Select Committee on Work and Pensions Written Evidence


Memorandum submitted by Low Incomes Tax Reform Group

SUMMARY

    —    Individual policy and practice initiatives to promote employment for disabled people can be beneficial, but there is a need for a comprehensive integrated approach involving tax, social security, and employment services.

    —    With higher employment levels, further improvement—bringing in more severely disabled people—will require more intensive on-going specialist support. Quick fixes will not work.

    —    Enabling disabled people to retain employment is of particular importance. Tax credits could be more helpful here.

    —    Tax relief's on adjustment expenses for employers and for self-employed people would encourage tailoring jobs to the needs of disabled people.

    —    It will be very difficult to encourage severely disabled people back into employment without tackling the barrier created by a frozen income support earnings disregard.

    —    The interplay between earnings, benefits and tax, is inevitably complex, and there must be expert advice available on particular circumstances whenever disabled people are facing change.

INTRODUCTION AND BACKGROUND

  1.  The Low Incomes Tax Reform Group (LITRG) is an independent policy group supported by the Chartered Institute of Taxation. It aims to help people on low incomes to cope with their tax and campaigns for a more friendly tax and tax-benefit system for the unrepresented. As part of our brief we bring together experts in tax and social security to consider the impact on people with low incomes of tax and tax credits, and the interplay between these and social security benefits.

THE COMMITTEE'S INQUIRY

  2.  LITRG welcomes the inquiry. Together with the further inquiry stage envisaged once the Green Paper on incapacity benefit reform is published, this inquiry provides an opportunity to look coolly and comprehensively at an area in which assertion and popular myth sometimes dominate, and there is a risk of change for the sake of change or of short-term initiatives.

  3.  Incapacity benefits levels are low by normal income standards in this country, and low by developed country benefits standards, and disabled people who are unable to work may be dependent on these benefits for many years. It would not be acceptable (or effective) to use reduction in benefit levels to steer people into employment. More subtle and complex benefit changes would by definition be less potentially damaging, but it seems unlikely that beneficiaries are as clear about the subtleties as are policy makers. The impact of such changes in terms of incentives may be limited. It is likely that for many people, and particularly those with severe disabilities and limited earning capacity, the one clear message at present is that if you earn more than £20 you start losing benefit entitlement. This disincentive needs to be tackled by an immediate update of the income support earnings disregard and the main IB permitted work rule which allows £20 a week, and annual up-ratings thereafter.

A COMPREHENSIVE APPROACH

  4.  For the severely disabled person who has never worked, or who has been out of work for a long time, and for whom employment may be low-paid, demanding, and uncertain, isolated policy and practice changes will not have the desired impact unless the total environment supports the employment option. This includes the net financial outcome, including tax liability, charges, passported benefits, and the on-going support available. Few of those affected can do the better-off calculation for themselves, let alone update it as circumstances change. Access to work provision has an important part to play in any comprehensive approach—particularly if provision under this heading can be speeded up.

SEVERE DISABILITY

  5.  Understandably, much of the emphasis of "Work rather than Benefits" has been on support for less severely disabled people, and those who need transitional rather than on-going support. If more severely disabled who wish to work are to be included, and if there is to be a higher employment rate for groups such as people with severe learning disability (90% non-employment), not only is a comprehensive approach important, but specialist support is required; and there has to be encouragement of part-time work and not just full-time employment. There is a case for easing the hours requirements for tax credits entitlement, though an overlap between entitlement to benefits plus some earnings and earnings plus tax credits would need careful handling.

JOB RETENTION

  6.  The focus has been on getting people back to work once they have left. For substantial numbers of disabled people, the onset of disability results in reduced working capacity and reduced earnings. Job retention is both a cheaper and a better approach in some cases; and early onset tax credits could be helpful here. If people leave work because of disability, their training and experience can be wasted, and a return to work requires re-investment. If they can stay on in work, the initial investment is less likely to be wasted, and fresh investment less likely to be needed; and the morale of the disabled person can benefit.

  7.  The mechanism currently used within the tax credit system to enable people who become sick or disabled while in work to continue working is known as the Fast Track procedure. If on going back to work their earnings capacity is reduced because of their illness, such people may qualify for the disability element of working tax credit, but only if they fulfil certain rigid criteria. Problems with the Fast Track procedure are:

    —    the length of time they must be off work sick before they can qualify (broadly 20 weeks);

    —    it does not help people whose treatment is complete within that time but who still experience loss of earnings;

    —    nor does it help those who carry on working despite their disability, or who develop a debilitating condition (such as deafness) over time while in work; and

    —    in general, the rules are too hedged about with bureaucratic restrictions to be of any real assistance.

TAX RELIEF'S

  8. Our December 2003 report "Disability in Tax and Related Benefits: The Case for a Modern and Coherent Approach" argued the case for tax relief to support both the provision by employers of a disability-friendly environment, and provision made by disabled self-employed people for themselves. (Report attached.) There are tax concessions, but they are partial and inconsistent.

  9.  Taxation of disability benefits can be complex, so official guidance should be clear and comprehensible. Sadly it is not. We have seen examples of recipients of the tax-free categories of incapacity benefit being taxed when they should not be, and yet the only specific guidance offered by what was the Inland Revenue (the leaflet IR144) was withdrawn in March 2004. HMRC and the DWP should surely pool their resources better in order to inform incapacity benefit claimants of the tax status of what they are receiving, and to prevent them from being wrongly taxed.

INCOME SUPPORT EARNINGS DISREGARD

  10.  It is anomalous that the incapacity benefit permitted work limit and its predecessors have been annually up-rated since 1971, but the income support earnings disregard and its predecessors have remained frozen (and therefore declining in value) for long periods. The effect is to reduce each year the amount of work that a disabled person can do without putting their benefit at risk. If at point A, a given amount of work with a given level of earnings is consistent with benefit entitlement, the updated equivalent the following year should be equally consistent.

ADVICE

  11.  However well integrated and consistent the tax and benefit and services arrangements may be, and however much simplification may be achieved, there will always be a need for good prompt advice on the overall financial implications of working. People on low incomes are vulnerable to income fluctuations, because their current income just about covers their current expenditure. We have already drawn attention to the shortcomings in official guidance on the taxation of incapacity benefit (paragraph 9 above). Also, there have been unfortunate examples both of officials reacting to any mention of work by disabled people by challenging benefit entitlement, and of cavalier or partial advice on financial implications that has left disabled people worse off. In addition, the benefits system has often been slow to respond to movement in or out of work, leaving people with no income for a time. These systems failures are unnecessary.

Hazel Mazelin-Forbes

23 September 2005



 
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