Select Committee on Social Security Second Report

Treatment of income and capital: whose should count?

53. ICC will be based on family income, as happens in Australia and Canada. Commenting on those countries, Jane Millar said "There seems to be general agreement that, as a family benefit, entitlement should be on the basis of family income."[108] We agree it is right that ICC should be based on family income. The IFS concluded that the fact that ICC is based on a family's joint income "perhaps represents a turning point in the structure of tax and benefits since the 1990 reform to introduce individual taxation. This move perhaps reflects the Government's recognition of the limitations of an individual tax system when targeting support to the poorest families rather than the poorest individuals."[109] ICC will in fact go to families on middle as well as low incomes, who may be more familiar with the system of individual assessment, which applies to income tax, than the household means-test for benefits/tax credits. The joint assessment rules will mean that couples will have to share information about their incomes. The presence of a higher rate taxpayer will be particularly relevant, because it is likely to remove entitlement to ICC altogether. Yet individuals in a couple may not necessarily be aware of the other's income. In Canada, we were impressed by the fact that the tax system was able to reconcile individual tax records, to assess a couple's joint income for Canada Child Tax Benefit purposes, thus enabling couples to maintain privacy in their individual financial affairs.[110] The Australian tax system does the same. In both cases, the reconciliation of the tax records of couples is possible because most people file tax returns. We have concluded that there is some merit in moving towards a system of more universal tax returns in this country. See paragraph 81 below.

Treatment of capital

54. In outlining its plans for ICC and the Employment Tax Credit, the Government declared that "the next phase of modernisation offers an opportunity for a thorough review of the treatment of income and capital in assessing a person's or family's entitlement to support...A modern system should be simple and aim to promote work, fairness and incentives to save."[111] The new thinking of Government can be seen in its proposals for the new Pension Credit, whereby capital limits (which currently restrict benefit entitlement for people with savings above a certain level[112]) would be abolished, and instead, like income tax, only actual income from capital would be counted. It is clear from the evidence given to us, that a similar proposal is under active consideration with regard to ICC. Nick Macpherson told us that an important objective of ICC was to encourage savings. The new Pension Credit proposals were a "starting point" for discussion in this connection: "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 if you save if you are in low-paid employment because at every twist and turn you will be penalised by the system."[113]

55. CPAG considered that the abolition of the capital rules which apply to current means-tested benefits and tax credits would lead to significant administrative and time savings, speeding up decision-making and greatly reducing the scope for error and fraud.[114] They recommended that abolition should apply to adult benefits and credits, as well as ICC, drawing attention to the inconsistency which would be created if different rules applied to children and adults.


56. But IFS sounded a note of caution: "if we are to have the same sort of measure for income tax and this credit, then that is another area of some difficulty and some quite tricky choices [will need] to be made."[115] The difficulty arises from the standard of evidence required to assess income from capital, and the verification needed. Andrew Dilnot contrasted the position of someone on a low income requiring benefit, where a fairly simple and quick decision is needed in order to assess and pay benefit; and the more detailed and careful scrutiny of income from capital required for tax purposes.[116] For example, actual income from investments can change as a result of fluctuations in interest rates; income is also affected by increases and decreases in the underlying capital. Thus, a policy of evaluating actual income from capital rather than capital itself may not produce the simplicity and ease of administration which is intended.

57. We have concluded that abolition of the current capital rules which apply to benefits and tax credits in favour of rules which take into account income from capital may not produce all the simplifications that could be achieved.

58. Whatever changes are made to the treatment of capital for ICC, we recommend that the same changes are applied to adult benefits and tax credits.

Treatment of income

59. We have been impressed by the relative simplicity of the child tax benefit systems in Canada and Australia, where there is a consistency with income tax rules in the treatment of income. This allows information provided for tax purposes to be used simultaneously to calculate entitlement to financial support for children, removing the need for separate forms for families and separate administrative systems. There have been some attempts in the UK to bring consistency of definitions to the treatment of income between income tax and tax credits, notably in the treatment of self-employed people. Nevertheless, according to the Low Income Tax Reform Group (LITRG), substantial differences still remain in rules, terminology and information, for example in the treatment of depreciation and losses. The LITRG added that there was a need to align the definition of employment income for income tax and tax credits, for example in the treatment of benefits in kind and accommodation provided by an employer.[117] Andrew Dilnot commented that, if there were moves to develop a common definition of income for tax and tax credit purposes, it was likely that the income tax definition would predominate because it was "a more complete definition of income."[118]

60. We recommend that, in designing the next generation of tax credits, the Government moves closer to aligning definitions of income for tax credit purposes with those used for income tax.

