Select Committee on Social Security First Report


APPENDIX 9

Memorandum submitted by TaxAid(in consultation with the Kilburn Citizens Advice Bureau) (TAB 72)

EXECUTIVE SUMMARY

  We welcome many of the changes announced in March 1998, although we have a number of concerns which are described in this paper, together with suggested solutions.

WORKING FAMILIES TAX CREDIT

  1. We welcome the WFTC as one way of addressing the poverty/unemployment traps and work incentives, but are concerned about the short lead time to implementation. We urge that its introduction be delayed 12 months. If this is impossible, the second stage—delivery by employers—should be delayed 12 months.

  2. We are concerned that consultations are currently restricted to employer representatives. We urge that the Revenue should immediately form a committee of organisations which might represent prospective claimants, whose views should carry the same weight as employer representatives.

  3. Practical arrangements for the self-employed to claim WFTC should be addressed without delay.

  4. The Government should demonstrate that it is devoting sufficient resources to 'customer service' arrangements, to meet its commitment to seeking universal take-up of the WFTC.

  5. We recommend that consideration be given to setting the WFTC figures in round pounds.

Employer/employee issues

  6. While it is important for employers to become willing participants in the WFTC, this must always be seen against the need for a scheme which is 'user friendly' for claimants.

  7. We urge that the WFTC is delivered as a separate item on the payslip and not merged within the tax deduction under PAYE.

  8. The WFTC proposals contain many areas of potential difficulty, highlighting the dangers of rapid implementation, and the need for full consultation (see paragraphs 1 and 2).

OTHER ISSUES THAT NEED TO BE TACKLED

  9. The NIC burden on the low-income self-employed is punitive, is unfair when compared with the reforms being made to employee NICs, and is a serious obstacle to work. We urge that Martin Taylor's recommendations for reform of self-employed NICs be adopted without delay.

  10. We urge that the Chancellor finds a way to raise the threshold for employee NICs as a matter of urgency, perhaps by way of NIC credits.

  11. We believe that the impact of the Budget changes on the poverty/unemployment traps cannot be ascertained until the future of housing and council tax benefits are known.

  12. We recommend a comprehensive review of tax rates and allowances, to tackle the poverty/unemployment trap, increase work incentives and achieve a clearer tax and benefits system.

  13. We recommend that the taxation of benefits be reviewed at the earliest opportunity.

BACKGROUND

  TaxAid and the Kilburn CAB have previously submitted evidence on Tax and Benefits to the Committee, which was published in the Committee's Third Report. In that paper, we sought to emphasise the practical difficulties that arose from the existing regime and made various recommendations.

  We have now been invited to submit further evidence following the Budget announcements of 17 March 1998. We regret that the short amount of time available, and our own very modest resources, have limited the scope of this paper. We nevertheless hope that our comments—which again focus on the practical issues—will constructively assist the Committee's deliberations.

GENERAL MATTERS

  Our previous paper explained that we are keen to see reforms that address six unsatisfactory features of the existing tax and benefits systems: Outdatedness, Unfairness, Complexity, Dissonance, Bureaucracy and Lack of appropriate help[26]. The announcements that have been made will address a number of the problems that we identified.

  Working family tax credit. The Government was clearly committed, upon entering office, to introducing a new benefit for workers similar to the Earned Income Tax Credit in the USA. While there are certain attractions to the principle of such a reform, we envisaged considerable difficulties in adapting the EITC to the UK tax and benefits systems. In view of this we welcome certain key features of the WFTC that have now been announced. In particular that

    —  it will build on the strengths of Family Credit;

    —  it retains the six month fixed entitlement period;

    —  it will not necessitate any tampering with independent taxation of married couples; and

    —  there will be the option not to receive the credit from the employer.

  National insurance changes. We greatly welcome the abolition of the "entry fee" for employees. This will align the structure of the NIC charge more closely with income tax (which also has a tax free allowance), and so reduce tax/NIC complexity and dissonance. We also hope that the new threshold for employers NIC will encourage greater employment at lower income levels.

  Operational changes. We support plans to transfer both the Contributions Agency and the Family Credit Unit to the Inland Revenue. Although we are yet to see the details, in principle the changes provide the opportunity to bring tax, NIC and certain benefits into greater alignment, to reduce bureaucracy and to improve the quality of help available.

  While the thrust of these developments is broadly positive, we have a number of concerns which we wish to raise, and we also offer some proposals for dealing with them.

THE WORKING FAMILIES TAX CREDIT

Speed of introduction of the WFTC

  1. It has been observed that "the devil is in the detail", and it is already apparent that very little time has been allowed to ensure that there is adequate consultation on the issues that need to be ironed out, proper drafting of the legislation, and putting in place of administrative and "customer care" arrangements, before the system is due to go "live". Concerns about the tight timescale have already been raised in Parliament. We urge that

    —  the introduction of the WFTC be delayed by 12 months; or

    —  at least the second stage, delivery by employers, be delayed by 12 months until April 2001.

