Select Committee on Social Security First Report


APPENDIX 10

Memorandum submitted by the Child Poverty Action Group (CPAG) (TAB 77)

WORKING FAMILIES TAX CREDIT AND CHILD CARE CREDIT

1. SUMMARY OF RECOMMENDATIONS

  The incentive effect of in-work support is improved by:

    —  ensuring the availability of objective (or independent) expert and confidential advice about in-work entitlements;

    —  simplifying the interaction of tax and benefits;

    —  having a simple, efficient claim procedure for all in-work benefits;

    —  ensuring that the transition from benefit to work is understandable, predictable and smooth. There should be stability of income until the first wages are paid.

  Clear, accurate and confidential information will be important. The following could be provided:

    —  a national "back to work" Freeline, which can offer confidential advice on all relevant benefits;

    —  anonymous, but specific computer generated "better-off" calculations. An interactive programme for use by potential claimants could be available in JobCentres or libraries.

  The best way to simplify the claiming of in-work benefits would be a "one-stop" approach. It may be possible for the Inland Revenue to calculate entitlement to other in-work benefits.

  Housing benefit and council tax benefit must be reformed if the new WFTC is to be effective in its aims. An integration with WFTC would potentially simplify the system and the claiming process. However, we would strongly oppose a move towards a flat-rate system. An improvement would be a reduction in the rate at which benefit is withdrawn as income rises.

  WFTC should be awarded for a six month period.

  Payment options should be made explicit on the claim form and explained.

  Separate records of payment should be sent to the home address in the names of both members of the couple—it will then be clear to both the wage earner and the primary carer that the payment is a resource for the whole family.

  Consideration should be given to extending help with mortgage payments to people receiving WFTC.

  The new WFTC should be a passport to free school meals, subsidised travel and a grant/loan for initial work related expenses. People receiving WFTC should have access to payments from the social fund (at least for a 6 or 12 month period after coming off IS or JSA).

  Consideration should be given to guaranteeing income in the first difficult few weeks when moving off benefit and starting a new job. We suggest three options;

    —  extended payments of income support or income-based jobseekers allowance;

    —  interim payments of WFTC by giro;

    —  access to one-off payments.

2. INTRODUCTION

  CPAG welcomes the opportunity to contribute to the Select Committee's enquiry in to the new working families tax credit (WFTC).

  CPAG accepts that paid work is for many the best route out of poverty, while recognising that work of itself does not guarantee an adequate income. Whether work is or should be an option should depend on the circumstances of the individual and the family. Where work is not available or is not an option, adequate minimum levels of income should be provided.

  We welcome the improvement in in-work support provided by the new WFTC. Being in work does not necessarily mean that families escape poverty—work can bring new expenses and poverty traps.

  Payment of non-means tested benefits by right, e.g., adequate levels of child benefit, can do much to alleviate in-work poverty and smooth the transition from benefits to work. Obviously the best solution is to ensure that earnings are at a level at which the family no longer needs the support of a wage subsidy.

  We accept that there is a place for a wage subsidy for families in the tax and benefit system. The new WFTC provides an opportunity to take the best of family credit (FC) and to improve on it. The best system is one which will help claimants move off IS or JSA into work and from there continue on an "up escalator" enabling them to increase their earnings( if there is the opportunity), lessen their reliance on means-tested benefits and take them out of poverty. Any system on in-work support should also accommodate, and support, opportunities for training and learning.

  The new WFTC provides an opportunity to improve the process for claiming and administration, with better standards of service delivery.

Success measures

  The "success" of the new WFTC can be measured in many ways. Perhaps the most immediate and important measure is the amount of additional financial support the new payment provides for families with children—and the ease and speed at which payments are made.

  There are a number of other ways by which the success of the WFTC can be measured:

    —  improved levels of take-up;

    —  the number of people moving from income support (IS) or jobseekers allowance (JSA) into work;

    —  the number of people who remain in work (e.g. beyond 26 weeks);

    —  the number of people who, over time, move off means-tested benefits.

The importance of clear and accessible information

  Clear, accurate and confidential information will be important. The following could be provided:

    —  a national "back to work" Free-line, which can offer confidential advice on all relevant benefits;

    —  anonymous, but specific computer generated "better-off" calculations. An interactive programme for use by potential claimants could be available in JobCentres or libraries. However, better off calculations should take account of (or at least flag up) all relevant issues including the effect of the loss of free school meals, additional work related expenses and the potential loss of accumulated or transitional benefit entitlements.