61. Key decisions also need to be taken regarding the treatment of certain types of income, which are currently treated differently within Income Support and JSA; WFTC and DPTC; and Children's Tax Credit. Differences include the treatment of child support payments, statutory maternity pay, and, at first sight, Child Benefit. In the case of child support, parents in receipt of Income Support and income-based Jobseeker's Allowance face a less generous regime than other parents; whereas child support is ignored completely for WFTC, DPTC and Children's Tax Credit purposes, it counts in full for IS and JSA purposes (some parents will have £10 of child support ignored from 2002). Several respondents to the inquiry argued that there was a case for adopting the more generous system of ignoring child support payments for ICC purposes.[119] Jane Millar put it to us that ICC and child support were doing different things: ICC was a contribution from the community to the care of children; child support was about the contribution from the non-custodial parent for the care and upbringing of children.[120] IFS commented that the Government had only relatively recently introduced the more generous rules for treatment of child support which applied to WFTC and DPTC; it was therefore unlikely that the policy would be reversed so quickly.[121] Certainly, ignoring child support payments within ICC would considerably simplify administration. We recommend that child support payments are ignored for ICC purposes. We have in the past expressed concern that the rule by which £10 of child maintenance will be ignored for Income Support purposes (which will apply from 2002), will only benefit 'new' cases brought into the reformed Child Support scheme from that date.[122] Parents on Income Support with existing child support arrangements will only be allowed the £10 concession when, at an indeterminate date in the future, the reformed Child Support scheme is extended to them.

62. We are concerned that the apparent unfairness may substantially undermine the credibility of the reformed Child Support scheme. We repeat a recommendation made in our earlier report on the Child Support reforms that all parents with care in receipt of Income Support or income-based Jobseeker's Allowance should be permitted to benefit from the £10 child maintenance premium from the date of commencement of the reforms.

63. The treatment of statutory maternity pay and maternity allowance differs, in that these payments are ignored within WFTC and DPTC, but counted within Income Support and Jobseeker's Allowance, and also for Children's Tax Credit purposes. IFS thought it "odd that the poorest mothers - those on Income Support - benefit less from maternity pay than better-off mothers."[123] We consider there is a case for ignoring payments of statutory maternity pay and maternity allowance for ICC purposes. This does not, of course, mean that maternity payments should not be counted against adult payments of Income Support or Jobseeker's Allowance.

64. Another apparent difference is the treatment of Child Benefit, which is taken into account in full for Income Support and Jobseeker's Allowance, but ignored when calculating WFTC and DPTC. CPAG explained the reasons for the difference: "it is often said, rather misleadingly, that claimants of WFTC (and DPTC) can 'keep' their Child Benefit, whereas it is deducted from other means-tested benefits. What in fact happens is that Child Benefit is taken into account when WFTC and DPTC rates are set, rather than afterwards as part of the individual assessment."[124] It is difficult to see that this difference in the way Child Benefit is taken into account can continue with ICC. We favour the WFTC and DPTC model for the treatment of Child Benefit, not least because we know from direct experience that the reduction of benefit to take account of Child Benefit is a perpetual source of complaint among poor families. However, if this model were adopted, CPAG pointed out that it could lead to a drop in the level of means-tested payments for children at the point of change.[125] CPAG argued that "if sufficient resources could be found to boost these rates far enough to avoid a cash reduction at the point of change then the WFTC model (taking Child Benefit into account when rates are initially set) would be the more comprehensible to the public."[126] There is little doubt that support for the introduction of ICC would be badly affected if means-tested benefits for children went down at the point of change. We therefore urge the Chancellor to make sufficient funds available to ensure that this does not happen.


