Select Committee on Social Security Minutes of Evidence

Examination of witnesses (Questions 260 - 279)



  260. Who are they?
  (Mr Orhnial) A lot of the people who have come to you: the Low Pay Unit, the Child Poverty Action Group, the Low Income Tax Reform Group. We have a lot of these people in regular contact with us because they sit on a special committee of the Working Families Tax Credit implementation programme where they are helping us to see how well that is being delivered. There is a continuing dialogue. Despite the fact that detailed proposals have not been published as yet, we are doing things, if you like, in an incremental way, gathering evidence up which then informs our thinking. People volunteer that evidence and a lot of the submissions that have been made to you have also in different terms been made to us.

  261. Just a final subject, I understand that the adult credit within the Working Families Tax Credit is only given to parents. Will there be a conflict with the Employment Credit? How do you view that?
  (Mr Macpherson) I think the Adult Credit in the Working Families Tax Credit would be absorbed in the Employment Credit, so the Child Credit would just be about the payments around children. As I say, the only issue there is whether you have a higher payment for the first child or some sort of family credit or premium. The issue around the Adult Credit then relates to the Employment Tax Credit and we are working on that. You inherit a system which goes all the way back to Family Income Supplement where if you are a lone parent you got the full Adult Credit, exactly the same credit as two parents get. So there are issues there and we need to look at that in the light of the effects on couples, but also taking into account relative costs for a lone parent of moving into work.

  Mr Robertson: Thank you very much.

Dr Naysmith

  262. Helen Ghosh earlier on talked about one of the main reasons for all the changes associated with ICC, which was to improve customer service and to make it easier for people to access the system. I want to ask a few questions about that because what this amounts to is means-testing and we will probably end up with means-testing for more people than are means-tested now. It is important to get it as simple to understand and access as possible. First of all, in some of the consultation documents that have come out you have talked about setting annual awards for ICC and basing awards on income during the year. Do you envisage basing awards on income in the previous year as happens in Canada or income in the current year as happens in Australia? Or have you not got as far as thinking about the details of that?
  (Mr Macpherson) We are thinking about that and first I take your point about assessing payments on an income-related basis. If you are having a lot of people assessed on that basis you need to make it easy for the customer to access, and we hope to get away from overly complicated forms. On the issue of the period of assessment, you are absolutely right. First, we are tending to home in on the idea of an annual assessment, although clearly you want to have a safety net as well so that people do not fall out of the system. The issue then is, do you assess it on the previous year or the current year? I think that we clearly need to look, and indeed have looked, at the Canadian and Australian systems. It is worth saying how their experience is different from ours. For example, in Australia everybody files a tax return and their system, I think, is going to involve end year reconciliations where people might have been overpaid to quite a large extent and might have to pay back money to their revenue service. If they were still on very low incomes, that could be a problem.

  263. I am sorry to interrupt but this annual reconciliation could mean introducing increasing complexity into the system.
  (Mr Macpherson) Exactly. If you look at the Canadian system, where it is done on the previous year a lot of the information is pretty out of date. If you had a good year last year, and you were a couple both of whom were working you might be eligible for very little payment, but your economic circumstances might change the following year and under the Canadian system there would be no redress; that is just rough justice. It is these sort of issues that we are looking at and Tony from the Inland Revenue is looking at this most of all.

  264. Before we bring in Tony, Andrew Dilnot gave us some evidence[8] in which he said there were likely to be some "awkward corners" in matching up weekly benefits with annual income returns.
  (Mr Orhnial) I am not entirely sure of the sense in which Andrew meant that particular point. What we have currently is a collection of different vehicles, some of them based on annual income like children's tax credits, and assessed on an annual basis, others like WFTC, which are based on a short snapshot which determines your entitlement which then is fixed for six months, and entitlement to Income Support, which is based on a very much shorter period. What we will be looking to for the ICC is having a common basis across all of those. I think what we need to get clear is the distinction—this may be where Andrew was coming at it from—between the basis on which you assess entitlement to something, whether it is your income for a year or six months or six weeks, and the frequency with which you make any payments. I think what Andrew was particularly concerned about was the frequency of payments and there are a range of options open to us. Some of the systems we have looked at overseas essentially involve payment in lump sums after the end of the year as an option; others involve weekly or fortnightly payments.

