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in the rate at which benefit is withdrawn as income rises.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 coupleit
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 povertywork 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 childrenand 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 workexample:
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 centan 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 expensesexample:
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 incomeexample:
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
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 claimingonly
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 bewithout
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:
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 delaysexample:
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 paymentwith 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 coupleit 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 careor 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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