APPENDICES TO THE MINUTES OF EVIDENCE
APPENDIX 1
Memorandum submitted by the Low Incomes
Tax Reform Group (ICC 01)
SUMMARY
1. The new tax credits will successfully
reduce child poverty only if they are clear and simple and so
encourage full take-up. Much of the innate complexity of the Working
Families Tax Credit (WFTC) stems from its not having been integrated
with the tax system, so that, despite having been re-named a tax
credit, it essentially remains a benefit. By contrast the Children's
Tax Credit (CTC) is essentially a tax credit. Merging them as
they stand with other income related benefits in what purports
to be a seamless web in order to form the new tax credits is likely
to be a recipe for confusion, low take-up, fraud and error. On
any basis it appears that the computer systems to support a fully
integrated system will not be available until 2006, three years
later than the new tax credits are due to be introduced.
2. The additional take-up of WFTC over those
drawing Family Credit is less than half the estimated increase.
The cause of the shortfall is likely largely to be the complexity
of the scheme. Some of our proposals for simplifying it for the
self-employed have at last been accepted. But there remain large
areas where differences between WFTC and income tax remain, leading
to confusion for claimants and a greater risk of fraud and error.
This is compounded by outdated and inaccessible legislation. The
underlying law for the new tax credits should be drafted from
scratch, in accordance with modern drafting techniques, so that
it is accessible for claimants' advisers.
3. The CTC is also very complex for what
is essentially a simple mechanism and its interaction with the
WFTC has not been worked through or explained. One reason stems
from the failure of the Inland Revenue to consult the professional
bodies. Such consultation is essential if the new tax credits
are to be effective. The Revenue may also have failed to reach
all those potentially entitled to the CTC by failing to consult
benefit records. Effective joining up between the Inland Revenue
and ONE is essential if the new tax credits are to deliver the
Government's policy objectives.
4. Both the WFTC and the CTC muddle up the
family and the individual in the basis of assessment. There must
be a consistent basis for the new tax credits—probably the
family should be the unit.
5. Disability issues have so far been given
a poor second place in the development of the tax credits and
take-up of the Disabled Person's Tax Credit (DPTC) has been very
disappointing. The needs of the disabled must be given priority
in the work on the new tax credits.
6. So far, Housing Benefit (HB) (and Council
Tax Benefit (CTB)) and tax credits have been considered in isolation
from each other, leading to confusion in both policy and administration.
Changes to HB and CTB must be tied in with the development of
the new tax credits along the lines recommended by the Social
Security Committee in its Sixth Report. The aim of making work
pay and of providing employment opportunities for all will be
furthered only if action is systematically taken looking across
all the income related benefits and tax credits.
INTRODUCTION
7. The Low Incomes Tax Reform Group (LITRG)
was established by the Chartered Institute of Taxation
"to target for help and information those
least able in the community to afford tax advice and make a real
difference to their understanding of taxation, and to work to
make the tax system more friendly to their needs".
The Chartered Institute of Taxation is the leading
professional body in the United Kingdom concerned solely with
taxation.
8. Number 6 in the series published by the
Treasury "The Modernisation of Britain's Tax and Benefit
System" and called "Tackling Poverty and Making
Work Pay—Tax Credits for the 21st Century" (hereafter
Treasury 6) introduced the new tax credits—the Integrated
Child Credit (ICC) and the Employment Tax Credit (ETC). These
credits are to take further the Government's aims in this field
which are:
(i) to tackle poverty, in particular to abolish
child poverty within a generation; and
(ii) to provide employment opportunity for
all.
9. These credits are to be developed from
the WFTC, from income support and from the CTC which is due to
replace the Married Couples Allowance (MCA) in April 2001. Treasury
6 makes it clear that using one system such as the WFTC to serve
two purposes can give rise to tensions (paragraph 2.22). Accordingly
the purpose of the ICC and the ETC is to move further in tackling
child poverty and worklessness respectively.
