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 stagedelivery by employersshould 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 commentswhich again focus on the practical
issueswill 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 commentin Parliament
and elsewherethat 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 incomeshalf the expected national
minimum wagemay 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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