTC/DPTC in the case of individual
grievances. However, in the case of the DPTC there will be issues
concerning the disability test and employment matters which could
legitimately be raised by individuals which fall beyond the expertise
of tax commissioners. As the Department for Education and Employment
(DfEE) is responsible for disability policy generally across departments,
as well as employment of disabled more specifically, DIG believes
that a new appeal structure falls more sensibly within the DfEE
than the DSS of IR.
6.3.2 On matter of oversight of regulations
and policy, there needs to be a body undertaking the role currently
played by the Social Security Advisory Committee (SSAC). As with
individual appeals, DIG suggests the establishment of a statutory
body under the remit of the DfEE, to deal with the non-tax-specific
issues around the DPTC, looking at disability and employment matters,
including taking a view on regulations about tax, social security
and employment schemes.
6.4 Passporting and National Insurance (NI) credits
6.4.1 DWA is a passport to the Disability Premium
or Higher Pensioner Premium with IS/JSA, HB and CTB; Social Fund
maternity and funeral payments; free legal advice and assistance,
and health benefits. So that people are no worse off, either the
value of the tax credit would have to reflect the extent of this
passporting, or the credit itself provide the same passport to
other benefits and services. The latter may be the simplest solution.
6.4.2 In the March Budget, the Chancellor also
announced progressive changes to the NI system, with alignment
between tax and NI starting with employer's contributions in April
1999 at £81 per week. Employees will still pay NI from £64
per week, but from April 1999 this will be a flat rate of 10 per
cent on all earnings between £64 and £485 per week.
The Government has stated that it is committed to aligning employee
NICs with the income tax personal allowances as soon as it has
reformed the rules for contributory benefits to ensure that those
who are taken out of NICs do not lose their right to accrue benefit
entitlement (New ambitions for Britain: financial statement
and budget report, HC 620). The Government's commitment to
consider future contributory benefit entitlement is especially
welcome for disabled workers, many of whom will not be able to
sustain a long working life. Many people on DWA already need to
reclaim benefit after a period in work (see paragraph 3.9).
6.4.3 Considerable numbers of people receiving
DWA have earnings below the NI lower earnings limit (currently
£64 per week) and/or below the tax threshold. In 1996, 3,605
DWA recipients were earning too little to pay NI, 45 per cent
of whom were single people without children, 29 per cent couples
with children (HC Hansard, 25 February 1997, col 207w). People
earning below this level on DWA can be credited for NI purposes,
thus helping them to requalify for contributory benefits if necessary.
The need for the DPTC to carry on NI credit in the same way as
DWA will be especially important when the threshold for employee
NICs is raised to align with the tax allowance (currently £81),
otherwise an unacceptably wide gap would open between earnings
and thresholds for future benefit entitlement.
6.5 The hours threshold
6.5.1 DWA claimants tend to be more likely to
work fewer hours than FC claimants. Fifty-seven per cent of DWA
claimants work between 16 and 30 hours, whereas only 47 per cent
of FC claimants (mainly lone parents) do so. A fifth of FC claimants
work 40 hours or more, but only one in eight of DWA claimants.
6.5.2 The 16 hour threshold for DWA is a less
clear cut boundary between in and out of work benefits than is
the case between FC and IS/JSA. Disabled people can work for more
than 16 hours and still be eligible for benefit, provided their
earnings or hours are reduced to 75 per cent of what a person
without that disability would be able to do or earn. So, in theory,
there is some degree of choice as to whether to stay on IS/JSA
or claim DWA.
6.5.3 The 24 hours rule also allows a JSA/IS
claimant who has a partner who is working for between 16-24 hours
to remain on IS/JSA (but with earnings and DWA taken into account
for the means-test and DWA as a qualifier for the Disability Premium).
6.5.4 In the light of the greater complexity
of the hours rules for disabled people compared with other claimants,
DIG suggests that the Government should undertake a thorough review
of the hours rules for both DPTC and out-of-work benefits to determine
their relevance.
7.0 DPTC AND THE
MINIMUM WAGE
7.1 It is theoretically possible that firms
would respond to a tax credit which subsidises wages by cutting
the wages paid. There is no evidence that this has occurred in
response to the Earned Income Tax Credit (EITC) in the United
States (Liebman, Lessons about tax-benefit integration from
the US Earned Income Tax Credit experience, Rowntree, 1997).
But it might be obvious to employers that their employee was receiving
the credit (as discussed above) and it could increase the chances
of lower wages.
7.2 A particular concern is that if employers
were part of the information gathering and assessment process
they would be in a position to use the information to depress
wages (Taylor, Work Incentives: The modernisation of Britains
tax and benefit system Number 2, Budget, 1998). However, there
is a safeguard to a large extent in the shape of the minimum wage
which will protect employees by establishing a floor for wages.
7.3 The introduction of a minimum wage at £3.60
per hour for most workers is likely to have a significant impact
on the earnings of disabled people. Raising the wages floor will
clearly remove the worst aspects of low pay for disabled people,
and also in some cases reduce public spending on benefits like
FC and DWA. Any savings in current DWA spending could be ploughed
back into making the DPTC a more relevant and better system of
support for disabled people in work.
7.4 The minimum wage will, however, also have
an impact on eligibility for, and amount of the DPTS. People working
reduced hours because of a disability or long-term illness may
be less likely to see gains from the minimum wage than their full-time
counterparts. The point at which the DPTC tapers off (at 55p in
the £) will be the thresholds of £90 for couples and
£70 for single people (Treasury press notice, 17 March 1998).
A minimum wage of £3.60 an hour means that, once a single
person has worked 20 hours a week, their DPTC begins to be reduced.
For a couple, only 25 hours are worked before this happens. In
effect, a single person would see their DPTC withdrawn sooner
than a couple.
7.5 The interaction of the minimum wage, earnings
and the DPTC will also have a bearing on the current "exempt
work" rules for IB. The earnings rule of £48 per week
will effectively set a limit of 13.5 hours at £3.60 an hour,
well before the current 16 hour rule is reached. People on means-tested
benefits with a £15 disregard will find themselves limited
to working a little over four hours a week before their benefit
is affected.
7.6 We urge the Government to keep under regular
review the impact of the minimum wage on both DPTC and exempt
work so that claimants gain maximum benefit from work.
8. CONCLUSION
8.1 Whilst there are arguments for and against
moving towards a tax credit, improving the take-up of the DPTC
over DWA is one of the most compelling reasons for reforming the
system and has the support of DIG. However, as is shown above,
any change will require more than a simple transfer of payments
from DSS to Inland Revenue, or simple grafting of DWA onto WFTC
arrangements.
8.2 At the same time it is important to ensure
that people are no worse off under the new system. For all these
reasons DIG hopes that the policy reforms will be in place before
the transfer to Inland Revenue.
Pauline A Thompson MBE
Marilyn Howard
29 June 1998
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