APPENDIX 8
Memorandum submitted by National Association
of Citizens Advice Bureaux (TAB 71)
SUMMARY
1. The introduction of the working families
tax credit (WFTC), the childcare tax credit and the disabled person's
tax credit (DPTC) will mean considerably extra resources being
devoted to directly boosting the earnings of certain groups in
low paid work. This is welcomed by the CAB Service. However, it
is by no means certain that the problems intrinsic to a means
tested wage subsidy (although ameliorated) have been resolved
by the switch from payment through a benefit to payment through
the tax system.
2. The new tax credits will reduce the unemployment
trap by increasing the income of those in work compared to those
out of work. The childcare tax credit addresses a key element
of the unemployment trap which particularly affected parents.
Another key element which has not been addressed concerns the
costs of homeowners, who are immediately responsible for the whole
of their mortgage payments when they start a job.
3. The lower tapers within the WFTC and DPTC
of 55 per cent compared to 70 per cent will reduce the poverty
trap by reducing marginal tax rates for the lower paid. However,
it is clear that the impact of the WFTC and DPTC will be severely
curtailed unless the questions of the interaction of the WFTC
and DPTC with housing and council tax benefit is addressed. The
solution is reconfiguration of housing subsidy away from housing
benefit and towards affordable social housing.
4. When considering work incentives from a "grassroots"
perspective, key considerations are the ease with which a person
can predict their net income from working; the ease of the financial
transition between out-of-work benefits and in-work help; and
the complexities or otherwise of claiming. On these counts, the
WFTC and DPTC do not score highly. Their introduction emphasises
the need for a "one stop" approach for advice and assistance
to the newly employed, and better financial provision at the start
of a job.
5. The effectiveness of the WFTC and DPTC will
largely depend on the efficiency of the operational arrangements
made for delivery of the service. Key issues for the Inland Revenue
will be speed of delivery; accuracy of assessments; efficiency
and ease of payment and good communication between the Revenue,
working people and their advisers. Issues are also raised concerning
organisational barriers between Departments.
6. The enhanced role of employers in delivering
the WFTC and DPTC raises issues of enforcement. The CAB Service
believes there must be Government activity to promote good practice;
incentives on employers to comply with their statutory obligations
by imposing financial penalties if they do not do so; and enforcement
activity by statutory agencies to investigate employers.
7. The childcare credit will greatly assist
parents in low paid work. However the scarcity of registered childminders
and other approved childcare arrangements, will hamper the ability
of parents to make use of the credit.
INTRODUCTION
1. The CAB Service is grateful for the opportunity
to give evidence to the Select Committee on the issues arising
from the Chancellor's announcement of tax credits for working
families and disabled people. Every day in CABx across the country,
thousands of people seek advice about work and benefits. As a
result the CAB Service is very aware of the practical difficulties
which can confront people keen to make the transition from benefits
into work. In 1997 the Service published a report Benefits
and Work which analysed the barriers which exist and made
recommendations for change.
2. The introduction of the working families
tax credit (WFTC), the childcare tax credit and the disabled person's
tax credit (DPTC) will mean considerably extra resources being
devoted to directly boosting the earnings of certain groups in
low paid work. This is to be welcomed. However, it is by no means
certain that the problems intrinsic to a means tested wage subsidypoverty
and unemployment traps, administrative cost and complexity, and
take-up problemshave been resolved by the switch from payment
through a benefit to payment through the tax system.
EFFECT ON
POVERTY AND
UNEMPLOYMENT TRAPS
3. The new tax credits will reduce the unemployment
trap by increasing the income of families in work compared to
those out of work. The childcare tax credit addresses a key element
of the unemployment trap for parents, namely the costs of childcare.
However, another key element of the unemployment trap for homeowners
is the costs of housing. Unlike tenants, who have access to housing
benefit if they take a low-paid job, homeowners are immediately
responsible for the whole of their mortgage payments. People who
are keen to work rather than be dependent on benefit can find
it difficult to bridge the financial gap between their mortgage
liabilities and low pay:
A CAB in Kent reported the case of a lone parent
with three children who had been working part-time in a school
kitchen whilst claiming income support. She was offered the opportunity
of full-time work paying £75 per week but the CAB calculated
that even with family credit the woman would be £50 worse
off due to loss of help with her mortgage costs.
