Select Committee on Social Security Appendices to the Minutes of Evidence



Memorandum submitted by the Low Incomes Tax Reform Group (ICC 01)


  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 This is compounded by outdated and inaccessible legislation.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.


  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.


  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.


  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.


  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.


  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.


  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.


  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.


  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


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

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2001
Prepared 22 March 2001