Select Committee on Work and Pensions First Special Report


Recommendations and Responses

Recommendation (a)

We value the role of universal Child Benefit and believe it should continue to play a substantial role in supporting the children of this country. We welcome the commitment from the Chancellor to Child Benefit. We recommend that the Government takes steps to ensure that, as integration develops a separately identifiable universal element, presently Child Benefit, is preserved.

Recommendation (z)

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 very worrying that plans to move Child Benefit administration to sit alongside ICC appear to be so uncertain and ill­defined at this stage.

    1.  The Government is committed to Child Benefit as the foundation of support for families with children. In the last parliament the rates of Child Benefit for the first child were raised by 26% in real terms. On 31 May, the Chancellor said: "Millions of families can be absolutely reassured that not only will Child Benefit not be taxed, it will remain universal, and in the (next) parliament it will rise in line with prices." Child Benefit will continue to form the universal foundation of support for families.

    2.  On 25 June the Prime Minister announced that responsibility for Child Benefit in Great Britain will transfer to the Inland Revenue so that when the new credit is introduced in 2003, Government support for children will be administered by one Department. It makes sense for a single department to administer both Child Benefit and the new tax credit for families with children. It will mean parents can benefit from a better, more joined up service.

Recommendation (b)

We believe that the introduction of Integrated Child Credit provides an opportunity for a long overdue review of the level and structure of financial support for children in Britain which should not be missed.

Recommendation (c)

We recommend that the Government should establish a specific budget to fund a variety of research by different social scientists into the levels of income which are sufficient to keep families with children out of poverty.

Recommendation (d)

We also recommend that the Government convenes an ongoing working party involving policy makers, academics and other interested parties to assist it to devise publicly acceptable measures of the levels of income needed to avoid poverty.

Recommendation (e)

Given that ICC is creating a framework where all families will be part of the same system, we believe there is a case for working towards a maximum award of ICC, paid to families on the lowest incomes, which reflects what parents on average need to spend on their children, an amount which is then tapered away as income rises.

Recommendation (u)

There is little doubt that support for the introduction of ICC would be badly affected if means­tested 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.

    3.  We welcome the Committee's acknowledgement that the new integrated child credit, by providing a transparent system of support for families with children, will facilitate discussion about the appropriate level of support in the context of the Government's commitment to eliminate child poverty within a generation. The final decision on rates, tapers and thresholds will of course be a matter for the Chancellor who will set these rates nearer to the time of introduction of the new system. Decisions on where to focus resources will, as now, reflect the Government's objectives of supporting families, tackling child poverty and making work pay.

    4.  The Government takes an active interest in research into the levels of household income that are associated with poverty, including work on adequacy, but notes that there is a wide variety of views on how this question should be approached.

Recommendation (f)

We recommend that the disabled child premium within IS/JSA and the disabled child credit within WFTC/DPTC be incorporated within Integrated Child Credit.

    5.  The new tax credits are intended to build on the approach taken in WFTC/DPTC and IS/JSA where the additional responsibilities associated with caring for disabled children are recognised by additional premia.

    6.  As outlined in Chapter 2 of the consultation document, the integrated child credit will similarly recognise these additional responsibilities by providing extra credits for each child with a disability in a household, based on the existing credits in WFTC/DPTC and the premia in IS/JSA (IB) and paid at a higher rate for children with more severe disabilities.

Recommendation (g)

We recommend that ICC rates do not distinguish between first and subsequent children, and that levels of Child Benefit between first and subsequent children be equalised.

Recommendation (h)

We recommend that there should be no age­related element in the rate of child credit per child.