  265. Do you think there will be much take-up for payment at the end of the year?
  (Mr Orhnial) My personal guess is no, because our system does not work well that way for most people. Lump sum payment works well with a system where most people have annual tax returns, where you have a pay-as-you-earn type system which over-deducts tax during the year and where people expect a repayment. So what you are getting at the end of the year is X pounds repaid in overpaid tax plus Y pounds reflecting entitlements to tax credit for this, that and the other. Lump sums at the end of year do not really go with the grain of our system for most people. Fortnightly or monthly payments might well go better with our tax system. Going back to the point Nick was focussing on earlier, we have looked quite closely at both the Australian and Canadian systems because in a sense they represent opposite ends of the spectrum, with the Canadian system being relatively inflexible and underpinned by a safety net, essentially at the provincial level.

  266. To come in on the Canadian system, one of the reasons why you are right, it is more inflexible, is because the taper starts at a much higher level than is likely to be the case here. Do you think that is a good thing, that you start higher up and that obviates the need for all these adjustments? Even if they are annual adjustments it still involves a lot of adjustments and at six months it is worse, and at shorter intervals it is even worse. The Canadian system, as I understand it, increases when the taper starts to come in and it is fairly generous.
  (Mr Orhnial) Again it is a trade-off which our ministers will need to look at to see precisely where the taper begins and ends. I do not think the Canadian system just relies on that. It relies also on people, when they have a big fall in income, not readjusting tax credits to get more money, but falling back on a social security system of some sort. With the ICC, remember, we are integrating the whole of the child payment system, so they will not be able to fall back on Income Support for child payments. Therefore we have to design an ICC that can deal within the system itself with sharp falls in income.
  (Ms Ghosh) I think Andrew Dilnot was talking about precisely that point, what happens if you are swimming along in a low-paid but reasonably comfortable position and you then you lose your job and for the remaining weeks of the year your income is extremely low? If you looked at the whole year you would still look reasonably comfortable. At that point the person would be caught in that case by moving on to Income Support/Jobseeker's Allowance where they would get their passport automatically on to 100 per cent ICC. So in that case the system provides an immediate safety net.

  267. What is the thinking nowadays in the Department on changes in family composition over a period?
  (Mr Macpherson) Although you start on the assumption that you want to have a fairly light touch, an annual approach, you also need to have a system which is responsive. There are certain key changes such as giving birth to an extra child where for WFTC at present you have to wait until your current time period expires. It is inflexible in that respect. We want to be able to ensure that the system responds to that and we also want the system to respond to precisely your point about changes in family circumstances. Say you are a mother and your partner walks out on you, you want to ensure that you get the maximum child credit (assuming your income is consistent with that) as quickly as possible. That requirement of a safety net is central to this system. The challenge is to come up with a system which is sufficiently simple for everybody to buy into it, in a sense, but also provides the necessary targeting for when key life events happen, and I think we are on our way to developing an answer to that conundrum.

  268. So you are fairly optimistic then that you will be able to crack that?
  (Mr Macpherson) We are fairly optimistic because in a sense if we did not think we could solve that problem we should not have announced this proposal in the first place.

  269. The Treasury discussion document on tax credits says that "the next phase of modernisation offers an opportunity for a thorough review of the treatment of income and capital." That is really very far-reaching in terms of accessing benefits.
  (Mr Macpherson) It is.

  270. Jane Millar, who has already been quoted, talked about "means testing with a light touch". Those two things, I imagine, are closely intertwined and both very important?
  (Mr Macpherson) I think that is a very important point. It is very striking that the income tax system does not recognise capital. It taxes you on your income and if you choose to tie your capital up in low-yield activities then you are not taxed more. The key thing here is—and the Treasury has been responsible for this in the past so I can claim my fair share of guilt—there is an obsession with targeting systems in ever more elaborate ways. Clearly in one sense that is efficient; it gets money to the people who really need it, but it carries a very big cost in terms of complexity to the point in many cases—and I think Housing Benefit is quite an interesting example—where it becomes virtually impossible to administer in an efficient way. The Government has just announced proposals on the new pension credit. The consultation document sets out proposals that the capital rules will be abolished and in time will be replaced by some sort of income test, so what you look at is income. Clearly we have that as a starting point because the other important objective here is to encourage savings. If you want people to become more independent you have got to let savings pay. In a lot of areas over the last couple of decades savings have not paid. You are mad to save if you are in low-paid employment because at every twist and turn you will be penalised by the system.

