Supplementary memorandum submitted by
One Parent Families
1. We think that there are good reasons
on both administrative and policy grounds for removing the childcare
element of Working Tax Credit. The lack of responsiveness of childcare
costs was one of the major criticisms of the fixed nature of WFTC
awards. Research suggested that this was one element of the system
that claimants did want to be more responsive. Under Working Families
Tax Credit callers to our helpline reported problems in not being
able to claim new or increased childcare costs after the date
of the initial claim for WFTC. Other research also suggests that
this lack of responsiveness was a problem. Research into the childcare
element by MORI for the Revenue found that "The fact that
WFTC awards were fixed created difficulties for some recipients.
The key issue was where needs changed over the course of the award.
This could lead to disparities between the award and actual childcare
use.... On occasion the gap between what was being claimed and
what was being paid out in childcare had caused severe if short
term hardship."[21]
2. But the system chosen for the payment
of the childcare element of tax credits at present represents
a halfway point between simplicity and responsiveness that satisfies
neither requirement effectively. Moreover, the childcare element
may not be the most effective way to meet policy goals. Removing
the childcare element from Working Tax Credit would considerably
reduce the administrative burden on the Revenue.
3. The operation of the childcare element
is far from simple. At present, there are four basic methods of
calculating average weekly costs, based on past childcare costs:
— Same amount weekly—add
last four weeks and divide by four;
— Different amounts weekly—add
last 52 weeks and divide by 52;
— Same amount monthly—take
last month, x 12, divide by 52;
— Different amounts monthly—take
last 12 months and divide by 52.
And two based on future costs:
— An estimate of costs over the
next 52 weeks if childcare has not yet or has recently started;
— Total costs divided by the total
number of weeks used if childcare is expected to last less than
a year (eg few months before a child goes to school).
4. In order to report changes in childcare
costs, costs have to have fallen to zero, decreased by £10,
or increased by £10 per week over a period of four consecutive
weeks. Therefore while increases in costs can be recouped, they
must have been incurred for a month previously, which for those
on a low income does not constitute a high degree of responsiveness.
5. Our own research found that parents find
the current system difficult: just over a quarter of those in
the sample required to calculate their childcare costs struggled
with this, with lone parents reporting problems recalling how
much was paid, understanding the instructions provided by the
Inland Revenue and actually performing the calculation.[22]
6. Two options for reform have been put
forward for the way in which the childcare element within the
Working Tax Credit operates:
— System 1 (Average weekly costs)—Claimants
would estimate their total costs for the tax year, divide by 52
to arrive at their average weekly cost, and receive an award based
on that average weekly cost each week or 4 weekly. Claimants could
base the cost on their costs over the last tax year, or could
estimate how much they expected to spend in the current tax year
if they were anticipating a significant change from the previous
year's costs, or if none had been incurred. If a claim was made
in-year, the claimant would estimate their total costs to the
end of the tax year and divide by the number of weeks left to
the end of the tax year.
— System 2 (Actual costs)—Claimants
would claim for their actual costs. They would provide the Revenue
with their actual weekly cost (or monthly if costs paid monthly)
and would then receive an award paid every week/four weekly based
on the actual cost until that cost changed or childcare ceased.
7. System one has been criticised for being
difficult for low income parents to operate, as the extra cash
will not be in their pockets at the time of the increased childcare
costs. System two has however come under similar criticism as
placing an unreasonable administrative burden on the Revenue.
Following several meetings about the issue the Revenue now appear
to have reached an impasse in attempts to reconcile simplicity
and responsiveness.
8. Looking at the policy objectives of meeting
the costs of childcare there are also reasons to think that the
childcare element of working tax credit may not be the best or
only mechanism available. There may be a number of reasons why
the Government wishes to subsidise formal childcare use through
the Working Tax Credit, including:
— To encourage or enable families,
and particularly women, to work.
— To encourage the use of formal
childcare which may have beneficial outcomes for children.