THE NATURE
OF THE
TAX CREDITS
10. In considering the structure of the
ICC, a good starting point is to look at the extent to which the
WFTC is being, and the CTC seems likely to be, successful in tackling
child poverty. The fundamental issue here stems from the decision
to import two social security benefits (Family Credit (FC) and
Disability Working Allowance) into the income tax system simply
by deeming them to be tax credits (Tax Credits Act 1999, s 1(1)).
Unfortunately deeming something to be something else does not
change its nature unless other steps are also taken; and in this
instance little further has been done to integrate the rules,
terminology, processes, forms, computers and so on of the benefits
system with those of the tax system. This goes to the heart of
many of the more detailed matters to which we draw attention in
the next sections of this evidence.
11. Hardly surprisingly, the respective
cultures of the two Government departments involved, the Department
of Social Security and the Inland Revenue, are very different,
reflecting their different roles and purposes. In particular the
basis which each department uses for calculating income and determining
entitlements is very different—one being concerned with
short term financial needs on a week by week basis, the other
concerned with looking back over the previous year on a historic
basis.
12. Even though little attempt has been
made to integrate the WFTC with the income tax system, a further
merger with another tax credit, the CTC, is to be forced through—and,
unlike the WFTC, the CTC is a construct of the Inland Revenue
which very largely reflects the principles of the tax system.
Calling some things tax credits which are really benefits and
other things tax credits which are really tax credits and then
merging the two with components of the income related benefits
in what is stated to be a seamless web is, in our view, a recipe
for confusion. And if as a result claimants are confused, take-up
will be low, fraud and error will be encouraged, and the aim of
the reform, to reduce child poverty, will not effectively be secured.
THE WFTC
13. From the outset of planning the WFTC,
the LITRG has been concerned that the system should be as simple
as practicable in order to encourage the greatest possible take-up.
However there must be doubt as to how far this has been achieved.
The number of families in receipt of its predecessor, FC, in September
1999 was 788,000. By May 2000 (after the end of the six month
period of transition) the number of families receiving WFTC was
1,056,000 (Hansard, 27 July 2000, cols 877-8 WA). The initial
Government estimate of entitlement to WFTC was about 1.5 million
working families (Dawn Primarolo, then Financial Secretary, Hansard,
7 May 1998, col 1784). This estimate was subsequently reduced
to 1.4 million families (Dawn Primarolo. Paymaster General, Hansard,
16 December 1999, col 380). Hence, compared with the later estimate
of 612,000 families who had not been claiming FC but who would
be entitled to WFTC, the actual increase was 268,000—only
43.8 percent. Most recently, in Opportunity for All One year
on: making a difference, the number of families receiving
WFTC has been rounded up to 1.1 million, and the increase over
FC to 270,000.
14. The Government has not explained this
very considerable shortfall in take-up, but in our view a large
part of the explanation is likely to lie in the complexity of
the scheme. We have put forward to the Inland Revenue a substantial
number of ways in which the WFTC could be made more friendly to
claimants. The Revenue have accepted a few of these, but most
of our proposals were originally rejected on the grounds—or
so we were told—that the present computer system, which
it inherited from the Benefits Agency, could not be adapted. More
recently our suggestions have been turned down on the grounds
that we have to await the introduction of the new tax credits.
15. The Treasury has admitted that the pace
and scale of reform has been constrained by the structures and
systems already in place, but looking forward to the future it
has said ". . . as the Government begins to plan the next
generation of tax credits there is much greater scope for creating
a radically new system" (Paragraph 2.21, Treasury 6). There
are many areas where we believe that there is a need, in drawing
up the ICC and ETC, to take advantage of this scope for being
radical and to bring the system far closer to the needs of claimants.
16. It is not clear, however, how far all
this can be done by 2003. The present timetable is for ONE to
come into existence in summer 2001 and the ICC in 2003. Yet the
computer system to support both will be developed only gradually
with a target completion date of 2006 (see Alistair Darling's
evidence to the joint meeting of the Social Security Committee
and the Education and Employment Committee (Employment Sub-committee)
on 3 July 2000, Q30). Compatible computer systems will be the
key. The aim is that once the reform is completed families claiming
Income Support or Job Seeker's Allowance will need to provide
details only once, through ONE, with the relevant information
being passed electronically to the Revenue (Treasury 6, para 2.30).