65. Under the present system, receipt of Income Support or income-based Jobseeker's Allowance entitles a family to various 'passport' benefits including free school meals, free prescriptions, free dental treatment and free sight tests and glasses.[127] Receipt of Income Support or income-based Jobseeker's Allowance is also a 'passport' to Social Fund grants and loans and the 'Sure Start' maternity grant. The effect of the introduction of ICC will be to reduce the level of Income Support or JSA received by an adult. Therefore, it will take a lesser amount of alternative income to lift people above Income Support or JSA level. Thus, unless the rules for entitlement to the various passported benefits are changed, the effect of the introduction of ICC will mean that many people will lose their entitlement to them. A solution would be to extend entitlement to these passported benefits to families in receipt of maximum ICC. This would have the effect of easing the transition into work for many families on low incomes, who at present lose all passported benefits should they get a job. We are aware that there is an element for school dinners within the calculation for Working Families Tax Credit, and that there is a case for working parents making such provision from within their own budgets. However, school dinners do make a significant impact upon low income families, and may well represent a disincentive to work. We recommend that a component for school dinners be separately identified within the ICC calculation and that the Government should give consideration to extending entitlement to other 'passported' health and education benefits, Social Fund payments and 'Sure Start' Maternity Grant to families in receipt of maximum ICC.

66. Although not generally considered as a 'passported' benefit, automatic full Housing and Council Tax benefit follows from receipt of Income Support or income-related Jobseeker's Allowance. The introduction of ICC, which will mean that adults will lose entitlement to Income Support or income-related Jobseeker's Allowance at a lower level of income, will have the consequence that fewer people would qualify for automatic 100 per cent Housing Benefit. This could have considerable administrative consequences for local authorities (who could face a substantial increase in Housing Benefit claims which needed individual assessment), as well as leaving many people worse off. In addressing the question of the interaction of ICC with Housing Benefit and Council Tax Benefit, the effect of ICC on entitlement to maximum benefit is a matter to which urgent and careful thought must be given to avoid creating large numbers of 'losers', thus undermining the credibility of ICC.

Implementation and operational issues


67. During the inquiry we asked the various witnesses whether they considered the timetable for implementation was attainable, bearing in mind the need to ensure that there had been adequate consultation and that there are considerable administrative complexities to be overcome, not least of which the need to ensure that the necessary upgrading of outdated IT systems had been completed and that those systems are fully operational.

68. A prerequisite is to ensure that sufficient consultation has taken place before the necessary primary legislation is introduced. Mr Dilnot of the IFS said that he would:

"be disappointed if the [Government] were to announce final details of a reform of this scale without a little bit more opportunity for some public discussion of a bit more detail of the ideas the Government has in mind."[128]

Since much of the detail has yet to be announced[129], we believe it would be sensible to provide a further period of public consultation on the details of ICC once they have been finalised. In particular there should be an opportunity to consider the detail of how the new relationship between payments to those in and out of work, which involves significant administrative and structural reform, will be achieved.

Creating a seamless service

69. Delivery of ICC requires seamless working arrangements between the Inland Revenue, the new Working Age Agency, and the Child Benefit Centre in particular, but also the Child Support Agency and even the proposed new Pensions Organisation. Where families are simultaneously entitled to Income Support or income-related JSA, the Government proposes the provision of information only once via the Working Age Agency. The Working Age Agency will then pass on information relevant to ICC[130] to the Inland Revenue. For families not in touch with the Working Age Agency, the Government has said that there is 'considerable scope' for handling ICC claims through the gateway of Child Benefit and developing a shared data base.[131] The Committee welcomes the potential offered by ICC for the development of a more seamless approach to the collection and transmission of information between agencies, but is aware that the introduction of ICC is taking place against the background of massive restructuring of the DSS and its Agencies. Questions arise about the challenges this degree of structural change will create for the implementation of ICC. We were told by officials that ICC "fits and has synergy with our major modernisation programme".[132] CPAG, however, was critical of the Treasury's observations that "any new system developed by the Inland Revenue for the new tax credits [will require] close co-operation with other agencies and stakeholders".[133] Geoff Fimister told us: "there needs to be a lot more than co-operation. It is integrated administration [which is needed]: the new agencies, the Child Benefit claiming procedure, the Inland Revenue... if there is not adequate preparation, if there is not adequate testing of computer and administrative systems, it could be a mess".[134]