— To help reduce poverty by meeting
the costs of childcare that low income families are already using.
9. The Institute for Fiscal Studies in their
Green Budget of this year suggested that the current system does
little to address these objectives. Their arguments can be summarised
as follows:
— It is not transparent—it
is likely that mothers who are thinking about returning to work
and using formal childcare will find it hard to work out how much
money they will be entitled to receive for childcare, and this
uncertainty may reduce the extent to which the childcare element
of WTC can persuade mothers to enter work.
— It is not well designed to raise
the quality of formal childcare—research from the US suggests
that subsidies like the childcare element of WTC are not well
designed to increase the quality of care used by parents. A review
of the economics literature on childcare found that "when
price falls, consumers substitute towards quantity and away from
quality".[23]
They also point out that the termination of childcare payments
when a job ends is unlikely to be beneficial for children due
to the disruption caused (One Parent Families have long argued
for a run on in childcare costs at this point).
— It is not the best designed
instrument for helping mothers to work; evidence from the US suggests
that childcare subsidies are reasonably effective in increasing
what parents spend on formal childcare, but have little or no
impact on mothers' labour supply decisions.
— It is not particularly well
targeted on helping the poorest families—because the poorest
families are not in work, which is a condition of claiming the
childcare element of WTC.[24]
10. The childcare element of Working Tax
Credit therefore does not seem to be operating effectively either
administratively or in terms of meeting its policy objectives.
We therefore think that there is a good case for removing childcare
subsidies from the tax credit system and paying them by another
means—and thus removing an administrative burden from the
Revenue.
11. We obviously do not want Government
to stop meeting the costs of childcare and therefore need to suggest
other ways in which this could be done. The IFS Green Budget suggested
two ways in which childcare costs could be met:
(a) To give the Government greater control
over the quality of childcare provision, the demand side subsidy
of the Childcare element of Working Tax Credit could be turned
into a supply side intervention that directly increases quality.
Such interventions could be universal, limited to deprived areas,
or means tested against parental income in some way.
(b) The childcare element of the Working
Tax Credit could be replaced by tax credit changes that encourage
all mothers to work—for example by increasing Working Tax
Credit elements (eg the lone parent/couple element). Alternatively
extra money could be redirected to children whether their parents
are working or not by increasing Child Benefit or the per child
element of the Child Tax Credit.
12. Providing greater supply side funding
to secure universal free, quality childcare is an ambitious vision
and one that we have long supported. In their vision for childcare
in 2020, the Daycare Trust and Social Market Foundation suggest
that all two, three and four year olds should be entitled to 20
hours per week free early education and care for up to 48 weeks
a year, funded by payments to providers. They also suggest that
additional wrap around education and care be available from 8
am to 6 pm for 48 weeks a year for all two, three and four year
olds, and that additional wrap around care for five to 14 year
olds is delivered though extended schools, and suggest, much as
in the first IFS option that: "Childcare tax credits would
eventually be abolished to help meet the costs of this package,
which would primarily be funded through supply side grants to
early education and care providers."[25]
This vision has to some extent been taken up
in the Government's ten year childcare strategy which sets out:
— A goal of 20 hours a week of
free high quality care for 38 weeks for all three and four year
olds with this Pre Budget Report announcing a first step of 15
hours a week for 38 weeks a year reaching all children by 2010;
and
— An out of school childcare place
for all children aged three to 14 between the hours of 8 am to
6 pm each weekday by 2010.
13. Yet the out of school childcare places
are not necessarily free. Even if they were, and with full implementation
of these goals, there will still be parents who need to pay for
additional childcare, for example to cover atypical working hours,
and who will need help with the costs of this. Although we think
that the balance of funding should shift to providing supply side
subsidies in order to secure free childcare places, there will
still remain a role for some demand side payments.
