Supplementary memorandum submitted by
the Chartered Institute of Taxation (Low Incomes Tax Reform Group)
POSSIBLE OPTIONS FOR REFORM OF CHILDCARE
ELEMENT IN WORKING TAX CREDIT
SUMMARY
The childcare element in working tax credit
is unprecedented in its generosity. This gives rise to correspondingly
large overpayments if mistakes are made in calculating entitlement,
or in understanding the complex and rigid rules about eligibility.
The calculations are based on averaging which
few claimants are confident in working out.
The credit is tightly targeted so that if a
person ceases to qualify for WTC, they also cease to be eligible
for childcare credit. This can disqualify a person who has lost
their job and is trying to get back into the workplace, or a lone
parent who chooses to study or train to improve her work prospects.
Couples are also excluded if for example one
of them is working and the other is caring for a disabled child,
or studying, or abroad for a short period.
If a claimant makes a mistake, and has to repay
the ensuing overpayment, they may no longer be able to afford
to pay for childcare as well, and therefore have to stop work
altogether. Extreme hardship can result.
Any solution must address the situations described
where childcare support is needed but unavailable under the present
rules, and the overpayment problem.
We recommend a solution outside tax credits
which would pay the claimant directly as costs are incurred, or
pay the childcare provider. This need not compromise the level
of support, and would solve the overpayment problem.
But if childcare is to be kept within tax credits,
we would seek either some protection from overpayment recovery
for households below a certain income level, or a system of vouchers
if it could be delivered without being unduly susceptible to fraud.
We strongly advocate a payment for parents who
prefer to look after their own children.
We also would like to see some recognition within
the system of the extra costs and difficulty in securing childcare
for disabled or severely disabled children, perhaps by increasing
the maximum costs eligible for the credit.
INTRODUCTION
1. There is no doubt that the childcare
element in working tax credit is the most generous support ever
given by any Government in this country to the costs of childcare.
Making it part of the tax credit system means that anyone who
qualifies for WTC automatically gets the childcare element, provided
they fit the specific requirements—to that extent access
to affordable childcare for those claimants who wish to work is
made a lot easier.
2. Nevertheless, many claimants are reporting
difficulties of both comprehension and cash flow. The complexity
of the calculation, the very tight targeting of the eligibility
rules, and the consequential overpayments if mistakes are made,
result in too many people falling between the cracks. For those
people, the size of the overpayments can cause significant hardship.
3. In this paper we consider the problems
in the present structure of childcare support and propose some
solutions which could be carried out within the tax credit system.
We also look at the merits of taking childcare out of tax credits.
THE PROBLEMS
Looking at each of these in turn:
Complexity
4. Entitlement to childcare credits is normally
ascertained by means of an averaging calculation. There are two
problems with this:
— the difficulty most people have
with computing averages;
— the fact that where childcare
costs fluctuate, averaging does not deliver what is needed, at
the time it is needed, when costs are running above average.
5. To compound the difficulties, the booklet
WTC5 gives five different methods of computing entitlement:
— if you pay childcare costs weekly
in fixed amounts—such as £100 a week, every week—the
booklet WTC5 tells you to add up your costs for the last four
weeks and divide by four (the averaging calculation) whereas the
notes to the claim form TC600 say: "If you pay for child
care weekly and pay the same amount each week, insert that amount"
on the claim form;
— if you pay childcare costs weekly
and they fluctuate, add together what you have paid over the last
52 weeks and divide by 52. This covers situations such as childcare
being paid for term time but not in school holidays, or the very
common case where child care provision fails, and ad hoc
arrangements are made to tide the family over;
— if you pay costs monthly in
fixed amounts, multiply what you spent last month by 12 and divide
by 52;
— if you pay costs monthly and
they fluctuate, add together what you have spent over the last
12 months and divide by 52;
— if it is less than 52 weeks
or 12 months since you started using childcare, estimate what
you will spend over the next 52 weeks and divide that by 52.
6. When averaging is used, a further complication
arises if a claimant's average childcare costs drop by £10
a week or more over a period of four weeks, because HMRC must
be told. It is hard enough for claimants to work out their average
childcare costs in line with the above methodology, particularly
if there are frequent and unpredictable fluctuations; but to do
so over a four-week period during which costs are fluctuating
all the time is an unreasonable burden on most people. People
who have difficulty are advised to phone the helpline—in
practice this has proved to be an inadequate solution in many
cases. Experience suggests that helpline operators may have the
same problems in understanding the system as do claimants.
