APPENDIX 13
Memorandum submitted by the Confederation
of British Industry (TAB 83)
SUMMARY
1. The CBI supports the plans for the implementation
of the Working Families Tax Credit (WFTC) as a means of targeting
additional resources towards workers at the bottom of the income
scale. However the CBI believes that if the payment of the credit
through the wage packet is to work effectively:
— The overall responsibility for the
administration of the credit should lie with the Revenue. The
responsibility of employers must not go beyond the role of agent
for the payment of the credit to involvement in its assessment.
— The choice should remain for the
non-working partner in a couple to receive the credit as a benefit.
— Financial and administrative burdens
on employers must be minimised, particularly in view of a number
of changes proposed to taxation and payroll systems up to the
year 2000, at a time when the priority of IT systems specialists
will be the Millennium bug. The National Minimum Wage, due to
be introduced in April 1999, will entail substantial changes to
payroll systems and record keeping, and other changes to the tax
system include the Scottish variable rate and student loan repayments
through the pay packet. The administrative responsibilities of
the employer must be minimised and co-ordinated with these other
measures.
2. To help to alleviate the administrative burden
on employers we propose that:
— Small firms should be exempt from
the requirement to administer the credit through the pay packet.
For a firm with only four or five employees for example, the cashflow
and administrative problems posed by administering the credit
will be disproportionate and substantial. A suitable measure of
size would be that used in assessment for those firms who receive
compensation for administering Statutory Maternity Pay (a total
gross NI liability of under £20,000).
— Reimbursement of the WFTC to employers
should include a compensation payment similar to that awarded
for court orders for example, or the level of reimbursement awarded
to small employers for administering SMP, where the additional
5.5 per cent paid on top of reimbursement represents a partial
recognition of the additional costs. We would suggest a reimbursement
payment rate of 1 per cent of the WFTC paid out. This would assist
the administration of the credit and ensure that employers were
sufficiently reimbursed, particularly in respect of the substantial
initial costs of administering an entirely new tax credit.
CBI members have identified a number of problem
areas concerning the practical implementation of the WFTC which
will need to be addressed. These include ensuring the continuity
of payments when an employee changes employment, administering
the credit during periods when the employee is not paid or present
at the workplace, and implementation problems with administering
the credit for temporary staff and those with multiple employments.
These issues are dealt with below in our detailed evidence to
the Social Security Committee.
THE WFTC AND
THE TAX
AND BENEFIT
SYSTEMS
3. The Conservative administration proposed
in 1985 that the responsibility for the administration of Family
Credit should pass to employers, as a first move towards a system
of Negative Income Tax. The CBI opposed this transfer of responsibility
to employers at this stage as it was not felt that full integration
was a realistic proposition. However in previous years the CBI
has supported the use of in-work benefits such as Family Credit
as an alternative to a minimum wage set too high, which we do
not consider an effective policy to tackle working poverty. In
responding to Martin Taylor's Taskforce on Tax and Benefit Reform,
the CBI expressed support for changes to taxation and benefits
which would ameliorate some of the disincentive effects of the
present system, but also highlighted significant implementation
difficulties which could arise.
4. On Budget Day in March 1998 the conclusions
of the Task Force on Tax and Benefit Reform were published.[49]
They provided a broad policy outline for plans for the WFTC but
did not include concrete proposals for implementation, or provision
for wider consultation on implementation issues. The report proposed
that the WFTC would be introduced from October 1999, to be paid
to the majority of recipients through the wage packet from April
2000. It stated that it would provide almost £1½ billion
more in-work support than Family Credit and would benefit around
400,000 more families with children. The CBI expressed support
for the proposed in-work credit but also suggested that there
would be considerable difficulties in implementation.
5. The changes to the rules of entitlement and
withdrawal rates will help to lower marginal tax rates for many
claimants and help to alleviate the effects of both the poverty
and unemployment traps. However there is no clear evidence that
the WFTC will have the motivational effects anticipated by the
Government. Detailed studies by the Joseph Rowntree Foundation
have produced no indication that comparable tax credits in the
US or Canada have had a discernible effect on incentivising workers.
6. Moreover it is also debatable whether the
introduction of the WFTC will have the effect of reducing the
stigma associated with in-work benefits and increase take-up.
It has been suggested that this stigma could increase if the employer
has a greater knowledge of the employee's circumstances than under
the Family Credit system.[50]
If the introduction of WFTC is to increase take up of in work
benefits, employees need to be made aware of the benefits they
are entitled to by means of clear guidance and sufficient publicity.
7. The choice should remain for the non working
partner in a couple to receive the WFTC. This is necessary to
ensure that a "purse to wallet" transfer does not occur
when the WFTC is introduced. In three-quarters of couples in receipt
of Family Credit, the father is the main wage-earner, and in nine
out of 10 of these male wage-earner couples, the mother has no
earnings.[51]
Receiving the credit through the pay packet should not be imposed
upon couples who would prefer to receive the credit as a benefit.
THE ROLE
OF THE
EMPLOYER IN
ADMINISTERING THE
WFTC
8. The respective roles of the employer and
the Inland Revenue must be clear both to employers and claimants
if the WFTC is to be administered efficiently. The role of the
employer should not go beyond paying the correct amount of the
award to a claimant following an instruction to do so by the Revenue.
The Revenue should be responsible for:
— Carrying out all assessment of awards.
— Dealing with enquiries concerning
awards.
— Reclaiming any over-payment should
this occur.
9. The CBI welcomes Martin Taylor's assurance
that there will be no employer involvement in the assessment of
WFTC awards. Any employer involvement in the assessment process
would be seen as intrusive by employees and could be very damaging
to employment relations. Moreover employers would not have access
to the sources of information used by the DSS to check claims.