4. The CAB Service believes that, in order to
overcome the unemployment trap for homeowners and to assist them
back to work, the Government needs to look at better refocusing
help to homeowners by re-directing subsidies away from mortgage
interest tax relief available to all homeowners towards those
on the lowest incomes.
5. The lower tapers within the WFTC and DPTC
of 55 per cent compared to 70 per cent are calculated to reduce
the poverty trap by reducing marginal tax rates for the lower
paid, although it is accepted that more people at higher incomes
will be affected. However, the problem which has still to be addressed
is the interaction of the WFTC and DPTC with housing and council
tax benefit. Increases in net income from the award of a tax credit
and reductions in national insurance contributions will simply
lead to a reduction in council tax and housing benefit of 85p
in the pound, thus negating much of the extra reward. The Institute
of Fiscal Studies has calculated that the interaction of tax and
national insurance deductions, WFTC, housing and council tax benefit
will lead to only an insignificant reduction in marginal tax rates
for an individual from 96.85 per cent to 95.3 per cent.
6. The CAB Service argued in Benefits and
work that "if people are to be encouraged to take low
paid jobs, rented housing has to be affordable for people in work,
whether or not they are eligible for benefit". The Service
has therefore called for a reconfiguration of housing subsidy
back to "bricks and mortar" and away from reliance on
housing benefit which is cumbersome to claim, complex to administer
and has built-in disincentives for people in work.
WORK INCENTIVES
7. It seems self-evident that the promise of
greater rewards from working will make it more likely that people
will move off income support or jobseeker's allowance into low
wage jobs. However, the WFTC and DPTC can not be considered in
isolation. The experience of CABx shows that, for the individual
wondering whether to accept a particular job, there are a number
of key questions:
Predictability: what will my net income be if
I take this job?
8. A DSS study of family credit found that,
when asked to compare eleven factors that might be important in
getting and keeping jobs, families rated wages, job security and
childcare and convenience ahead of family credit. (Bryson and
Marsh, Leaving Family Credit, HMSO, 1996). Family Credit
did not feature strongly in the way families searched for work
or set their target wages: these were gauged against expenses.
The challenge for Government is to ensure that, when unemployed
families set their target wages, they are aware of the additional
income available to them through the WFTC or DPTC.
9. At present, without expert advice, it can
be difficult for an individual to predict what his or her net
income will be from earnings and in-work benefits, after tax and
national insurance deductions, and extra outgoings such as higher
housing costs, school meals and childcare costs. For parents living
apart, the means test for assessing liability for child support
contributions must also be considered. There is evidence that
unemployed people without access to advice and information can
underestimate the assistance which is available. For example,
a study of the impact of housing costs and the benefits system
on people's decision to work found that, although most people
attempted a better-off calculation to work out the level of earnings
they needed to cover their commitments, this could be significantly
inaccurate due to a lack of knowledge of the complex interaction
of tax, benefits and earnings. (Ford, Kempson and England, Into
work?, Rowntree 1995).
10. It is by no means clear that the introduction
of the WFTC and DPTC will make it any easier for a person to predict
net earnings from a job in advance, let alone net income after
new expenses, and outgoings are taken into account. Indeed the
calculation appears to be quite complex, It will involve assessment
of "gross" income tax, national insurance liability,
the basic tax credit (less taper withdrawal), and, if there are
childcare costs, the proportion of eligible child care costs which
qualify as a credit. Income tax liability then has to be offset
against credits due.
11. At present, specific "better-off"
advice which is related to a person's individual circumstances
is generally given a low priority within the Benefits Agency and
the Employment Service. The CAB Service would like to see more
resources earmarked by Government to make "better off"
calculations including WFTC and DPTC readily available (and publicised
as such) to any individual who wants one.