70. An anomaly in the evidence from the Department also became apparent. When the Secretary of State gave evidence to the Committee in July he indicated that the Child Benefit Centre was to be moved to the Inland Revenue. He said, "if you want to integrate it, you cannot have it run by two different Departments. If you look at the various components of money that go to children - Child Benefit, Income Support, Working Families Tax Credit and so on - the important thing at the end of the to get money coming in one stream, so that people can see where it comes from, from one source".[135] But in December, Mr Macpherson told the Committee: "No final decisions have been taken on this but it is one possible way forward..."[136] Clarification was sought by the Committee concerning the future location of Child Benefit administration, given the need for an integrated approach between ICC and Child Benefit.[137] In a joint reply, the Paymaster General and the Parliamentary Under-Secretary of State for Social Security told us in March 2001:

" is logical that Child Benefit administration should sit alongside Integrated Child Credit. This would help improve delivery and reduce bureaucracy for families with children. However, there are issues around capacity and timing which might impact on the extent to which we might want to move Child Benefit administration and when it would be possible to do so. The Government will make an announcement in due course."[138]

71. The Committee agrees with the logic of the Secretary of State's argument that it makes sense for the different components of money that go to children to be paid in one income stream, and therefore believes that different elements such as Child Benefit and ICC should not be paid by different Departments. It is therefore very worrying that plans to move Child Benefit administration to sit alongside ICC appear to be so uncertain and ill-defined at this stage.

The role of IT

72. The Government's plans for ICC are almost totally reliant on new technology for delivery. The assessment of claims will require data matching and the electronic transfer of information, in particular, between the Inland Revenue and both the new Working Age Agency and the Child Benefit Centre. In the case of IT modernisation at the Inland Revenue, we have sought to establish the resources which will be made available to support the introduction of ICC. This remains uncertain. We were told in a letter from the Paymaster General and the Parliamentary Under-Secretary of State for Social Security that:

"The Spending Review provided resources for the Inland Revenue to continue its programme of modernising its IT systems, part of which involves the changes needed to prepare for ICC. However, as you will appreciate, breaking these down into separate and discrete streams is difficult, especially when some of the key policy parameters underlying the new tax credits are not yet fully determined."[139]

For the Working Age Agency the Committee is already aware, through its inquiry into the ONE pilots, that merging Benefits Agency and Employment services to people of working age will require considerable investment in shared computer systems, not least because the social security IT systems, in the words of the Secretary of State are "completely out of date and unsustainable".[140] But so far, the planned modernisation has been concerned with the development of IT systems which enable the DSS and the Department of Employment systems to talk to each other. In contrast, the Secretary of State told us in July 2000, that ICC would be operated "off its own IT system".[141] The extent of integration of Inland Revenue IT systems for ICC with those for the Working Age Agency is still an open question.

73. In the case of the Child Benefit Centre, there is an obvious need for constant sharing of data with the Inland Revenue, not only to ensure maximum take-up of ICC among families not in touch with the Working Age Agency, but also to co-ordinate information regarding changes in circumstances such as a child going into hospital, being taken into care, or moving to live with another parent. We know, however, that computer equipment at the Child Benefit Centre is at least 21 years old.[142] It is hard to see how computer equipment this old is up to the job of information sharing with Inland Revenue computers. The Committee has sought further assurances from the Government that IT systems at the Child Benefit Centre are to be modernised in preparation for ICC. In response, the Government has said:

"If we are to ensure that ICC and Child Benefit work together, there must be appropriate IT support for the Child Benefit interface. However, only when final decisions have been taken on the best way to deliver Child Benefit alongside ICC, will it be possible to review the overall IT and funding requirements. DSS and Inland Revenue teams are working closely together on this work and will continue to do so to ensure the eventual solutions secures value for money."[143]

Whichever Department is in charge of the Child Benefit Centre, compatible computer systems are a key element in ensuring an integrated approach. IFS agreed with this[144] as did the Department's witnesses.[145]