Until this can be done, the aims of greater responsiveness combined
with a simple system and of not having to provide the same information
to different agencies simultaneously (Treasury 6, paras 4.11 and
4.17 respectively) can hardly be achieved. Such progress as can
be made before 2006 must be made while recognising the very long
lead required before the process is complete.
17. The area of greatest concern to the
LITRG has been the way in which the WFTC has been applied to the
self-employed. For income tax, in the case of those self-employed
people with a low turnover the Inland Revenue have for many years
accepted a three line account, showing only receipts, expenses
and net profits. By contrast, up until now for WFTC self-employed
claimants, however low their turnover, have been required either
to send the Revenue a full set of accounts or to complete a highly
complex form requiring filling in more than 30 boxes.
18. Happily, however, this is now changing
following pressure from the LITRG and in future three line accounts
will be acceptable for WFTC. Nonetheless there remain substantial
differences between income tax and WFTC in rules, terminology
and information—for example in the treatment of depreciation,
for which there is no provision in WFTC, and losses. So figures
acceptable to the Revenue for income tax are not acceptable for
WFTC, and vice versa. This unnecessary complexity must be removed
for the ICC and ETC so that self-employed claimants have to send
the Revenue only one set of figures each year which will suffice
for all purposes.
19. There are other areas where, in the
view of the LITRG, there is scope for considerable further clarity
and simplification. In particular, there is a similar need to
align the definition of employment income for income tax and WFTC,
and now for the ICC and ETC, for example in the treatment of benefits
in kind and accommodation provided by the employer.
20. In addition, the LITRG wants to see
for the ICC and ETC a system which is designed from the outset
to be as free as possible from fraud and error, in particular
in recognition of the drive to control fraud following Lord Grabiner's
report on The Informal Economy (HM Treasury, March 2000).
There is clearly a balance to be drawn between simplicity and
speed for claimants and the proper control of fraud; but although
the LITRG has asked the Revenue several times for a statement
about how that balance is to be drawn, the latter have been unduly
coy. This is an important consideration which in our view needs
to be set out explicitly when the ICC and ETC are being framed.
21. We are concerned also that the law relating
to WFTC, which is very largely formed by amendments to a plethora
of interrelated Family Credit and other social security regulations,
is almost totally inaccessible even to those with ready access
to a well stocked law library. Although claimants are themselves
unlikely to want or need to refer to the law, their advisers may
very well need to do so. However they will be all but unable to
find their way through it. This is unacceptable in a democracy
governed by the rule of law. We understand that The Stationery
Office is about to publish an edition of the tax credit legislation
incorporating all amendments to date, and this is a good step
forward. In our view, however, a priority for the Tax Law Rewrite
Project, which is charged with re-writing the tax laws in plain
English, is to draft the legislation which is to apply to the
ICC and the ETC from scratch. This will give claimants' advisers
a single, comprehensible source on which they can rely and to
which they can easily gain access. It will also avoid the "bolted-on"
style of the present legislation on the WFTC and DPTC with its
patchwork of amendments.
THE CHILDREN'S
TAX CREDIT
22. The Inland Revenue have a code of practice
on consultation to which they generally adhere. In particular
on WFTC, while initially they were reluctant to consult the LITRG,
more recently we have been kept generally well informed and have
therefore been able to contribute to its development.
