Select Committee on Social Security First Report


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 subsidy—poverty and unemployment traps, administrative cost and complexity, and take-up problems—have 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 entitlements—not 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 packet—which 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 based—for 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, and—in the case of new jobs—the 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 period—even 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 strict—docking £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 Abused—CAB 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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