Inadequate consultation arrangements

  2. The Chancellor has announced consultations on the WFTC with employer representatives, but as far as we are aware no similar consultations are being conducted with organisations that might represent prospective claimants. At paragraphs seven and eight we provide examples of issues on which employers and claimants might disagree and, given the tight timescale, we are concerned that the legislation and procedures may be "sewn up" between the Revenue and employer organisations before the views of other bodies are sought, at which point it may be too late to modify the arrangements. It is vital that consultations be started as soon as possible with organisations that might represent prospective claimants.

  Consultations with such organisations could take the form of

    —  separate bilateral consultations with a number of organisations; or

    —  a single forum where a number of organisations jointly examine the issues with Revenue representatives.

  In our experience the latter form of consultation is much more likely to tease out the likely problems and to lead to practical solutions which enjoy the widest support. We recommend that the Revenue establishes a committee comprising members of organisations which might represent the views of prospective WFTC claimants. The views of this committee should be given at least as much weight as that of the existing committee for employer consultation.

Practical arrangements for the self employed

  3. In his evidence to your Committee, Mr Martin Taylor said that his task force had not specifically considered the position of the self-employed in relation to the workings of the WFTC, and the Committee recommended that serious consideration be given to this matter[27]. For example, it can be very difficult for self-employed workers to compute or demonstrate their earnings (net of business expenses), particularly in the early months of self-employment, which currently causes difficulties in claiming family credit.[28] We urge that the practical arrangements for the self-employed to claim the WFTC be addressed without delay.

Customer service issues

  4. We observed in our previous paper that the complexity of tax and benefits, and the involvement of several different agencies, often made compliance difficult for individuals on low incomes and could be a cause of unemployment. The transfer of the Family Credit Unit to the Inland Revenue is very welcome in bringing all procedures for the WFTC under one administrative roof. But this is just a first step. If the scheme is to attract a high take up, work will need to begin in drafting clear forms and explanatory material, training back-office and front-line staff in enquiry offices, introducing of one-stop enquiry centres covering tax and benefits, and ensuring that voluntary advice agencies (such as CABx) are well-prepared to field queries. The Government has stated that "with the WFTC, the onus will be on the Government to seek to ensure that as many families as are entitled receive the credit".[29] The Government should be asked to demonstrate that it is devoting sufficient resources to 'customer service' arrangements, so as to meet its commitment to seeking universal take-up of the WFTC.

Setting the level of the WFTC

  5. We understand that the figures used by the Government in The Modernisation of Britain's Tax and Benefit System (Number Three) The Working Families Tax Credit and work incentives are for purposes of illustration, applying current benefit levels, and that these will be uprated before the system goes "live". It is our view that prospective claimants find it much easier to comprehend tax and benefit issues-and are more likely to "sign up" for a new scheme-if the amounts involved are in round pounds. It is just that little bit less confusing, which may tip the balance. We recognise that an upward adjustment of a few pence in WFTC can have a significant impact on Treasury accounts, but there could be compensating roundings down. We recommend that consideration be given to setting the WFTC figures in round pounds.

EMPLOYER/EMPLOYEE ISSUES

The burden on employers

  6. There has been much comment—in Parliament and elsewhere—that the compliance burden will discourage firms from employing individuals who are on, or will be claiming, the WFTC. This matter will doubtless be a focus of the current consultation process with employer organisations, which may be expected to press for the compliance burden to be kept to a minimum. In certain situations (see examples in the following paragraphs), reducing the burden on employers will make things more difficult for claimants. While it is important for employers to become willing participants, this must always be seen against the need for a scheme which is 'user friendly' for claimants.

Delivery of WFTC

  7. There would appear to be two alternative mechanisms for employer delivery of the WFTC:

    —  By an adjustment within the employee's PAYE code, so that the WFTC is part and parcel of the net tax deduction/refund shown as a single figure on the payslip.

    —  By requiring the employer to make a separate addition to the employee's net pay, outside of PAYE, and consequently showing the WFTC as a separate item on the payslip.

  This is one of the issues upon which we believe that employers and prospective claimants may not see eye to eye, prompting our recommendation of separate consultations with groups representing prospective claimants (see point 2 above).

  We would expect that many (if not most) employers would prefer to deliver the benefit through the PAYE code, since this involves no new procedures and would be administratively simpler.

  From the perspective of the claimant, we strongly favour delivery as a separate payslip item outside PAYE, due to the following deficiencies in the PAYE system (some of which have been described in our previous paper):

    —  Speed of delivery. PAYE is slow compared with the five day delivery period for family credit. In our experience it usually takes at least a few weeks for a PAYE adjustment to find its way into the pay-packet. It is impossible to see how PAYE could achieve anything like the current five day delivery period which it seems the Chancellor hopes to achieve.