  It is important that there is access to high quality information provided by the Benefits Agency, Employment Service and, when WFTC is introduced, the Inland Revenue. CPAG opposed the closure of the Freeline service. The development of a personal adviser service is welcome but information should be available to people who do not want to "go through the system". However, people should also have access to independent advice and support.

Work incentives

  Most people not in work and receiving benefit want the opportunity to work. For many the main barrier to work is the lack of secure jobs with adequate rates of pay.

  A major disincentive to work is the "in-work" poverty trap. Although IS and JSA rates are low and inadequate (particularly for families with children) the benefits do provide at least some security of income. When work is available, the financial advantages to working are not always immediate or clear. The interaction of benefits and wages is complex. The poverty trap remains a reality for many families.

  The "incentive" effect of in-work support is improved by:

    —  ensuring the availability of objective (or "independent"), expert and confidential advice about in work entitlements;

    —  simplifying the interaction of tax and benefits;

    —  having a simple, efficient claims procedure for in-work benefits;

    —  ensuring that the transition from benefit to work is understandable, predictable and smooth. For example, there should be stability of income until the first wages are paid.

3. UNEMPLOYMENT AND POVERTY TRAPS

  The move from IS or JSA to work can be difficult for many people. The problems or challenges are particularly acute for certain groups: a move to work, even with WFTC, may result in little or no additional income, or may actually lead to the family being worse off. These groups are said to be "trapped in unemployment". For example:

    —  home owners. A move off IS or JSA(IB) and the loss of help with mortgage payments can create a poverty trap. Consideration should be given to extending help with mortgage payments to WFTC;

    —  people with disabilities. The impact of losing IS or JSA (IB) can be greater where the partner of the person in work is disabled. The disabled persons tax credit can only be claimed if the person working is disabled (and meets the qualifying criteria). The disability premium is currently worth £30.60 a week. Consideration should be given to helping with extra costs where the partner or dependants of the person in work is sick or disabled;

    —  lone parents. The abolition of the higher rate of child benefit and the family premium for new claims creates a disincentive to move from "welfare to work". The loss of these benefits for new claims is not fully compensated by the increases in personal allowances for children under 11 (from November 1998) or the increase in child benefit (from April 1999).

  Government figures[39] show that from October 1999 1,470,000 lone parents will be an average of £6.30 per week better off as the overall result of the Budget measures and cuts to lone parent benefits. 255,000 will see no change and 60,000 will be an average of £2 per week worse off.

  Research shows that meeting housing cots is (along with childcare) one of the major problems preventing lone parents from moving into work. Lone parents in low paid work and claiming housing benefit are the group worst hit by the cuts to lone parent benefits. The Government own figures show that lone parents (not on income support) who make new claims for housing benefit and council tax benefits after 5 April 1998 will be up to £9.35 worse off as a result of the abolition of the lone parent rate of the family premium. Lack of any transitional entitlement to the higher rate family premium in HB for lone parents acts as an additional barrier to work lone parents getting the higher rate family premium should retain the premium when they move into work and claim housing benefit and council tax benefit.

  Housing costs and barriers to work—example:

    Families with one child under 11 with earnings of £120 a week (net) will pay different amounts towards rent depending on their circumstances. Lone parents without the higher rate family premium pay a greater contribution towards their housing costs. For example:

    —  a couple would pay £38.18 a week to their rent;

    —  a lone parent with protected HB higher rate family premium would pay £43.58;

    —  a lone parent without the HB higher rate family premium would pay £50.73 (ie, they are worse off by £9.35 a week).

Poverty traps

  Housing benefit and council tax benefit must be reformed if the new WFTC is to be effective in its aims.

  The government has stated that very few families receiving WFTC will experience the highest marginal tax rate of 95.48 per cent. However, people paying income tax and NIC's and who receive housing benefit will have a marginal tax rate of 89.4 per cent—an increase of only just over 10p for every extra £1 earned.[40]

  A more coherent benefit structure would make the system more transparent, with a clearer relationship between earnings and benefit levels. The benefit system also needs to be more accessible

 "In-work" expenses

  Increasing weekly gross income for families is welcome, but families may need help to reduce expenses or outgoings. In many cases additional costs and expenses will erode the advantage of WFTC over IS or JSA(IB):

  In work expenses—example:

    A couple with two children aged 12 and 14 receive an income of £140.75 from JSA(IB) and Child Benefit (CB) and pay no rent or council tax.

