Memorandum submitted by Low Incomes Tax
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 improvementbringing in more severely disabled peoplewill
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
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.
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.
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
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 approachparticularly
if provision under this heading can be speeded up.
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.
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
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
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
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.
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.
23 September 2005