[30]

    —  Inappropriate structure of PAYE. PAYE is designed to give reliefs by way of a deduction from taxable income and does not cope well with delivering tax credits. The conversion of the married couple's allowance and certain other reliefs into tax credits in 1994-95 has necessitated special adjustments to PAYE codes which are very widely misunderstood and give rise to many errors.

    —  Transparency. As income tax and the cumulative PAYE scheme are poorly understood, it will be difficult for claimants to check that they have received the credit that they expect if the WFTC is delivered through PAYE. We can also envisage difficulties where the WFTC is correctly "coded in", but other aspects of the PAYE code are incorrect, reducing net pay below the amount expected by the employee. In such cases it may be difficult for the employee to appreciate that the WFTC is being correctly delivered. It may also be difficult for advice agencies to help, as changes in tax allowances since 1994-95 have made PAYE coding notices increasingly difficult for non-tax specialists to comprehend.

  We urge that the WFTC is delivered as a separate item on the payslip and not merged within the tax deduction under PAYE.

Potential problem areas

  3. As the proposed mechanics for delivery by employers are not yet publicised, it is difficult to comment beyond observing that there are several potential problem areas that need to be considered and that the detailed provisions need to address these. For example:

    —  Disputes as to whether an employer has been notified of WFTC due. We can envisage a situation where an employee believes that he or she should receive WFTC on a certain payday, but the expected amount is not included in the wage packet because the employer claims not to have been notified. Arrangements need to be in place to keep such cases to a minimum and for some form of "arbitration" to sort out disputes very quickly.

    —  Less scrupulous employers. Some employers refuse to operate PAYE (telling employees that they must sort out their own tax) or do not provide payslips. In such cases the employee claimant may have difficulty obtaining the WFTC or checking that the correct amount has been given. There is an inequality of bargaining power, the employee may need the job and so may choose to manage without the WFTC (for fear that a claim, even through the Revenue, might rupture relations with the employer and so lead to loss of employment). In our previous paper we recommended better policing of such employers by the Revenue, and this is more pressing if the WFTC is to succeed.

    —  Wallet v Purse. Couples will be allowed to choose which partner should receive the WFTC and some possible problems have already been raised in Parliamentary debate. We can envisage difficulties where, for example, an individual does not receive the WFTC expected in his or her pay-packet and, upon enquiry, is told by the employer that the payment must be going to their partner. A visit to the Revenue might yield an opposite explanation. Who is going to sort things out?

    —  Leaving work. Relations are not always good when individuals give up employment. If the employee believes that the WFTC has been omitted from the final pay-packet, there will need to be rapid procedures for the Revenue to investigate and for the employee to be compensated (if appropriate).

  It is clear that the proposals for the WFTC contain many areas of potential difficulty, highlighting the dangers of rapid implementation, and the need for full consultation, as recommended at paragraphs 1 and 2.

OTHER ISSUES THAT NEED TO BE TACKLED

  There were a number of important points in our previous submission, which have not been addressed by the current round of changes.

NIC burden on the low income self-employed

  9. The Chancellor has not taken steps to tackle the penal NIC burden on the low income self-employed. This is not a side-issue; Inland Revenue Statistics 1997 (page 41) show that 1,239 million people had self-employed earnings below £5,000 per annum.

  In our previous paper we observed that:

    —  Self-employed workers earning between £66.92 and £111 per week pay more NIC than employees on the same level of income, because of the flat rate class 2 NIC of £6.15 per week (1997-98 figures).

    —  There is considerable confusion about the two classes of NIC due from self-employed workers, which can be an obstacle to work or cause of indebtedness.

  For those on low incomes, the disparity between the NIC paid by the self-employed and by employees will be further increased by the reforms of employee NICs. It is therefore worrying to read reiteration of the misleading generalisation that "the self-employed . . . substantially under-contribute to the National Insurance Fund, even allowing for their reduced entitlements",[31] without recognition that the opposite is true in the case of those on the lowest incomes.

  Martin Taylor has observed that class 2 NIC is "analogous to an entry fee" and "markedly higher" than that for employees. He has recommended:

    —  abolishing the class 2 charge

    —  aligning the lower profits level for class 4 contributions with that for employees' NIC

    —  adjusting the class 4 rate so as at least to restore class 2 yield

  and "the Chancellor has said that he will consider this recommendation".[32]

  The NIC burden on the low-income self-employed is punitive, is unfair when compared with the reforms being made to employee NICs, and is a serious obstacle to work. We urge that Martin Taylor's recommendations be adopted without delay.