    If one partner takes a job for 28 hours a week earning £150 net, they will receive £56.70 a week WFTC and £20.75 CB : total income £227.45 an increase of £86.70.

    This apparent gain is eroded by;

    —  £49.85 to rent after HB

    —  £15.34 to council tax after CTB.

    —  £10 a week on school meals

    —  £8.50 travelling to work

    The family is only £3.01 a week better-off.

Insecurity of income and moving into work

  It can be difficult for families to budget for one-off expenses when incomes, after basic costs, are not much above IS level. There are often initial expenses involved when moving into work (e.g., buying new clothes, equipment and travel passes) at a time when the family may be without income for a month or more.

  Fear of financial insecurity is often for people with families a considerable deterrent to take up work.[41] Awarding WFTC for six months would provide some security.

  In addition, other income could be guaranteed, or at least made more secure. Maintenance payments collected by the CSA should be guaranteed. Fluctuating maintenance payments can leave families in poverty for weeks at a time, with the additional stress and anxiety of having to urge the Child Support Agency to use its powers of enforcement. Stable weekly maintenance payments could be made with the WFTC award.

  With FC, £15 of maintenance is disregarded as income enabling the children to benefit from maintenance collected and promoting co-operation and enhancing relationships between separated parents.

  A disregard of at least £15 a week should be incorporated into the WFTC system and should be reviewed annually to maintain its value in real terms.

  For a person starting a new job, the period until the first payment of wages can be a time of financial hardship and insecurity. The wait for the first payment of wages may be four weeks or more. The family may not know during this time what benefits are available, or the rate at which they will eventually be paid. There may be more sources of income to sort out or juggle.

  Changes in income—example:

    A lone-parent on IS works part-time job for a year; she lives in local authority accommodation and has a CSA maintenance order in place. She has a weekly IS payment book and she pays no rent or council tax

    If the lone starts a second job and works over 16 hours a week she may need to sort out the following sources of income:

    —  part-time earnings from first job

    —  part-time earnings second job

    —  family credit

    —  maintenance

    —  separate HB/CTB claim to council

    —  four week extended HB/CTB claim

    —  child maintenance bonus

    —  back to work bonus from time doing one job.

    This are also tax and National Insurance issues and arrangements for child care to sort out.

 "Passport" benefits

  The new WFTC should be a passport to free school meals, subsidised travel and a grant/loan fund for initial work related expenses. People receiving WFTC should have access to payments from the social fund (at least for a 6 or 12 month period after coming off IS or JSA).

  WFTC should continue to be a "passport" to benefits such as free prescriptions and help with dental treatment. We believe that people in receipt of WFTC should also have entitlement to free school meals.

An "income bridge"

  Consideration needs to be given to guaranteeing income in the difficult first few weeks when moving off benefit and starting a new job.

  DSS research showed that the greatest deterrent to claimants taking up work was the fear of financial insecurity and the problems surviving with no income until the first payment of wages.[42]

  We can suggest three options which could be implemented singly or in combination;

    —  extended payments of JSA(IB) or IS. Supplementary benefit (replaced by IS in 1988) was payable for the first 15 days of starting work. HB/CTB are currently payable at the "out of work" rate for the first four weeks of a new job;

    —  interim payments of WFTC by giro. Any errors made in the interim calculation could be corrected in the six month award;

    —  access to one-off payments. Payments would be for work-related costs such as clothing or equipment. This could be by access to the social fund. However, given the budget restraints on social fund budgets, additional funding should be provided to meet these needs, or a distinct budget should be set up and ring-fenced for expenses (e.g., new clothing or equipment).

Encouraging claimants to leave JSA/IS and enter work.

  Family credit was not successful at encouraging people to move from IS or JSA(IB) into work. Research has shown that most FC claimants were already in work prior to claiming—only one in four families were on IS before applying (the research commenced before the introduction of JSA).[43]

  The availability of FC appears not to be a key factor in decisions to take up work, often because people on IS or JSA are not sufficiently aware of the scheme or how it operates.[44]

To be effective as a work incentive it needs to be clear to potential claimants how WFTC will operate. It's interaction with tax, national insurance and other benefits needs to be transparent.

  Studies show that FC failed to help a large proportion of claimant families out of poverty. They became worse off overall or ended up leaving work and going back on to IS or JSA(IB) before the end of the 26 week award period.[45] Claimants who had been on IS before their FC award were most likely to go back to IS.

4. ADMINISTRATION AND PAYMENT

  It is vital for people moving in to work to have benefits processed as quickly as possible with the transition from one claim to another as smooth as possible.