    7.  The integrated child credit will contain a family element paid to all families with children regardless of the number of children in the family. This family element recognises the responsibilities families have in caring for children and delivers support to these families across a broad range of income, ensuring that the integrated child credit is a single, inclusive system of supporting families. (Consultation document Chapter 2)

    8.  On the question of the relative rates for first and subsequent children, we are aware of research that shows the greater likelihood of poverty for larger families. This is why much of the additional resource that has been directed towards poorer families with children since 1997 has focussed on increasing the amount paid for each child, for example the Income Support and Jobseeker's Allowance for children aged under 11 increased by 80% in real terms over the last parliament. The family element in the integrated child credit and the different levels of Child Benefit remain important components of support as they recognise the sharp reduction in family income often associated with the birth of a first or only child. This approach is further enhanced by the availability of a higher rate of family element to any family with a child under the age of one, when the evidence shows that family need is often most acute. (Consultation document Chapter 2)

Recommendation (i)

We welcome the 'portability' of ICC for families moving into work, whereby the maximum rate of ICC will be retained across the no work/work divide. It will enable resources to go to children in the poorest families whilst providing their parents with certainty of income if they move into low paid work.

    9.  The introduction of the integrated child credit is an opportunity to create a secure bridge of support for parents moving from welfare into work. As chapter 2 of the consultation document explains, the portability of the integrated child credit is a fundamental feature of the new approach to targeted support for families with children.

Recommendation (j)

We have concluded that in order to reduce child poverty, assist the transition into work, and aid administrative simplicity there are strong arguments for maintaining a wide band of income across which maximum ICC is paid, before it starts to be withdrawn.

    10.  The integrated child credit will only be withdrawn once a household's entitlement to the employment tax credit is fully extinguished. This means that maximum child credit will be paid to all those on out of work benefits (IS and JSA(IB)) and all families with children who receive the employment tax credit. This structure ensures that the integrated child credit forms a portable and secure base of support for families which will make the transitions from welfare to work easier.

Recommendation (k)

We are pleased that the Government is looking at the interaction of ICC and Housing Benefit, but consider that the aim should be to improve marginal deduction rates rather than simply not make them worse than they are at present.

Recommendation (w)

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.

    11.  In exploring the interaction between the new tax credits and Housing and Council Tax Benefits, the Government is giving careful consideration to the way that support is withdrawn as income rises, the effect on marginal deduction rates and the issue of "passporting" families to maximum Housing and Council Tax Benefit. The Government agrees with the Committee that the aim should be to ensure that those who are on both HB/CTB and the new tax credits are not disadvantaged by the introduction of the latter. (Consultation document Chapter 7)

Recommendation (l)

We repeat the recommendation made in our report on Housing Benefit that consideration should be given to removing as many people as possible from the necessity of making claims for Housing Benefit alongside ICC, either by increasing the earnings disregard or examining the possibility of including a housing credit as part of the reforms of tax credits in 2003.

    12.  The Government is looking at the long term possibilities for reform of Housing Benefit (consultation document Chapter 7) but it is important that work on delivering the new system of support for families continues towards the intended introduction of the new tax credits in 2003.

Recommendation (m)

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 IS/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.

    13.  Chapter 6 of the consultation document sets out the details of the proposed responsive system for the new tax credits. We agree with the committee that entitlement to tax credits should change to reflect major changes in family circumstances and that there should be an integrated child credit safety net for those who move onto IS/JSA(IB). On the question of responding to income changes, the consultation document outlines the trade­offs to be made between a more responsive and better targeted system and a more rigid system. Our proposals are intended to strike the right balance by delivering a system that can respond to changes in income and target support to those who need it, whilst also providing certainty for those with stable incomes.

Recommendation (n)

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.

    14.  The details of our proposals for the treatment of capital and income from capital are set out in Chapter 5 of the consultation document. Our proposal to take account of income from capital with no capital limits is based on producing a fair but simple system, which does not create disincentives for people to save.

    15.  We want people to be able to benefit from tax incentives to save even if they are on a low income so we are also proposing to ignore income arising from tax­free savings vehicles such as ISAs and National Savings Certificates.

    16.  Our approach is based on delivering a simple system that is consistent with the tax system and encourages all families to build up their savings.

Recommendation (o)

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.

    17.  The approach to capital in the new tax credits is outlined in Chapter 5 of the consultation document and it should be noted that the integrated child credit in particular will be available to families on a broad range of incomes who will all be able to benefit from the proposed approach. As the Government announced in the Pre­Budget Report 2000, the next phase of modernising the social security and tax credit system offers an opportunity to review the treatment of income and capital in assessing entitlement to support for working­age families and this approach will be among those considered.