Certainty: how will I cope until I get paid?
12. One of the most pressing worries facing
people contemplating moving off benefit into work is how to pay
living expenses until pay day. Income support and jobseeker's
allowance cease immediately a person starts work, yet there can
often be a gap of two weeks or a month before the person is paid.
The payment of the WFTC or DPTC via the pay packet may result
in higher pay once awarded, but, in the absence of special arrangements,
it looks likely that it will not be available, at the earliest,
until the person receives their first pay cheque. To this extent,
the position will be worse than with fast-track family credit,
where the Benefits Agency prides itself on getting over 90 per
cent of claims from the newly unemployed processed within five
days. The CAB Service believes that the solution would be to
pay extended payments of income support or jobseeker's allowance
to the newly employed until they actually receive their first
wages. Alternatively, first payment of the credit could be via
the inland Revenue, prior to commencement of payments through
the employer.
The "hassle factor": how do I claim
in-work assistance?
13. The WFTC and DPTC will be assessed and administered
by the Inland Revenue. Even if an employer is responsible for
identifying eligibility for WFTC and DPTC and issuing claim forms,
it would appear that any enquiries about a possible assessment
will have to be between the Revenue and the employee. Potentially,
this introduces a further agency with which a newly employed person
will need to have contact, in addition to possibly the Employment
Service Jobcentres (responsible for jobfinder's grants, housing
benefit extended payments for unemployed people and the back to
work bonus); the Benefits Agency (responsible for housing benefit
extended payments for lone parents, child support bonus, and crisis
loans to cover the gap between benefit ending and first pay cheque);
local authorities (responsible for housing benefit and council
tax benefit); and the Child Support Agency (responsible for adjustments
in child support assessments).
14. At present it is left to the individual
to deal with each Agency separately. It is the experience of CABx
that the fragmented sources of possible financial assistance to
newly employed people, coupled with the multiplicity of application
forms and different claiming procedures, time limits, evidence
requirements etc, can lead to people losing out on their entitlementsnot
only because they are unaware of what is available but also because
it can be all too complicated. The CAB Service supports the
development of integrated "one-stop" shops involving
central and local government agencies offering detailed advice
and support to people on getting back to work.
TAKE-UP
15. It is by no means certain that the replacement
of family credit and disability working allowance with a tax credit
will, of itself, lead to higher take-up. Although the details
are far from clear, it would appear that workers will not automatically
be assessed for WFTC or DPTC by the Inland Revenue in every case,
but will have to make an application for the tax credit on their
own initiative at six monthly intervals. This instantly creates
a take-up issue, where those eligible have to be identified and
encouraged to claim. Data matching between the Inland Revenue
and the Child Benefit Centre may enable all taxpayers with children
to be targeted. Similarly, data matching between the Inland Revenue
and the Disability Living Allowance Unit would allow identification
of potential DPTC recipients. The role of employers in ensuring
that the tax credit is claimed will also be very important. The
Employment Service Jobcentre also has a role: for example, it
could issue the relevant claim form for WFTC or DPTC to eligible
people when issuing a form P45 at the end of a period of unemployment.
Regular information concerning credits will need to be sent to
self-employed people by the Inland Revenue.
CHOICE OF
PAYMENT METHOD
FOR COUPLES
16. There has been considerable concern at the
implications of the switch from payment of family credit to the
woman in a couple, to payment of WFTC through the wage packetwhich
will mean far fewer women in couples receiving the money. Recent
research has found that money paid direct to mothers is more likely
to be used to meet family needs, while men used some of their
income as personal spending money (Goode, Callender and Lister,
Purse of Wallet? Gender Inequalities and Income Distribution
within Families on Benefits, PSI, 1998). A recent CAB case
gives an example of the problems which can occur:
A CAB in Buckinghamshire reported the case of
a married Asian woman with two young children. Her husband was
in work, but did not pass on any money to her for household expenses.