74. The Committee is concerned that the necessary computer systems to support the introduction of ICC will not be up and running in time for the introduction of ICC and the Employment Tax Credit in 2003. In particular, we are concerned that it is not clear at this stage that the requisite funding has been earmarked by the Inland Revenue, the DSS and the Department for Education and Employment for the development of IT systems across Departments to support ICC. It also far from clear that the interface between ICC computer systems at the Inland Revenue and new IT systems for the new Working Age Agency has been fully thought through. Finally, there is a risk that the present lack of certainty concerning the best way to deliver Child Benefit alongside ICC will lead to delays in the urgent work which will be necessary to modernise the computer equipment at the Child Benefit Centre in preparation for ICC. We recommend that the introduction of ICC should only take place once computer systems at the Inland Revenue, the Child Benefit Centre and the new Working Age Agency are fully compatible and operational.

108   Ev. p. 3. Back

109   Ev. p.75, para 26. Back

110   See also Jane Millar, Ev. p. 3. Back

111   HMT 2000, para 4.15. Back

112   Under present rules, there is a lower and an upper capital limit. Below the lower capital limit (£3000 for non-pensioners and £6000 for pensioners from April 2001)) savings are ignored. Above the upper capital limit (set at £8000 for non-pensioners on Income Support, income-based Jobseeker's Allowance and for WFTC recipients, and £16,000 for pensioners on Income Support, and for recipients of Housing Benefit, Council Tax Benefit and Disabled Person's Tax Credit), there is no entitlement to benefit. For savings above the lower capital limit but below the upper limit, income from capital is assumed at the rate of £1 for every £250 or part thereof.  Back

113   Q 103. Back

114   Ev. p. 51. Back

115   Q 184. Back

116   Ibid. Back

117   Appendix 1, paras 18-19. Back

118   Q 184. Back

119   CPAG, Ev. p. 51, para 8.12. Back

120   Q 34. Back

121   IFS, Ev. p. 76, para 31. Back

122   The 1999 Child Support White Paper, Social Security Committee, Tenth Report, Session 1998-99, HC 798. Back

123   IFS, Ev. p. 76, para 31. Back

124   Ev. p. 48, para 6.10. Back

125   Ibid. Back

126   Ev. p. 48, para 6.11. Back

127   All children qualify for the various health benefits by virtue of their age; receipt of Income Support or Jobseeker's Allowance allows the adults in the family to also receive these benefits. Back

128   Q 185 Back

129   IFS commented, "it is important to realise that almost any of the major parameters of the integrated child credit could be changed, such as how the credit relates to family size and income, the period of assessment and length of award, the responsiveness to changes in needs or income, whether the system is cumulative or non-cumulative, as well as how it treats different sorts of income and capital." (Ev. p. 69, para 3). Back

130   HMT 2000, para 4.17. Back

131   Ibid. Back

132   Q 226. Back

133   HMT 2000, para 4.18 Back

134   Q 87. Back

135   Social Security Committee, DSS Departmental Report, Inherited SERPS Compensation Scheme and Resource Account Budgeting, Minutes of Evidence, Q 15, 12 July 2000, HC 717-i. Back

136   Q 292. Back

137   See Appendix 8, letters from the Chairman to the Secretary of State for Social Security and to the Chancellor of the Exchequer. Back

138   See Appendix 8.  Back

139   See Appendix 8. Back

140   Social Security and Education and Employment Committees, The Creation of a New Agency for People of Working Age, Minutes of Evidence, Q 13, 3 July 2000, HC 662-i. Back

141   Social Security Committee, DSS Departmental Report, Inherited SERPS Compensation Scheme and Resource Account Budgeting, Minutes of Evidence, Q 56, 12 July 2000, HC 717-i. Back

142   Statement by Secretary of State for Social Security in evidence to Social Security and Education and Employment Committees, see The Creation of a New Agency for People of Working Age, Minutes of Evidence, Q 13, 3 July 2000, HC 662-i.  Back

143   See Appendix 8. Back

144   Q 186. Back

145   Q 226-231, Q 279. Back

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