  271. It is something that every MP gets reinforced at every constituency surgery, the fact that you come along with a little bit of savings which stops you accessing any kind of assistance.
  (Mr Macpherson) All I am saying is that this is an area we are looking at from the point of view of savings as well as everything else and in terms of the administration. Equally, we want to have a system which generally does not come up with perverse results. All I can say is that we are on the case.

  272. Just one final quick question, and seeing as we have got three different Departments represented can we have an answer from all three, even from Mr Lodge who has been sitting there. We are always hearing about how forms are being simplified. You talk about how in hospital after a confinement a mother is given a form and gets quick access to Child Benefit. Can we really have forms that are simple and straightforward and easy to fill in?
  (Mr Lodge) I think I had better come in first! We are very keen to make sure that our systems are as accessible as possible and we are very keen to make sure that our forms are as simple as possible and as easy to understand as possible and as easy to complete as possible. It is important to outline some of the things we are doing to enable us to achieve those important goals. Principally, we will need to consult with the people who are going to be completing them to make sure.

  273. How often does that take place and how much people testing takes place before forms are introduced?
  (Mr Lodge) We do do quite a bit of that under controlled conditions and we will certainly want to do that for the new tax credits. We do concept testing to make sure people understand what the form is about. More importantly than that, probably, once we have understood the data and information we need to capture in order to decide whether to award or not we put that data in front of people and try to work with end users, with people who complete the forms, to make sure that they understand the information that we are seeking from them, that they understand, importantly, the guidance we want to provide to help them to complete the form and provide the information. We do that under controlled conditions. On a voluntary basis of course, we video people completing the forms. It is all standard testing arrangements and processes and we do an awful lot of that. We will want to do an awful lot of that given the lead in time we have got for tax credits to make sure that the forms are as user-friendly as possible.
  (Mr Macpherson) One of the objectives underlying these new tax credits, certainly in relation to the tax system, is to use information you have already got. A good example of this is the self-employed where Nick and others have been amending the whole application process for the Working Families Tax Credit so that instead of having to provide lots of different information you can pick up on a lot of the information they would provide for tax purposes, and certainly over time we will want to make more and more use of traditional tax information in order to make this system work.
  (Ms Ghosh) Obviously there is also a close link across to the e-government agenda and for some people, particularly when we can move into sophisticated interactive form filling, that would be a way of helping them. Certainly in the DSS, what we are doing—and I think the creation of the client groups has helped this—is embarking on a serious exercise of looking at all our groups of customers and seeing what kind of service would suit them best. For pensioners we are setting up models where it is basically a telephone and there is someone on the end of the phone to help people fill them in and so on. Again we are building e-capability not only into tax credits but a whole range of benefits, given the Prime Minister's commitment on that. There are some people we will still want to see walking through the door—

  274. It is not the people who are e-literate who have the problem; it is those who are not. It is important to do what you are doing but do not forget the others as well.
  (Ms Ghosh) Because we do not forget them—and it sounds bureaucratic but I am a civil servant—we have set up a group with the other key deliverers to the lowest income groups—the DfEE, the Inland Revenue, the local authorities—specifically looking at the people who are least likely to have access to e-government to see how we can make access easier for them. It may be that digital television is the way into that group because the reach of that may be greater in that group. We do not want to create another form of financial social exclusion through e-government.

Mr King

  275. I would like to ask Mr Lodge, what his thoughts are in terms of any choice that should be given to people in terms of how the payment of ICC should be made to them. Should it be in fortnightly payment to them or an annual tax refund?
  (Mr Lodge) There are a range of options and clearly this is something that Ministers will have to consider. The Prime Minister has made a very clear commitment that benefit and tax credit payments will continue to be available on a weekly basis at the Post Office and so we will be designing the new tax credit system in line with that commitment and we will want to consider the frequency of payments. Will it be a weekly payment or will it be a fortnightly payment or will it be available on an annual basis. Those are all options that need to be considered and Ministers need to consider them.