Her only income was child benefit of £20.05 and £30
family credit. The CAB commented that if family credit were to
be replaced by a tax credit paid to her husband, the only income
under her control would be child benefit. It seemed unlikely that
she would be able to insist on the new credit being paid to her.
Although the announcement that couples will
be able to choose whether to receive the WFTC through the wage
packet or as a cash benefit is welcome, in practice the woman
in the couple may be unable to assert her wish to receive the
cash. It is likely that those most in need of exercising the choice
for cash payments will be those least able to exercise it. The
CAB Service believes it is particularly important that the offer
of the option of cash payments of the credit is presented as an
equal option, with the potential advantages and disadvantages
if each option explained. For example, one positive aspect
of payment as a cash benefit is likely to be continuous payment
throughout the period of the award.
NEW PATTERNS
OF WORK
17. Deregulation and the growth in the service
sector have led to an increased pattern of flexible working, where
people work in often insecure part-time or temporary jobs tied
to the fluctuating demands of their workplace. Studies show that
such jobs dominate the market for unemployed people (see, for
example, White and Forth, Pathways through unemployment: The
effects of a flexible labour market, JRF, 1998).
18. The payment of the WFTC through the wage
packet will have the effect that, when wages cease, so does the
tax credit. It will affect workers, for example, where a firm
closes down for a holiday period and no wages are paid. (In this
situation, jobseekers's allowance is not payable.) It will also
affect people moving between spells of short-term work. Unlike
family credit, where payment continues in payment (via an order
book) for the six months of an award regardless of changes in
circumstance, the end of the job will mean at least the temporary
end of the credit (to be resumed once work recommences). This
will make it more likely that the person will therefore have to
claim jobseeker's allowance or income support between jobs.
OPERATIONAL EFFECTIVENESS
OF THE
INLAND REVENUE
19. The current case load of family credit recipients
is approximately 766,000 and expected to rise to 831,000 by 1999
(Social Security Departmental Report, Cm 3913, 1998). The
introduction of WFTC is expected to add a further 400,000 to the
total thus substantially increasing the workload. Much of the
effectiveness of the WFTC will depend on the operational arrangements
made for delivering the service.
20. There are worrying signs that the Inland
Revenue may struggle with the extra workloads WFTC and DPTC will
bring. Recent newspaper reports have indicated large backlogs
at Inland Revenue offices in connection with self-assessment of
income tax (see The Sunday Times 24 May 1998). Reports from CABx
also suggest that there may be problems:
A CAB in Lancashire reported a client who completed
a self-assessment form in April 1997. Later in the year the client
received a second form, and the Revenue said it had no record
of receiving the earlier form. The client completed the second
form with the help of her tax office. Early in 1998 the client
received a third form after the deadline for returning forms.
The client completed the form and was assured by her tax office
that it had recorded that she had completed an earlier form before
the deadline. The client has now received a notice for non-return
of the tax form. The client's local tax office said that they
had no record on their computer of her earlier visits.
A CAB in the Midlands reported a client on a
limited income who had been sent a tax rebate of £372 by
the Revenue to which she did not believe she was entitled. She
therefore returned it. The money was returned again to the client
and she therefore spent it. A month later, she received a tax
bill for £355 but could not afford to pay it. Although she
negotiated repayment in instalments, she incurred interest on
the tax due and overdraft charges.
21. Key issues for the Inland Revenue will be:
(a) Speed of delivery: This is important
not only for new claims but also for renewals at six monthly intervals.
At present, the Benefits Agency has a target of five days for
the processing of 90 per cent of family credit claims from the
newly unemployed. That target was met in the year 1996-97. Unfortunately,
there is no target at present for renewal claims, with the result
that there can be considerable delays:
A CAB from Kent reported the case of
a client whose family credit finished in January, and who had
applied for renewal. He came to see the CAB in March because,
despite several telephone calls, no benefit had been paid. The
CAB was advised that due to the computer being "down"
there was a backlog of applications. The Family Credit Unit agreed
to treat the case as urgent because the client had been without
benefit for almost eight weeks.