Rigidity
7. Building the childcare element into working
tax credit has the apparent advantage that anyone eligible for
the principal in-work welfare payment is also eligible for the
childcare support that goes with it, so that only one claim is
required.
8. However, this also has a corresponding
disadvantage in that anyone who falls out of WTC eligibility—eg
by their weekly hours falling to below 16—similarly forfeits
the childcare support. This would exclude from the childcare credit
a lone parent who is studying or training to improve her work
prospects, and possibly working less than 16 hours a week meanwhile.
9. It also excludes someone whose job has
come to an end, and with it their WTC entitlement, but who has
every intention of re-entering the labour market, during which
time it is vital—both for parent and for child—to
retain the child care place while the parent is seeking work.
10. It is also important to recognise that,
in the case of couples, childcare is only payable if both parents
are working, unless one parent is:
11. The effect of this rule means that childcare
credit is not available to families where one parent is in work
and the other parent:
—
has stopped work in order to go overseas temporarily
(eg to deal with a family matter), when the couple is disqualified
from childcare support for at least the first eight weeks of absence;
12. These are examples of how the tight
targeting of this benefit can defeat the welfare to work agenda
and indeed other government policy objectives.
13. The situation outlined in the second
bullet above results from an anomaly in the way the temporary
residence rules interact with the eligibility requirements for
child care credit. The temporary residence rules allow a couple's
joint claim to continue for the first eight weeks, or 12 weeks
in some circumstances, of any absence abroad that is not intended
to exceed 52 weeks. But because the childcare rules require both
members of a couple to be in work, when one member stops work
to go abroad the couple is no longer entitled to the credit. If
the member who has gone abroad has not returned by the end of
the eight (or 12) week period, the member who remains in the UK
becomes a single claimant for tax credit purposes and can then
claim the childcare credit. Two provisions, both intended to give
relief, effectively cancel each other out. That cannot have been
the intention of the legislature, yet there seems to be no will
on the part of the legislature to correct the anomaly.
14. The accompanying paper Working Tax
Credit—Child Care Tax Credit for Couples by Jane Hayball,
Welfare Rights adviser at the London Borough of Greenwich, gives
more details of the four situations described above.
15. Furthermore, if one parent is staying
at home to care for the children, not only are no childcare credits
paid to recognise the caring done by the parent, but the total
sum paid in working tax credit is the same as paid to a lone parent.
In other words, the system discriminates against two parent families
where one adult cares for the children, and arguably provides
a significant financial disincentive for a second adult to become
a permanent member of the household. Again, this could be seen
as contrary to the wider policy objective of providing stable
families for children.
Overpayments
16. Because the childcare credit is so generous,
childcare-related overpayments are correspondingly large. Overpayments
are likely to arise because mistakes are made as to the eligibility
rules, or in computing averages.
17. We have seen a case where attempts were
made to claw back considerable sums from a couple because the
husband had to go overseas to attend to a death in the family,
and the wife continued to receive childcare payments during his
absence.
18. In another case we handled, an enquiry
was launched into the claim of a lone parent whose mother, a registered
or approved childcare provider, was looking after the child in
the child's home, a practice that was permitted under WFTC but
forbidden under WTC.
19. In both those cases, the overpayments
were out of all proportion to the claimant's ability to repay—one
was around £4,500. We argued successfully that both overpayments
should be written off; but if we had not done so, those families
would have faced severe financial difficulties because they were
confused about the complex rules.
20. Similarly, as mentioned above, HMRC
must be told if a claimant's average childcare costs drop by £10
a week or more over a period of four weeks. This is not an absolute
amount, but an average over the period. Parents who are struggling
to cover their childcare needs often do not understand how this
works, or do not remember to notify HMRC, and hence an overpayment
begins to build up. This problem will be exacerbated when the
period within which such changes must be reported, at present
three months, is reduced to one month. No sooner has the four-week
run-on period expired than the reporting deadline passes too.
21. The price to the claimant of making
a mistake can be a high one, particularly for a lone parent. Faced
with the twin debt of paying for childcare without the 70% credit,
and repaying the overpayment, many are forced to cancel their
childcare arrangements, which means they can no longer work. In
short, a payment intended to be a work incentive becomes instead
an obstacle to staying in work. We have also documented cases
where people have been forced to sell, or at least consider selling,
their homes to repay the overpayments, adding considerable stress
and instability to the family unit.
POSSIBLE SOLUTIONS
22. Any solution would have to address two
things:
1. how to extend the scope of the childcare
element so that new categories of people who do need the support
can benefit from it (eg carers, people going abroad, full-time
students, etc); and
2. the problem of overpayments.