Recommendation (p)

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.

    18.  As Chapter 5 of the consultation document explains, one of the basic principles behind our proposed approach to income for the new tax credits is that the definition of income should be made as consistent with the treatment of income for income tax purposes as possible. We propose to follow that basic principle except in certain circumstances where doing so may be contrary to the overarching objectives behind the new tax credits of supporting families, tackling child poverty and making work pay.

Recommendation (q)

We recommend that child support payments are ignored for ICC purposes.

    19.  In WFTC and DPTC child maintenance payments are disregarded in the hands of the recipient. This has improved work incentives for single parents by allowing them to keep more of the income they receive for the support of their children. We should like to retain these arrangements for the new tax credits, which would be consistent with the fact that child maintenance payments are no longer taxed in the hands of the recipient. (Consultation document Chapter 5)

Recommendation (r)

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 income­based Jobseeker's Allowance should be permitted to benefit from the £10 child maintenance premium from the date of commencement of the reforms.

    20.  All parents with care on IS or JSA (IB) will have access to the child maintenance premium from the date that the reformed scheme takes effect in their case. In practice, it would be very difficult to introduce the premium for "old" cases on the existing IT system and, as it is part of a balanced package of reforms, we think it should not be pulled out in advance. We have decided that we should concentrate on getting the new arrangements working for new cases as quickly as we can.

Recommendation (s)

We consider there is a case for ignoring payments of statutory maternity pay and maternity allowance for ICC purposes.

    21.  Statutory maternity pay and maternity allowance are disregarded for the purposes of WFTC and DPTC. This is intended to provide mothers with more flexibility to stay at home to look after their new child in the first few months of it life. The Government remains committed to giving mothers this flexibility therefore, although statutory maternity pay is taxable, we continue to see a strong case for disregarding statutory maternity pay and maternity allowance for new tax credits purposes. (Consultation document Chapter 5)

Recommendation (t)

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.

    22.  Child Benefit will form the foundation of support for families with targeted support in the form of the integrated child credit sitting on top. We do not propose that Child Benefit would reduce a family's entitlement to the integrated child credit or vice­versa.

Recommendation (v)

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.

    23.  Access to passported benefits such as free school meals and other health and education benefits is a vital element in the Government's multi­faceted approach to combating poverty and social exclusion. As outlined in Chapter 7 of the consultation document, we propose to ensure that the new tax credits are structured in a way that makes it possible for entitlement to such passported benefits to be attached to an award of tax credit or a certain level of household income. The Government is considering the issue to ensure that all families receive an appropriate package of support, particularly those on the lowest incomes.

Recommendation (x)

Since much of the detail has yet to be announced, we believe it would be sensible to provide a further period of public consultation on the details of ICC once they have been finalised.

    24.  The publication of the Inland Revenue consultation document is an opportunity to obtain the views of interested parties on the next stage of the Government's modernisation of the tax and benefit systems.

Recommendation (y)

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.

Recommendation (aa)

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.

Recommendation (dd)

We invite the Government to give an unequivocal undertaking that ICC will not be implemented unless and until the administrative framework and IT systems to support it are fully operational.

    25.  The proposals in the consultation document outline a system that will require joined up delivery between the Inland Revenue and Jobcentre Plus, the new agency for working age people forming part of the Department for Work and Pensions. As officials outlined in their evidence to the Committee, the Inland Revenue and Department for Work and Pensions are working very closely on the delivery of the new system including the IT system. Clear communications across departments will be vital to the successful implementation of the new system and IR and DWP officials are working together to ensure a smooth introduction of the new tax credits in 2003.

Recommendation (bb)

We recommend that the new rules for tax credits should not consist merely of multiple amendments to social security benefit legislation. Rather, both the primary and secondary legislation relating to tax credits should be drafted, as far as possible, as stand alone legislation.

Recommendation (cc)

We recommend that, in planning the legislative timetable for ICC and ETC, sufficient time is allowed to enable careful drafting of both primary and secondary legislation in plain English.