Inevitably some enquiries will be directed towards the employer,
however a publicised helpline should be available for employees
to direct their enquiries to the Revenue.
10. If employers were to try to reclaim any
over-payment which might occur as a result of error or the employee
leaving their job, employment relations problems might arise.
Those entitled to the WFTC will inevitably be lower paid employees
and recovering overpayments may give rise to a nil wage payment
or one which would be unacceptably low to the individual. Difficulties
might also arise if an employee left a company before full recovery
was made. It should be clear to the employee that the IR is responsible
for correcting enormous payments, as the employer will have insufficient
records and information with which to do so.
ADMINISTRATION
11. The WFTC must be administered in a manner
which ensures the efficient delivery of the credit while minimising
the administrative burdens upon employers. Implementation of the
WFTC will entail initial costs for all organisations, and a substantial
increase in bureaucracy from the administration of Family Credit.
According to a 1994 DSS survey at least 10 per cent and possibly
up to a third of Family Credit claimants received the credit without
involving their employer by sending their pay slips to the DSS
directly.[52]
With the new rules of entitlement for the WFTC the client group
will be expanded substantially and the obligations on the employer
will considerably increase.
12. To minimise the burden on employers flexibility
in fitting in with employers' existing payroll systems is essential.
Employers should be at liberty to divide the 26 week total award
by the number of pay days within the period so that the WFTC can
be paid in equal instalments.
13. The costs of administering the new credit
will include making the alternations needed to payroll systems
or in some cases setting up new systems, the extra time which
will need to be spent by employers completing paperwork and administering
additional records and notification paperwork. Reimbursement of
the WFTC to employers should include a compensation payment of
1 per cent similar to that awarded for court orders for example,
or the level of reimbursement awarded to small employers for administering
SMP, where the additional 5.5 per cent paid on top of reimbursement
represents a partial recognition of the additional costs.
CASHFLOW PROBLEMS
14. Companies of all sizes may experience cash
flow problems in administering the WFTC, depending on the number
of their employees who are eligible. Every employer with a number
of WFTC recipients will suffer an initial impact to their cashflow
during the transition period in April 2000. However small companies
will find it particularly difficult to fund the credit in the
long term. It has been estimated by the Inland Revenue that in
approximately 80 per cent of cases the amount of credit to be
paid will exceed the tax liability of the claimant.
15. For the majority of employers it should
be sufficient for the Inland Revenue to put employers in funds
when this is requested. However the cumulative effect of initial
cash flow problems and administrative costs will place a significant
burden on small companies, many who have manual payroll systems.
For this reason the CBI proposes that employees of very small
companies should have their benefit administered by the Revenue.
A suitable cut off point could be set relating either the number
of employees or relating to NI contributions, for instance the
level at which companies receive compensation for administering
Statutory Maternity Pay (contributions of under £20,000 per
annum).
PAYE
16. It is possible for the WFTC to be administered
either by direct notification on the pay slip or through the PAYE
system. While CBI members have expressed preference for the latter
method, detailed work by the Inland Revenue suggests that there
are substantial technical problems with the administration of
the WFTC by means of an altered PAYE code. However we consider
that delivery through PAYE would be the preferable form if it
proves possible. Firstly it would entail a lesser administrative
burden on employers and require less change to payslips than direct
notification. It would also have the advantage of making it more
difficult to infer details of employees' circumstances and thus
maintain employee confidentiality.
THE NEED
FOR FLEXIBILITY
17. The CBI recognises that payment of the WFTC
through the wage packet is a key policy commitment of the Government.
For most permanent employees with one employer payment through
the wage packet would be feasible. However a significant proportion
of claimants will have circumstances which make it extremely difficult
for them to receive the WFTC in this way. In particular these
include:
— employees who change job during the
six month period;
— employees with more than one employer;
— employees who are in employment but
not receiving a pay packet.
18. For employees on a temporary contract which
lasts for under the six month period, the Inland Revenue should
administer the WFTC. Otherwise a greater incidence of delays is
likely if responsibility for the administration of the credit
has to pass to the Revenue mid-way through the award.
19. A number of claimants are likely to have
more than one employer and two or more wage packets. It would
be highly impractical for the credit to be divided among these
employers. However if one employer was chosen, the credit received
would be out of proportion to the wages received. This might arise
particularly in the case of agency workers, who might be employed
by a number of different agencies, and perform a varying number
of days work with each every week. In this situation it would
be virtually impossible for the credit to be administered by one
employer. The Inland Revenue should administer the credit in the
case of claimants with more than one employer.
20. Pay periods where no wages are payable present
a further obstacle to the administration of the WFTC by employers.
This could include extended sick leave, maternity leave or other
instances where the employee remains in employment but is not
receiving pay. It is unclear how the employer could administer
the credit if the employee is paying no tax for a period. If the
Revenue was to take over the administration of the credit in these
situations this problem could be overcome.
TIMETABLE AND
GUIDANCE
21. The target date set for the administration
of the WFTC by employers is extremely tight. Employers will 77need
clear guidance on their responsibilities at least six months before
April 2000 to enable the necessary changes to 7be made to payroll
systems. During the first few months of implementation a high
volume of queries will be inevitable and support and guidance
from the Inland Revenue in dealing with teething problems will
be essential. A dedicated hotline for employers should be set
up to enable queries to be dealt with quickly and efficiently.
September 19981
49 Martin Taylor, The Modernisation of Britain's
Tax and Benefit System No. 3; The Working Families Tax Credit
and work incentives (March 1998). Back
50
Julian McCrae, IFS, cited in The Guardian 5 February 1998
p. 2. Back
51
Professor Ruth Lister in The Guardian 28 January 1998 p.
18. Back
52
DSS Research Report No. 32, Employers and Family Credit
1994. Back
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