23. By contrast, despite the gap of a year
between the abolition of the MCA and the introduction of the CTC
which will replace it, the Revenue failed to consult any professional
body, including the LITRG, on the Credit. This was in spite of
public assurances that the Revenue would consult on the claim
form and accompanying notes "with interested parties"
and would test both on potential claimants "to ensure that
they are easy to complete and understand" (Tax Bulletin,
Issue 44, December 1999). It is perhaps not wholly surprising,
therefore, that the CTC is riddled with inconsistencies, and is
disproportionately complex for a mechanism which in essence does
no more than give £8.50 a week to the large majority of taxpayers
with one or more children. In our view it is most important that
the take-up of the ICC is as high as possible, and if this is
to be achieved undue complexity must be avoided.
24. One of the greater weaknesses of the
CTC, to which little thought appears to have been given and which
is of particular relevance in the development of the ICC, is its
relationship with the WFTC. This arises because under WFTC the
amount of credit awarded in any case is based on the claimant's
net income and in future this will include the CTC. The withdrawal
rate of WFTC is 55 per cent, so that a WFTC claimant entitled
to the CTC of £442 will find that his or her disposable income
is increased by only 45 per cent of £442, ie £199. To
the best of our knowledge this interaction has not been acknowledged
or disclosed by the Government—certainly Treasury 6 is notably
silent on the point, nor is it explained in the guidance notes
which accompany the claim form. The Government has consistently
implied that the only taxpaying parents who will not benefit from
the CTC by the full £442 will be those where one or other
pays at the higher rate. This sort of interaction must be avoided
for the ICC.
25. Another issue relates to the basis period.
In the case of the WFTC a claim is made by reference to the income
and savings of the claimant, and where appropriate those of his
or her partner, over a period of a few weeks immediately before
the claim is made. The amount of credit then awarded is fixed,
except in particular circumstances, for the next six months. Indeed
Treasury 6 suggests that for the ICC this period might be extended
to a year (paragraph 4.9). By contrast the amount of CTC which
is due depends on events as they unfold. Any amount of CTC paid
during the year may be reduced or augmented if the taxpayer's
circumstances change or incomes fluctuate, and may not be capable
of being self-assessed until well after the end of the year to
which it relates. In our view the approach taken for WFTC is much
to be preferred over that taken for CTC, and the latter should
be dropped with the introduction of the ICC. We would also hesitate
before extending the period for the ICC to 12 months which we
fear would be vulnerable to abuse.
26. A further issue reverts to the question
of sharing information between departments. The Revenue sent details
of the CTC to all taxpayers who had been in receipt of the MCA
or the Additional Personal Allowance before their abolition in
April 2000. They did not, however, also target recipients of Child
Benefit, Income Support or the Job Seeker's Allowance. By not
using the records of the Department of Social Security in this
way, they failed to reach people in these groups who subsequently
become liable to income tax this year or next. Until a compatible
computer system is available, every initiative to bring together
ONE and the new tax credits by more traditional means must be
taken.
27. We have given the Inland Revenue details
of many more technical issues relating to the CTC, some of which
may very well be relevant as the ICC is developed. We should be
very willing to let the Committee have details if it would find
this helpful. The general lesson however is that, once the Government
has formulated the broad principles of the ICC, professional bodies—including,
we believe, the LITRG—should be consulted. They will, and
we shall, be able to contribute significantly to its development
so as to ensure that claimants can fully and properly benefit
from it and so that child poverty can more effectively be tackled.
THE UNIT
OF ASSESSMENT
28. Underlying many of the difficulties
with the WFTC and the CTC—and these need to be fully sorted
out before the ICC and ETC are introduced—is the unit of
assessment. The question is whether it should be the individual
or the family. The benefits system is concerned with the family
as a whole—the parents, whether married or cohabiting, and
their children. By contrast, since the introduction of independent
taxation in 1990, the taxation system is based on the individual.
Both the WFTC and the CTC, however, straddle the two in a seemingly
incoherent and uncoordinated manner.
29. In particular the WFTC looks at the
family as a whole in determining its income and savings. Once
this has been done, however, the family disappears from the scene,
and the amount of the credit is determined by the circumstances
of the claimant and his or her children alone. In consequence,
after taking account of their circumstances in the way which is
done for benefits and generally for the purposes of income distribution,
the amount of tax credit which a couple receives does not fully
reflect their family circumstances. For example, the basic and
child tax credits available to a single-earner couple with two
children of a certain age are exactly the same as those available
to a lone parent with two children of the same age. The result
is that the children of couples in work are more likely to be
in poverty than are the children of a lone parent in work. This
is both illogical and unfair.