A CAB in Lincolnshire reported the case
of a single parent with two children who had been waiting five
weeks for renewal of her family credit. Her original application
had been in January; a query regarding maintenance had been resolved
in early February; but by the third week of March no benefit had
been paid: the client was told she was "in a queue".
She had no money to feed her children because practically all
her earnings went to pay the mortgage.
A CAB in Lancashire reported a single
parent whose renewal claim for family credit had been delayed
by over six weeks. The Benefits Agency confirmed to the CAB that
all data was to hand but there was a backlog of work. The adviser
quoted the five-day turn round, but was advised that this did
not apply to renewal claims.
There is clearly a need to set demanding
targets for the renewal of WFTC and DPTC claims, as well as for
the initial assessment.
(b) Accurate assessments: Assessments
will involve not only assessment of income (including income of
partners), but also of capital. Because the WFTC and WPTC will
extend further up the income scale, more people are likely to
have savings. The CAB Service considers it essential that recipients
are able to get a clear breakdown of the calculation of their
tax credit from the Revenue so that assessments can be checked.
(c) Efficiency and ease of payment:
For the first time, the Inland Revenue will be making payments
of allowances on a substantial scale, both to self-employed people
(who currently make up 13 per cent of the family credit caseload
(101,000 awards) and to couples who have opted for payment to
the non breadwinner. This is a major undertaking. The CAB Service
believes it is important that people have a choice of payment
methods. For example, a detailed study by the Policy Studies
Institute of nearly 2,400 households showed that 63 per cent of
women categorised as "full-time housewives or mothers"
did not possess a current bank account (cited in Kempson, Outside
the Banking System, Social Security Advisory Committee, 1994).
In many cases, this may well be because there is reliance on a
partner's account. However, if the credit is being paid to the
woman non-breadwinner on the basis that the money might not otherwise
reach her, she will obviously prefer to cash payments at a post-office
.
(d) Good communication: It is important
that working people and their advisers will communicate swiftly
and effectively with Revenue staff, and that information, letters
and forms sent to potential tax credit recipients are informative
and easy to understand. At present, there are complaints from
CABx that it can be difficult on occasions to contact the Family
Credit Unit at Preston by telephone, due to the number being constantly
engaged. Given the increased volume of work, this problem will
need to be addressed. The advent of new computer systems to run
WFTC and DPTC also provides an opportunity to develop more personalised
correspondence which can respond to individuals' specific queries.
WORKING ACROSS
ORGANISATIONAL BARRIERS
22. The Government is keen to remove unnecessary
organisational barriers to closer working between Departments.
The WFTC and DPTC essentially involve the transfer of family credit
and disability working allowance from the Benefits Agency to the
Inland Revenue. Many of the underlying rules will be benefits
basedfor example, the assessment of the income of couples
and the calculation of capital, which are currently designed to
be largely consistent across all means-tested benefits. The
CAB service believes it would be logical for the new systems for
decision making and appeals in social security put in place by
the 1998 Social Security Act to apply to the WFTC and DPTC, and
for appeals concerning questions common both to WFTC/DPTC and
benefits to go to the same tribunal.
THE ROLE
OF EMPLOYERS
23. It is difficult to anticipate how such employers
will react to the introduction of the WFTC and DPTC. On the one
hand, employers may be willing to promote take-up. The credit
will make the wage they can offer employees more attractive, and
the cost will be met by the Government. The nearest analogy is
to the payment of statutory maternity pay, where employers are
largely reimbursed by the Government and CABx report few problems.
The contrasts with statutory sick pay, where the Government no
longer reimburses most employers and where, as a result, CABx
report that employer non-cooperation had greatly increased. On
the other hand, the WFTC and DPTC will require a greater administrative
role for employers, particularly in the case of employers with
employees currently paid below the tax and national insurance
thresholds. The latter group might possibly be reluctant to co-operate,
if it brings greater scrutiny of their affairs by the Inland Revenue
and Contributions Agency.