Raising the threshold for employee NICs

  10. We strongly support the Chancellor's commitment to raising the lower earnings limit for NICs into line with the personal tax allowance (from £64 to £81 per week). However, he has not specified a target date, and it is understood that the main obstacle is the need to find a way of protecting the benefit entitlement of employees earning between £64 and £81 pw[33] Pending a more general review of the contributory principle[34], one solution might be the introduction of "NIC credits". Anyone earning between £64 and £81 pw would be credited with NICs in the same way as credits are currently given to certain unemployed individuals. There would be a very small compliance cost to employers, who would have to report such employments separately. We urge that the Chancellor finds a way to raise the threshold for employee NICs as a matter of urgency, perhaps by way of NIC credits.

High marginal rates of tax/benefit withdrawal

  11. Although the WFTC has a taper set at 55 per cent (which is much lower than the 70 per cent applicable to family credit), the marginal rate facing those claiming housing benefit and council tax benefit is still 95.3 per cent (down from 96.85 per cent)[35], although we accept that many WFTC claimants will be "floated off" housing benefit. We believe that the impact of the Budget changes on the poverty/ unemployment traps cannot be ascertained until the future of housing and council tax benefits are known.

Tax allowances and rates

  12. In our previous paper we demonstrated that individuals on very low incomes—half the expected national minimum wage—may be liable for income tax and NIC.[36]

  We argued for raising tax allowances so as to exclude a greater number of people whose incomes are so low that they would ordinarily be expected to qualify for benefits. We believe that this will reduce tax complexity and will also address the unemployment/poverty gap, but we note that this point has not been taken up.

  We also argued against the introduction of a 10 per cent starting tax band, which we fear will merely increase tax complexity and divert resources which could be deployed towards raising tax allowances, while doing little to reduce the high marginal rates of tax/benefit withdrawal mentioned at paragraph 11. We note with regret that the Chancellor is still committed to a 10 per cent starting rate of tax "when it is prudent to do so".[37]

  We recommend a comprehensive review of tax rates and allowances, with a view to tackling the poverty trap, increasing work incentives and achieving a clearer tax and benefits system.

Reviewing the taxation of benefits

  13. In our previous paper we highlighted a number of anomalies whereby some benefits are taxable and some are not, and we demonstrated how this might 'reward' benefits claimants with a poor NIC payment record, or penalise those with a good record[38]. We recommend that the taxation of benefits be reviewed at the earliest opportunity.

June 1998


26   Outdatedness The systems no longer reflect the realities of today's workplace. They were designed for a time when most work was long-term full-time employment.

Unfairness The tax/NIC system can be penal for those on very low incomes, while the axation of benefits rewards non-compleance with NIC obligations.

Complexity The complexity of the systems is notorious; even the government agencies responsible cannot get things right.

Dissonance There is little harmony between tax, NIC and benefits. There are different legal codes, cultures, offices and periods for which calculations are made.

Bureaucracy People moving into work must deal with five agencies. Too many people pay tax and receive benefits concurrently. Most of them lack the skills to cope.

Lack of appropriate help There is no single government agency which can provide help on tax, NIC and benefits. Advice centres cannot confidently advise on all three areas. Back

27   Social Security Committee, Third Report p. ix. Back

28   See our submission reproduced in Social Security Committee, Third Report, at p. 115. Back

29   The Modernisation of Britain's Tax and Benefit System (Number Three) The Working Families Tax Credit and work incentives, para 2.09. Back

30   "when we asked the Chancellor about achieving the same rapidity of payment, he replied: `I think that is going to work' (Select Committee on Treasury, Fourth Report, para 30). Back

31   Fourth Report from the Treasury Committee, Session 1997-98, The 1998 Budget, HC 647, para 40. Back

32   Work incentives: A report by Martin Taylor, paras 2.26 and 2.27; and 1998 Budget Press Release HMT 6. Back

33   Fourth Report from the Treasury Committee, Session 1997-98, The 1998 Budget, HC 647, para 39. Back

34   We observed in our previous paper that the contributory principle has been seriously eroded over the years, and that NIC is in reality another tax. We therefore suggested that benefits be related to an individual's income tax payment record. However, we recognise that this would be a major reform and there is the obstacle that many voters will perceive a link between their NIC paid and their benefit entitlement. We noted that Martin Taylor thought that a review of the contributory principle might be desirable, but would need some lead time (Work incentives: A report by Martin Taylor, para 2.17). Back

35   Fourth Report from the Treasury Committee, Session 1997-98, The 1998 Budget, HC 647, para 31. Back

36   See our submission reproduced in Social Security Committee, Third Report, at p. 113. Back

37   Budget Speech, 17 March 1998. Back

38   See our submission reproduced in Social Security Committee, Third Report, at p. 113. Back


 
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