  276. I am glad to hear that there is a commitment to the Post Office as we all share that concern. Social Security, have you given consideration to this aspect of it?
  (Ms Ghosh) It is the Inland Revenue who will be making the payments. We will not be making payments of either of the tax credits. Clearly we have our own payment modernisation programme, which I am sure the Committee knows more about than I do, which is to roll out payment modernisation through Automated Credit Transfer (ACT) from between 2003 and 2005 and again, as Nick Lodge said, we are working within the Prime Minister's commitment to the availability of cash payments and we are working with the Inland Revenue on, for example, developing the Universal Bank to enable that to happen.

  277. We have heard earlier about Jane Millar's thoughts to the Committee about various aspects of this. Her view is that it does not feel like much of an integration to families who are going to be recipients of this because of the myriad of other benefits which people are going to have to claim from different agencies. Will the Integrated Child Credit make that much difference?
  (Mr Macpherson) I think it will make a difference. A good example, more from the Inland Revenue perspective, is how on the one hand you get support for children through the Children's Tax Credit system, which happens through the more traditional PAYE arrangement, but you also get support through the Working Families Tax Credit. Although the Inland Revenue is responsible for both, the two systems are still very unintegrated. You have to ring up Preston if you have got some problem around WFTC and you probably have to ring up your local tax office if you are not getting your Children's Tax Credit. So I think that that does represent progress and, of course, if you land back inside the more traditional welfare system you will have to access support through Income Support or indeed Housing Benefit. Hopefully, as far as that group is concerned, with the new Working Age Agency there will be this single front-end where you come in and discuss all your benefit needs as well as how you might move back into work, assuming you are capable of working.
  (Ms Pattison) And another thing to bear in mind is that as the ICC will probably stay with people through the life of their children in the way Child Benefit does now, many people coming onto Income Support will bring ICC with them already so what we are looking at there is making sure that the safety net kicks in rather than it being about filling in lots more forms because they have claimed Income Support. The point about Housing Benefit is a good one and we are working to look at how the new tax credits interact with Housing Benefit. We are very conscious of the Government's commitment around Marginal Deduction Rates (MDRs). We are also not looking at creating additional burdens on customers or indeed the local authorities, who could do without it. In the context of that we are looking at income tests between the two benefits, the responsiveness between the two areas of provision, and Housing Benefit indeed is included in the review of income and capital that was announced by the Chancellor.

  278. Thank you. This is an Inland Revenue question. Currently you do not collect data in terms of children in families. Do you have any plans to change that in the future in order to assist in making this a much more efficient operation and making sure that people do not miss out in terms of benefits?
  (Mr Orhnial) We are increasingly collecting data about children and families. We have always had information about children in the context of the additional personal allowance that went to lone parents until quite recently. With the Children's Tax Credit that starts to run from April this year we are collecting information about children, so that we will have data about children and the families they belong to. We, of course, do so for purposes of the WFTC. For the new tax credits certainly we will be building a system that will bring together the information we need on families and children.
  (Ms Ghosh) On the point we made earlier about pulling together closer integration on administration—Child Benefit, although it has got a 21-year-old computer system, has got some good data and a nearly 100 per cent take up, so most of the children who exist are in there somewhere, and again we can work on that.

  279. So you do have plans to data match between the two agencies?
  (Mr Macpherson) Definitely. This lies very much at the heart of the system. We do not want to have lots of agencies having their own data. We want to have one source of data on children so that you know who they are, where they are, who they belong to and you can use that system to provide the Child Support they are entitled to.
  (Ms Ghosh) Being a relative newcomer to the DSS I am always astonished at how expensive these things are, but it is a very good way of reaching everybody. I do not know whether you have seen recent Child Benefit notification forms but they are already advertising WFTC, and I am sure in due course they will be advertising Integrated Child Credit in the same way. So it is a very good way of reaching people. There is a captive audience out there.

8  See Ev. 29 November, 2000 (HC 951-iii). Back

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