  The system for administering WFTC should aim to minimise the period of wait before the first payment of wages.

 "Fast tracking" of claims

  The "fast tracking" of claims for those moving off IS or JSA onto WFTC should be maintained, and improved. This should be easier with the transfer of responsibility to the Inland Revenue. The Inland Revenue will be able to determine from the gross wage information (supplied by the employer) and the family composition, what net income will be—without the need to wait for six weeks or three months for pay slips. Problems in the calculation of payment caused by tax rebates or ticket loans included in an individual month pay slip can be avoided.

  The fast track claim system should be expanded to include consideration of all associated benefits. A short form could be enclosed with a WFTC claim asking whether the person wishes to claim back to work bonus/ HB/CTB etc., which could then be forwarded to the appropriate department(s). A similar form called an NHB1 is currently included in an IS claim and forwarded to the local authority to process HB/CTB.

  An integrated system would make the process even more simple.

  The WFTC is to be a tax credit administered by the Inland Revenue rather than a benefit. In order to retain the advantage provided by its higher thresholds and lower taper, we assume that the treatment of income other than earnings will be the same as for FC e.g., child benefit and a maintenance disregard should continue to be ignored.

  The best way to simplify the claiming of in-work benefits would be a "one-stop" approach. The IR will administer WFTC, but it may be possible for the IR to calculate entitlement to transitional benefits (e.g., extended payment of HB). This need not require a radical overhaul of the benefit rules themselves but can be achieved by IT and professional advisers.

  The use of IT can be powerful to:

    —  process claims;

    —  link claims and information;

    —  personalise information;

    —  target likely claimants.

  There are considerable similarities between FC and WFTC. For this reason it seems sensible, and most cost effective, to simply transfer Benefits Agency staff to the Inland Revenue.

  WFTC should be awarded for a six months period. This gives security of income and simplifies payments, keeping down administration costs.

Clearance times

  The clearance time target for family credit is 90 per cent of claims within 5 working days (this does not mean that payment will be made within 5 days). We would like to see this retained for WFTC to prevent the actual transition being a barrier to work, there are problems in that the "other" 10 per cent can remain un-processed for months under pressure to meet targets by processing straight forward applications.

  Payment delays—example:

    CPAG has been informed of a case of family of six who made a claim for FC when the father moved from a JSA(IB) claim into a job paying little over the threshold level. There was a five month delay, in large part because without a NINO for the mother the claim could not be put on to the FC computer system for payment. Presumably in line with the fact that compensation is only payable if an FC claim is delayed longer than 6 months, the FC officer was unable to say that the delay was unacceptable, even though throughout this time the family were living on substantially less income then on their JSA claim.

  There should be an independently managed section to deal with difficult cases, the "other" 10 per cent and the clerical claims. They too could have a clearance target, allowing longer to recognise the complexity of the cases e.g. 80 per cent within 15 days. Only in exceptional cases should a claim take longer then three months to process.

  In setting up computer systems to process claims and issue determinations there is a need to ensure that awards are easily understandable and show clear reasons for the decision. All WFTC determinations need to be sent to claimants with full appeal rights on all aspects of entitlement and the calculation.

Choice of claimant

  We would welcome the devising of a form similar to the current FC claim form which is clearly designed to be completed, for couples, by the primary carer. Payment options should be made explicit on the form and explained.

  The Government has said that there will be a choice of payment—with wages or by giro.

  There is substantial evidence that support for families is best channelled via the main carer, usually the woman, in order that most of it reaches the children. In 1985, before the introduction of family credit, CPAG summarised the responses of 60 organisations including, employers, churches, women's groups, trade unions and political bodies.

  CPAG found only the Monday Club in favour of proposals to pay FC via the pay-packet.[46] There is little evidence to suggest that the dynamic of relationships and financial decision making within families has changed significantly over the last 14 years.

  CPAG supports the position expressed by the Social Security Advisory Committee's 4th Report, SSAC in 1985:

    "In a benefit intended specifically for families with children, it seems retrograde to divert resources out of the hands of the person most closely concerned with providing for the children's needs"

  If payment via the pay-packet is the chosen option, the record of payment needs to be clearly marked. However, too much information on the employer provided wage slip may have its disadvantages (see below). Separate records of payment should be sent to the home address in the names of both members of the couple—it will then be clear to both the wage earner and the primary carer that this is a resource for the whole family.

  Payment by giro will be necessary, and should be dealt with quickly, should the job end.