30. There is a similar confusion within
the CTC. According to Treasury 6 (paragraph 2.17) the CTC "provides
support for children taking account of household circumstances
and is consistent with the principles of independent taxation".
Since of its very nature independent taxation does not take account
of household circumstances, this is a contradiction in terms.
What will actually happen is that eligibility for the CTC will
start by looking at the family as a whole: in particular cohabiting
partners will be treated as husband and wife. However the individual
basis will then apply and the credit will be tapered if either
parent is a higher rate taxpayer, regardless of family income.
Hence credit will be progressively withdrawn from a single earner
couple if their income exceeds £32,000 and no credit will
be due if their income exceeds £38,000. If however both parents
are earners, and their income is equally split, they will be able
to earn over £64,000 before the credit begins to be withdrawn.
There is no clear logic or reason for this injustice which denies
the very next sentence to that quoted above—that CTC "is
an important step in delivering a fairer tax system for families
with children".
31. This issue of the unit of assessment
needs to be resolved before the ICC and ETC are introduced. The
amount of credit should be based consistently on either the family
or the individual. The family seems a more rational basis to adopt,
but whichever is chosen it should be applied consistently and
coherently. Families of whatever size and composition should be
equitably treated, so that all children can, so far as possible,
be lifted out of poverty.
DISABILITY ISSUES
32. An additional credit for a disabled
child is to be introduced into the WFTC in October 2000. There
has been such a credit within the Disabled Person's Tax Credit
(DPTC) from the outset, a difference which could not be justified.
Although no reference to disabled children has been made in relation
to the ICC, we hope that we are justified in assuming that proper
provision will be made for them.
33. More generally we are concerned at the
lack of any public consideration of the future of the DPTC. It
may well be unintentional, but all too often the impression is
given that decisions are taken in the context of the WFTC and
then, at a later date, consideration is given to their implications
for the DPTC. We should like to see at an early stage specific
proposals for the provision of tax credits for disabled people
within the new system, based on the experience of the operation
of the DPTC. The take-up of DPTC has been very disappointing and,
despite the forthcoming introduction of the fast track procedure,
financial hurdles to the return to work, or the continuation in
work, of disabled people remain and need to be tackled. We have
put forward to the Revenue a large number of suggestions designed
to remedy this situation, but they have yet to be acknowledged,
let alone discussed with us or acted upon. The needs of the disabled
must be given a much higher priority within the new tax credits.
INTERACTION OF
THE ICC WITH
HOUSING BENEFIT
(HB) AND COUNCIL
TAX BENEFIT
(CTB)
34. So far in this evidence we have been
concerned solely with the nationally administered benefits and
tax credits. This is the basis on which the Treasury has also
been working. The only reference to HB or CTB in Treasury 6 was
in a footnote to one table. Similarly in the Budget 2000 Red Book
"Prudent for a Purpose; Working for a Stronger and Fairer
Britain" a table purporting to show the combined effect
of the Government's reforms on high marginal deduction rates ignored
altogether the impact of HB and CTB. The table therefore gave
a wholly misleading account of the numbers of people actually
suffering marginal deduction rates exceeding 70 per cent (paragraphs
4.66—4.67). Equally the otherwise very full discussion of
worklessness in the recent annual report on the changing welfare
state Opportunity for all One year on: making a difference
is notable for its silence about the impact of HB and CTB.
35. By contrast the discussion of HB in
the Housing Green Paper "Quality and Choice: A decent
home for all" does refer to the interaction of HB with
WFTC. However it appears that the author of this chapter was not
in close contact with the Treasury. For example, the discussion
of fixing awards for a set period (paragraph 11.26) was in sharp
contrast to the proposal normally to fix awards to the ICC for
12 months (Treasury 6, paragraph 4.9).