24. The co-operation of employers is already
a necessary feature of family credit, in confirming earnings,
hours worked, andin the case of new jobsthe duration
of the job. For the most part this works well. However, CAB evidence
does show that there can be problems:
A CAB in the Home Counties reported a woman caring
for four children and working as a cleaner. Her claim for family
credit had been delayed due to the failure of the employer to
confirm her wages. When the CAB contacted the firm on a Tuesday,
they were told by the payroll clerk that she was "too busy"
to process the wages enquiry from the Benefits Agency. She told
the CAB that she would be unable to attend to it before the end
of the week. As a result of the delay, the client was forced to
claim a crisis loan from the social fund to tide her over.
A CAB in Dorset reported a man who had been employed
on a weekly contract. His claim for family credit was rejected
on the basis that his employers would not confirm that the job
would continue for five weeks, apparently because they did not
want to commit themselves in advance to employing him for this
periodeven though, in the event, they did so. The man lost
out on family credit as a result.
A CAB in Essex were consulted by a man who had
obtained a job after a period of unemployment during which he
had lost his home and his car. His new employer was very strictdocking
£20 off the wage of £165 for 48 hours work if an employee
was more than two minutes late. He also refused to provide wage
slips. The client was afraid to ask for them for fear of losing
his job. He therefore did not feel able to apply for family credit.
25. From the employee's perspective one of the
key issues arising from the introduction of WFTC and DPTC will
be enforcement. How will an employee force a reluctant employer
to pay the credit and pay it accurately and promptly, without
jeopardising their job? The issue of enforcement in this context
is similar to that which arises in connection with other employer
obligations in respect of their employees. A number of the broad
recommendations made in NACAB's 1997 report Flexibility AbusedCAB
evidence on employment conditions in the labour market, NACAB,
1997) and in CAB evidence to the Low Pay Commission concerning
enforcement of the minimum wage are relevant here:
there should be pro-active role by
Government in promoting good practice, with a view to enhancing
employer's awareness of their obligations and the benefits of
compliance;
employers should be given an incentive
to comply with their statutory obligations by the award of compensation
against them should they consistently fail to do so;
enforcement mechanisms are needed
which require the relevant statutory bodies to take active steps
to investigate employee complaints. Such mechanisms are needed
to address the vulnerability which is part and parcel of the working
lives of many low-income employees.
26. One specific recommendation of the CAB Service
in relation to WFTC and DPTC is that the statutory obligation
on employers to provide an itemised payslip should be extended
to require the specific inclusion of information relating to "gross
income tax"; and tax credit payable; and "net income
tax".
THE CHILDCARE
TAX CREDIT
27. The CAB Service very much welcomes the recognition
given by the childcare tax credit to the costs of childcare. The
childcare tax credit will address one of the key elements of the
unemployment trap for lone parents and non-working partners. The
Service welcomes in particular the extension of assistance with
childcare to parents on very low earnings who were previously
excluded from the family credit childcare disregard. This was
one of the recommendations in NACAB's report Benefits and Work
(NACAB 1997).
28. The CAB Service made two further recommendations
in Benefits and Work which still remain relevant:
consideration should be given to
extending help with childcare costs to all verifiable childcare
arrangements, given the scarcity of registered childminders and
other officially approved childcare arrangements. Although the
Government has plans to increase the availability fo such childcare,
it is clearly a long-term goal. Meanwhile, many parents who could
benefit from the tax credit will not be able to do so;
a couple should be accepted as eligible
to apply for the credit where the non-working partner is undergoing
training or is a student. Currently, difficulties in paying for
childcare can make it more difficult for a working partner to
stay in work, if the other partner is not available for child
care duties. The present policy, whereby couples are excluded
unless both partners are working or one is disabled, can make
it difficult for non-working partners who lack skills or qualifications
to improve their chances of getting a job.
CONCLUSION
The introduction of WFTC and DPTC has the potential
to substantially improve the incomes of people in low paid work.
However, many of the problems associated with means-tested benefits
will remain. There is a considerable challenge for the Inland
Revenue in delivering a service which is fast, efficient and transparent
to recipients of the credit.
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