23. We believe that the first issue can
only be resolved if Government were to take the necessary policy
decisions, and make the necessary changes to the legislation.
The cost of doing that can—we suggest—be met by reducing
the volume of overpayments arising from the childcare element.
To that extent, the solution to 1 may be partly dependent upon
2.
24. How, then to resolve the overpayment
problem?
25. Overpayments are endemic in a system,
such as tax credits, which is designed to give provisional awards
which are later adjusted. Accordingly, for as long as (a) this
remains true of the tax credit system, and (b) childcare support
is kept within tax credits, there will always be a tendency to
underpayments and overpayments and there will always have to be
some form of reconciliation at the end of the year.
26. That observation gives force to the
argument that childcare support should be taken outside the tax
credit system altogether, and either paid directly to the claimant
as it is incurred, or paid to the childcare provider. One objection
might be that if childcare support were taken out of the working
tax credit, it would be more difficult to link it to work; but
the same could perhaps be achieved by a simple passporting mechanism.
The present generous level of support need not be compromised
by taking child care out of the tax credit system; and recoverable
overpayments would only arise where there was misrepresentation
or omission on the part of the claimant. Overpayments would no
longer be endemic in the system. In short, the advantages of this
course are many, and we can see no insurmountable drawbacks.
27. However, the Government appears committed
to keep childcare within tax credits. We must therefore also look
for possible solutions within that system. We raise two possibilities:
1. Some form of protection for more vulnerable
claimants. One way of doing this would be to put a ceiling on
overpayment recovery, analogous to the system of student loans.
Overpayments would remain on the claimant's account, as it were,
but recovery would be suspended in certain circumstances. For
example, there would be no recovery at all where household income
was less than x amount, partial recovery where income was more
than x but less than y, full recovery above y. This would protect
those who could least afford to repay large overpayments, but
would not of itself decrease the volume of overpayments in the
system. Nor would it release the funds necessary to bring within
childcare support carers, and those others whose circumstances
might merit help of that kind.
2. A more radical (and possibly controversial)
idea would be to issue vouchers at the start of the tax year based
on 70% (or 80% from 2006-07) of a forward estimate of childcare
costs. Once issued, the vouchers would be available to claimants
to spend on registered or approved childcare for the rest of the
tax year. If the estimate at the beginning of the year proved
too low, the claimants could apply for more. If the estimate proved
too high, no overpayment would result, because the money would
not be spent until the voucher was presented for payment. At the
start of the next tax year the claimants would again estimate
their forthcoming expenditure, and the process would be repeated.
Eligibility would still be linked to the working tax credit; there
would be no need to keep track of average expenditure over a cycle;
and the overpayment problem would be resolved because however
many vouchers were issued, only those presented for payment would
be counted. Clearly, a scheme of this type would need to be designed
carefully to prevent fraud, and also the development of a secondary
market in vouchers. It would also be necessary to link the issue
of vouchers to current award levels in order to determine how
much of the credit should be subject to the 37% tapered reduction—unless
that were simply fixed for a year on the basis of preceding year's
income.
28. Much of the problem with overpayments
caused by rises in income has been removed by the announcement
in the 2005 PBR of a £25,000 disregard. Greater tolerance
of downward movements in childcare would be a considerable help
in both reducing the bureaucracy of the system, and reducing overpayments.
Support for informal childcare
29. As noted above, there is no support
in the UK for parents who prefer to look after their own children,
despite the resulting loss of income from employment or self-employment.
30. Nor is there support for those who are
able to leave their children with a member of their family, most
obviously their own parents, unless very restrictive conditions
are fulfilled.
31. In other countries, notably France and
Finland, the state supports both paid childcare and childcare
by parents or grandparents. The current UK system is biased in
favour of the lone parent, and thus can be seen as hindering the
formation of permanent, stable, two-adult family units. We do
not understand the policy reasons why the state contributes so
generously to the costs of the single parent family, or the family
where both parents work, while ignoring the costs of the other.
32. If a more even-handed approach were
adopted, perhaps it would ameliorate the economic circumstances
which require many couples and lone parents to choose work, thus
having to find paid childcare provision for their children, rather
than care for their children themselves.
Disabled children
33. We conclude with a note about childcare
for disabled or severely disabled children. Because conventional
childcare facilities are generally unable to accommodate such
children, childcare for them can be hard to find and disproportionately
expensive once found. We would like the system to recognise the
extra costs of obtaining care for disabled children by, for instance,
increasing the maximum costs eligible for the credit.
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