    26.  The committee rightly recognised that the introduction of the new tax credits is a major reform of the tax and benefits systems which will require extensive legislative change. As announced in the Queen's Speech, a Bill will be brought forward in this parliamentary session to introduce the new tax credits. Today's publication of a consultation document outlining the details of the new tax credits is the first step towards the introduction of the Bill.

    27.  The drafting of legislation is a matter for parliamentary draftsmen.

Recommendation (ee)

We believe that the introduction of a simple annual tax form to complement existing information held by the Inland Revenue would enable people to report unearned income; the presence of children and if appropriate, the existence of a partner. It would provide the required balance between simplicity and eliciting the basic information and we recommend the consideration of such a system.

    28.  One of the main themes of these reforms is that the new system should be kept as simple as possible. This runs throughout all of our proposals in the consultation document and in particular has influenced our thinking on the treatment of income (Consultation document Chapter 5).

    29.  Keeping the rules as simple as possible will enable the application process to be straightforward so that people can easily provide the right information, encouraging potential claimants to apply. The work on devising the application process will build on the lessons learned from WFTC/DPTC and the Children's Tax Credit.

Recommendation (ff)

We welcome the proposal that ICC should be paid to the main carer.

    30.  It is only right that dedicated support for children should be paid to their main carer just as payments focused on making work pay should be channelled to the person in work. (Consultation document Chapter 6)

Recommendation (gg)

We recommend that recipients be given a choice concerning the intervals at which they are paid: (for example fortnightly, monthly, annually), and that the main carer be given the option of payment otherwise than electronically, if he or she does not have a bank account.

    31.  Where payments are made direct to a recipient we agree with the Committee that the recipient should have flexibility as to how often they will receive the payments. We are therefore proposing to offer recipients the choice to receive direct payments either weekly or 4 weekly in arrears. (Consultation document Chapter 6)

    32.  Where some families do not currently hold a bank account or may have difficulty opening one, we want to build on the Government's drive to tackle financial exclusion. Work to ensure that those without bank accounts will be able to open a suitable account into which we can pay tax credits is being taken forward together with the Post Office and major banks. (Consultation document Chapter 6)

Recommendation (hh)

We conclude that although ICC is a welcome step towards a simpler system, there is still a considerable way to go to create a tax credit and benefit system which is easy to understand and easy to use from the recipient's perspective.

    33.  Creating a system that is simple and easy to access is at the heart of the proposals in the consultation document. In addition to this, the new system is intended to be more flexible and better targeted. In many areas there are trade­offs to be made between simplicity and more flexibility and better targeting. The proposals in the consultation document intend to strike a balance between these sometimes conflicting objectives, creating a system that is simple and easy to access but which delivers targeted support in a fair way.

Recommendation (ii)

It is important to know the characteristics of those people who are not claiming ICC, to establish whether there are trends in family structure; income or regions, so as to enable

the more accurate targeting of take­up campaigns. We recommend that these patterns of lack of take­up are analysed by the Government.

Recommendation (jj)

We agree that the take­up of ICC will be vital to its success and that active encouragement to claim should begin as soon as a child is born. We therefore recommend that Integrated Child Credit application forms be sent to parents of newly­born children alongside those for Child Benefit and that data matching between Child Benefit and Income Tax records should be regularly used, as in Australia, to identify likely claimants and to encourage them to claim.

    34.  Creating a simpler and more accessible system of tax credits will in itself help to ensure that people are encouraged to apply. Nevertheless, it is essential that all potential applicants are made aware of their potential eligibility. In the lead up to the introduction of the new tax credits in 2003 we will look carefully at patterns of take up in existing tax credits and aim to learn the lessons from the introduction of those credits.

    35.  When targeting those families who may be eligible for the new tax credits in the lead up to introduction in 2003, we aim to specifically target our efforts at families who claim all forms of existing support for children, including Children's Tax Credit, WFTC/DPTC and Child Benefit. The transfer of responsibility for Child Benefit will enable Government to deliver a better joined up service to families who will be eligible for both Child Benefit and the integrated child credit.

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