36. It was therefore reassuring that in
its report on HB (Sixth Report, Session 1999-2000) the Social
Security Committee showed itself to be fully aware of the extent
of the interaction between these benefits and the tax credits.
In addition to the matters mentioned in the previous two paragraphs
(to which the Committee referred in paragraphs 79 and 29 of its
Report respectively), the Committee's recommendations in relation
to the threshold levels for savings and for consideration to be
given to a housing credit are also relevant to the ICC (paragraphs
82 and 94 respectively).
37. The issue of the threshold level of
savings is a good example of the minor differences between the
various benefits and tax credits for which there is no clear rationale
and which are liable to make for muddle and confusion among claimants.
The threshold level for savings for the DPTC is £16,000 as
it is for HB: for WFTC however it is £8000. In our view the
threshold for WFTC should be increased so that it would be the
same for all benefits and tax credits, including the ICC and ETC,
as well as being, as the Committee recommended, uprated for inflation.
38. The Committee's recommendation that
consideration be given to a housing credit is in our view particularly
important, and we hope that the Committee will review the matter
further in its current inquiry. In our experience claimants are
far too often pushed from one agency to another, each with its
somewhat varying rules and with its own complexities. As the new
credits are introduced the confusion must be removed. The introduction
of a housing credit would be an important step in achieving a
far more integrated and transparent system of in-work benefits.
39. This is not only a matter of ensuring
a more user-friendly system for claimants and of encouraging take-up.
It would also be likely to reduce the likelihood of error and
the temptation to indulge in fraud. It should also enable the
authorities to identify fraud more readily when it does occur.
40. We note that the Committee believes
that the arguments against the administration of HB by a central
agency are persuasive (paragraph 145). Our own belief remains
that the depth of the skill and experience of the Inland Revenue
is such that it would be the agency most likely effectively to
bring together all the various elements of the in-work benefits
and tax credits. Even though the Committee did not in terms consider
administration of HB by the Revenue, in view of its recommendation
we do not press the matter further. However, if the administration
of the scheme is not significantly and speedily improved, we hope
that the Committee will be prepared to reconsider the matter at
a later date.
CONCLUSION
41. The new tax credits are to be based
on the WFTC and the CTC. However, despite being deemed to be a
tax credit, the WFTC remains in essence a benefit which has not
been integrated with the tax system. By contrast the CTC is essentially
a tax measure. There are many aspects of these credits—some
fundamental, others of significant detail—which are making
them less effective in meeting the aim of reducing child poverty
than need be the case.
42.The increase in the take-up of WFTC over
that of FC has been less than half that estimated. The opportunity
for tackling these issues more effectively which is being provided
by the introduction of a radically new system of tax credits should
be securely grasped if it is to be any more successful in meeting
the Government's aims. Particular attention should be given to
the credits for disabled people, including disabled children.
43. The Government has not so far given
any consideration—at least in public—to the interaction
of the new tax credits with HB and CTB. However the evidence given
by David Blunkett and Alistair Darling to the joint hearing of
the Committee with the Employment Sub-Committee of the Education
and Employment Committee suggest that Ministers are well aware
of the extent to which HB is a nightmare, and of the need to tie
changes to it in with the development of the new tax credits (eg
Q42 and 43).[1]
44. The recommendations made on HB by the
Committee in its Sixth Report in the current session provide a
basis which should be fully developed in this wider context. Only
by these means will the new tax credits be made easier for claimants
to understand so that take-up is maximised and delays and frustration
minimised. Fraud and error are also most likely to be reduced
by an approach of this nature. Unless changes to HB and CTB are
tied in with the development of the new tax credits, employment
opportunities for all and the consequential reduction in child
poverty will remain a distant dream.
John Andrews
Chairman
September 2000
1 Minutes of Evidenc: The Creation of a New Agency
for People of a Working Age (HC 662-i) Session 1999-2000. Back
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