5. ROLE OF EMPLOYERS

  Employers have a direct involvement in the administration and payment of tax credits in the United States. Such involvement may be more appropriate in the US system where all workers are required to file tax returns yearly, unlike the UK which operates a PAYE system.

  To administer a claim for WFTC it should be possible to limit the information required from an employer to hours worked and gross rate of pay. Information to support a claim should remain confidential between the employee and the Inland Revenue.

  There is a danger of providing the employer with information about the employee simply by informing the employer of the amount of WFTC in payment. Where the employee is paid through the wage packet, it would be possible for the employer to work-out the employee's other non-disregarded income if the maximum WFTC is not in payment.

  Employers are likely to find the process of information gathering onerous. The CBI and employers organisations opposed employer involvement in paying FC in 1985.

  We are concerned that payment of WFTC with wages will increase the "visibility" of what is in effect a subsidy for low wages.

  Employers, who need not know that a person is receiving FC, will know that WFTC is in payment and will know the amount being paid. The knock-on effect of the minimum wage needs to be considered: employers will be required to pay at least the minimum wage, but the payment (and uprating) of WFTC may be used to help justify the "freezing" of pay levels.

  Greater employer involvement increases the possibility of systematic fraudulent claims, particularly if they are also involved in payment.

6. CHILD CARE AND CHILD CARE CREDITS

  We welcome the more generous help with childcare which WFTC will provide.

  As an incentive and to maximise take-up, the credit needs to be easy to claim and simple to understand.

  Although the child care credit is more generous, the maximum payment possible will not meet the full cost of essential child care in many cases. Figures in the recent consultation document "Meeting the Childcare Challenge" recognised that "the cost of care is high and out of the reach of many parents' (page 5). The document quoted Daycare Trust estimates that the typical weekly cost of a full-time childminding place for a child under five years varies from £50 to £120.

  The shortfall in the help provided by the child care credit may increase if the wages of child minders rise with the introduction of the minimum wage. Parents will have to meet 30 per cent of the child care costs (and more if the cost exceeds the ceiling)—a significant proportion of income. We recognise the arguments that not meeting the full cost gives an incentive to "shop around" (although the argument presumes that there is a sufficiently broad choice on offer!). There is also the argument that meeting actual cost will simply allow child care providers to increase their fees. There is, however, a strong case to make the credit more generous, albeit subject to a ceiling.

  Child care costs may be significantly higher for children with special needs.

  To qualify for the child care disregard for HB and FC the child minder must be registered. However, in practice many parents do use informal child care—or would do if the cost could be met. The expansion of childcare places outlined in the proposals for a National Childcare Strategy will improve the availability of childcare and complement the additional help provided through the child care credits.

  The current rule for couples is that the child care disregard can only be claimed if a non-working partner is incapacitated. We believe that the child care credit should be available to all parents who need it to enable at least one partner to remain in full time work.

  Where one of a couple is in full time work, the credit should at least be allowed where:

    —  the non-working partner is a full-time student. This would remove a disincentive to study;

    —  the non-working partner is registered as unemployed. An unemployed partner may have time to provide child care. However, most people claiming JSA are required to be available for work at 24 hours or 48 hours if the claimant has care responsibilities (which are accepted as reasonable by the JobCentre). The child care provided by the unemployed partner (out of necessity as the child care credit is not payable) is therefore not stable. Jobsearch activities (e.g. signing on) may not be compatible with child care responsibilities.

Fiona Frobisher

Martin Barnes

CPAG

May 1998

REFERENCES

  Bryson and Marsh 1996 "Leaving Family Credit" DSS/HMSO

  Corden and Craig 1991 "Perceptions of Family Credit" Social Policy research Unit/—York University HMSO

  Public Studies Institute 1996 "Relative Incomes" PSI

  Shaw et al 1996 "Moving Off Income Support" DSS Research Report 53 HMSO

  "Checklist of the Responses of 60 Key Organisations to the Government's Green Paper" CPAG November 1985). Social Security Advisory Committee's 4th Report, SSAC 1985.


39   Hansard, 31 March 1998, col. 486. Back

40   Hansard, 8 April 1998 cols. 242 and 388. Back

41   Corden and Craig 1991. Back

42   Shaw et al; 1996 DSS Research Report 53 HMSO. Back

43   Bryson and March 1996. Back

44   Corden and Craig 1991; Bryson and March 1996. Back

45   Bryson and Marsh. Back

46   "Checklist of the responses of 60 key organisations to the Government's Green Paper"; CPAG November 1985. Back


 
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