Period of assessment, length
of award and responsiveness
47. One of the key design parameters for ICC is the
length of an award and the period of assessment. ICC will bring
together three systems, each of which have made, for good reasons,
different decisions for determining length of award and period
of assessment. Income Support and income-based Jobseeker's Allowance
provide immediate income for poor families with little other income.
These benefits are assessed weekly and paid fortnightly. They
are heavily means-tested, in the sense that any change in income
or family structure is likely to have an immediate effect on the
payment due. In contrast, WFTC and DPTC are based on a 'snapshot'
of income in the weeks before the claim, and are then paid for
six months at a fixed rate, regardless of changes in income or
family size. The relative inflexibility of WFTC and DPTC reflect
the fact that they are a supplement to families who have other
income through working, albeit low. The Children's Tax Credit
goes much higher up the income scale, and for most families will
be a flat rate reduction in their annual tax bill, regardless
of income. For higher rate taxpayers, the amount of the Children's
Tax Credit, if any, will be calculated only when the person's
income for the year in question is known. Andrew Dilnot of IFS
suggested that in bringing the three regimes together, there were
likely to be "some awkward corners."[98]
Jane Millar commented, "I think one of the challenges to
the UK is, we have to think about income-testing in a different
sort of way. We have been used to using income-testing or means-testing
to identify current needs very precisely and we have very detailed
rules in those. I think you might need what you might call 'means-testing
with a light touch'...to make this sort of thing work."[99]
Andrew Dilnot's view was "We can do means-testing with a
lighter touch, but the consequence will be more expenditure. If
we do not want to spend more, then some of the means-testing we
have to implement will in certain circumstances seem a little
more aggressive than we might otherwise want. Those are some of
the sorts of decisions which the Government has to make."[100]
48. Both Canada and Australia assess entitlement
to their child credits on an annual basis. In Canada, National
Child Benefit is assessed yearly through the tax system, based
on income in the previous tax year. Nick Macpherson of the Treasury
commented, "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 very
little redress, that is just rough justice."[101]
When we travelled to Canada, we did indeed hear complaints about
rough justice in this situation from recipients of National Child
Benefit in British Columbia. Nevertheless, experts on the Canadian
system based at the independent Caledon Institute in Ottawa told
us that their research had concluded that recipients were willing
to accept a degree of rough justice in return for a lack of intrusive
inquiries into their personal circumstances. Jane Millar thought
the annual basis of assessment in Canada worked because there
is a relatively "long plateau" across which maximum
payments were made, so a family who suffered a drop in income
might already be getting maximum payments; and because there was
a safety net, in the form of Income Support administered at provincial
level, which could step in if people became unemployed.[102]
Tony Orhnial of the Inland Revenue pointed out that, in the UK,
children's Income Support would be absorbed into ICC , "therefore
we have to design an ICC that can deal within the system itself
with sharp falls in income."[103]
49. In Australia, since July 2000 Family Tax Benefit
has been based on an estimate of current year's income, with an
annual reconciliation at the end of the year. The system has not
yet gone through a complete cycle. Potentially, the system appears
problematic, in that some people might end up underpaid during
the year, whilst others might face large bills at the end of the
year because they have received too much. Peter Whiteford thought
that when reconciliation took place in July 2001, "there
are going to be some nasty scenes around the country...any reconciliation
it seems to me must produce more people with debts and a lot of
unhappiness."[104]
50. The Treasury argues that there is a case for
setting annual awards of ICC in the UK: "An annual award
would minimise administrative work for both public and government.
It also means that information on incomes could be verified against
data collected for income tax purposes."[105]
In contrast, Andrew Dilnot put the case forcefully that "it
would be a very substantial change to go to a system where at
the end of a year those on low incomes identified as being low
income by having received some entitlement during the year were
asked for a repayment." He added that, "if we are not
going to go down that road, then we shall end up paying benefits
to people, which if we were to measure their income over a longer
period, we might well not think they were entitled to."[106]
51. It is difficult to separate the question of the
length of award and period of assessment from the degree to which
an award should change in response to fluctuations in income or
family size. A balance has to be struck between immediate responsiveness
to changes in income, which is administratively burdensome but
which ensures that the credit accurately responds to falls or
increases in income, thereby containing costs; and less responsiveness,
which is administratively simpler, but which may be more expensive,
and can lead to hardship on the one hand and accusations of abuse
on the other. In Canada, changes in income during the year are
generally ignored, although in-year re-assessments can be made
for changes in family composition. In Australia, Peter Whiteford
pointed out that a crucial design feature of the system was the
high level of maximum payments of Family Tax Benefit, which represented
60 per cent of average male earnings. Thus for many recipients,
a drop in income does not require an adjustment because they are
already receiving the maximum. For those with higher family incomes,
from 1996 families have been able to apply for a reassessment
if their income went down by any amount. If their income increased
by 10 per cent or more, they were required to have a reassessment.[107]
52. We have concluded that the best model for
ICC is likely to be a relatively unresponsive structure, with
fixed awards of at least six months duration, but with a safety
net of 100 per cent ICC when income drops to ICC/JSA level. Otherwise
there should be adjustment only for major changes in family circumstances
such as the birth of a child; a child leaving the household; a
new partner; or loss of a partner. Our conclusion that there should
be a relatively unresponsive structure reinforces our earlier
recommendation that there should be a wide band of income across
which maximum ICC is paid.
69