14. Would demand side funding best be provided
by giving more money to all working parents, or all those with
children as in the IFS's second suggestion? While this may help
to reduce poverty if extra money is put into Child Benefit and
Child Tax Credits, or to increase work incentives if put into
Working Tax Credit, we think that it is likely to make things
difficult for parents who are actually trying to meet the costs
of childcare, as it could bear no relation to childcare use. If,
for example, the addition to Working Tax Credit amounted to £50
a week, those using childcare that cost, say £100 a week
may be forced to reduce their hours in order to have to use only
£50 worth of childcare.
15. We do not however want to replicate
the highly responsive but complicated system we already have operating
through the Childcare Tax Credit. An alternative, simpler system
is operated in New Zealand, which might provide a model. The system
includes some means testing, and relates to both the number of
children you have and the number of childcare hours you use. A
set payment is given for each childcare hour you use, depending
on your income band. Income bands are different depending on the
number of children you have in your family. At present you can
claim for up to 50 hours a week if you are in paid work or study,
and for nine hours if in neither. Current rates are as follows:
|
| Number of children in family | The family's weekly income before tax
| The subsidy (per hour) per child is up to
|
|
| 1 | less than $770
| $2.91 |
| $770 to $849.99
| $2.03 |
| $850 to $929.99
| $1.13 |
| $930 or more
| No subsidy |
| 2 | less than $950
| $2.91 |
| $950 to $1,039.99
| $2.03 |
| $1,040 to $1,129.99
| $1.13 |
| $1,130 or more
| No subsidy |
| 3 | less than $1,110
| $2.91 |
| $1,110 to $1,219.99
| $2.03 |
| $1,220 to $1,329.99
| $1.13 |
| $1,330 or more
| No subsidy |
|
Source: Ministry of Social Development, New Zealand
http://www.workandincome.govt.nz/get-financial-assistance/extra-help/childcare-oscar-subsidy.html
16. We think that it might be possible to operate a similar
system on a local authority level. This could operate in a similar
way to the currently piloted Local Housing Allowance with local
maximum rates being set. While in New Zealand the payments are
made direct to childcare providers, we would prefer to see payments
made directly to parents—and as local authorities are making
payments directly to claimants under the Local Housing Allowance
scheme this should be possible.
17 Advantages of operating a scheme like this would
be:
— It is simpler and more transparent than the
current system of tax credits. Parents thinking of going into
work and using childcare should be able to easily work out how
much subsidy for this they will receive.
— It would enable local differences in childcare
costs to be accounted for—we would expect, for example,
the per hour subsidy to be higher in London.
— It takes into account family income, number
of children and actual childcare use, albeit less precisely than
the current system.
— It allows parents choice about the type and
hours of childcare they use (although this is assuming that the
payment would remain in place only for formal rather than informal
childcare).
— It encourages childcare use amongst those
not in work—albeit that free childcare provision should
already be doing this.
18. Possible disadvantages with this system however are
that:
— Local Authority practice in delivering Housing
Benefit does not inspire great faith in their ability to provide
timely and accurate payments to claimants.
— Parents using expensive childcare may lose
out.
— Marginal tax rates would be very high as
parental income reaches the upper limit of each income band.
These would have to be weighed up carefully but we do think
that it is worth examining the potential of this model.
January 2006
21
Nicholls J and Simm C (2003) The childcare element of Working
Families Tax Credit-qualitative study Inland Revenue. Back
22
Griggs J, McAllister F and Walker R (2005) The new tax credits
system: knowledge and awareness among recipients One Parent
Families. Back
23
D Blau, "Child care subsidy programmes", in R A Moffitt
(ed), Means-Tested Transfer Programs in the United States,
University of Chicago Press, Chicago, 2003. cited in IFS (2005)
The IFS Green Budget January 2005 IFS. Back
24
Adapted from Chote R, Emmerson C, Miles D and Oldfield Z eds.
The IFS Green Budget 2005 IFS. Back
25
PricewaterhouseCoopers (2004) Universal early education and
care in 2020; costs, benefits and funding options. Daycare
Trust and Social Market Foundation. Back
|
