Memorandum by the Low Incomes Tax Reform
Group, the Chartered Institute of Taxation (CTB 14)
SUMMARY
The concern of the Low Incomes Tax Reform Group
(LITRG) is that any system of taxation should be transparent,
as simple as possible and related to the ability of the individual
to pay.
Many people on very low incomes remain liable for
some council tax even after they receive CTB. Many more retain
a full CT liability because they do not realise that they can
apply for CTB. Many suffer the high marginal deduction rates from
interactions with other benefits, tax credits, tax and national
insurance, and claimants from whom tax credit overpayments are
collected directly experience particular disadvantage. The current
arrangements for CTB are self-evidently failing because take-up
is so low, especially amongst older people.
We suggest the following changes:
Collection of CT arrears should
follow the more measured approach to arrears and overpayments
adopted by DWP and HMRC. Local authorities should be instructed
to refer council tax arrears to bailiffs only as a last resort,
and given power to seek recovery through modest deductions from
contributory benefits, as is already the case for means tested
benefits.
CTB should be rebranded as a
"rebate". The change of name should be accompanied by
a changed onus upon the local authority, so that it should be
responsible for ensuring that people on low incomes only pay CT
in the first place at a level appropriate to their financial circumstances.
HMRC, DWP and DCLG should work
together to ensure that opportunities are taken to use the dealings
that HMRC, the Pension Service and local authorities have with
pensioners, and people approaching state pension age, to reinforce
the view that people should only pay what they need to pay based
on their financial circumstances.
It would be desirable to have
changes in the liability rules to make the system as simple as
possible for the public to understand and for local authorities
to operate. We suggest that the government should engage in consultation
on how to achieve this.
The rebate should be backdated
for as long as the taxpayer has had the low income which qualifies
them for the rebate.
The saving limit of £16,000
for CTB should be removed both for people of working age and those
over state retirement age not in receipt of guarantee pension
credit.
If CT is going to move to a
closer alignment with income tax principles and the ability to
pay, the notional income rate for savings should be specifically
reviewed.
The scope for aligning systems
across local and central government, so that information already
held by one part of Government can be used to fix entitlement
to a CT rebate, should be examined. Further, the level of CT rebate
thresholds should be set with reference to rates and thresholds
elsewhere in the tax and benefits systems, not simply in isolation.
The complex rules about the
effect that a non-dependent adult in a household has on CTB should
be reviewed.
INTRODUCTION
1. The Low Incomes Tax Reform Group (LITRG)
is an initiative of the Chartered Institute of Taxation to give
a voice to the unrepresented in the tax system. As part of that
remit we have been involved in the consultations on the future
of Council Tax, and made submissions in response to Lyons in April
2005 and March 2006 (available on our website at http://www.litrg.org.uk/uploadedfiles/document/1341lyonsinquirycounciltax110405.pdf
http://www.litrg.org.uk/uploadedfiles/document/1341Lyonsinquiry130306.pdf).
2. Our concern is that any system of taxation
should be transparent, as simple as possible and related to the
ability of the individual to pay. The structure of council tax
(CT) as it now exists does not meet these criteria. The report
by Michael Orton, for the Joseph Rowntree Foundation, Struggling
to Pay Council Tax (2006) suggests that more than two million
households struggle to pay their council tax each year.
3. The current arrangements for council
tax benefit (CTB) are self-evidently failing because take-up is
only 62-68% (Lyons, page 250) and is particularly low (53-58%)
amongst older owner occupiers.
4. Against this background, we make first
some general observations about the structure of CTB, its interactions
with other benefits and tax credits, and the way in which CT debt
is collected (paras 5 to 9); we then address the specific issues
raised by the Committee (para 10 onwards).
GENERAL OBSERVATIONS
Structure of council tax benefit
5. People on low incomes, who have a council
tax liability, can be assisted with the costs of CT through CTB
which is administered by local authorities, alongside housing
benefit, according to nationally set rules. Those who receive
income-based jobseeker's allowance, income support or guarantee
pension credit are passported to full CTB and generally have their
entire CT bill covered, subject to any non-dependent deductions.
For people who are not in receipt of those benefits, CTB is calculated
by comparing income against an "applicable amount" which
is determined by reference to a set level plus the circumstances
of the claimant. Those who have income less than or equal to their
applicable amount receive full CTB. However, those whose income
is above their applicable amount have CTB reduced by 20p for every
£1 of the excess. Possession of capital of more than £16,000
(other than the value of your home) removes eligibility for CTB,
except for people over 60 who qualify for the guarantee element
of Pension Credit. Any capital above £6,000 has an income
imputed to it.
6. These rules mean that many people on
very low incomes remain liable for some council tax even after
they receive CTB. Many more retain a full CT liability because
they do not realise that they can apply for CTB, or find it too
humiliating or complex to have to give all the personal financial
information to apply. Many people whose sole income is long term
incapacity benefit have a residual CT liability because their
income is slightly higher than the level of means tested benefits.
Interactions with other benefits and tax credits
7. Those who do not benefit from a passport
to full CTB also suffer high marginal deduction rates from the
interactions between CTB and other benefits such as housing benefit
(HB) and tax credits. Although the withdrawal rate for CTB may
only be 20%, it has to be seen alongside the 65% withdrawal rate
for HB and 37% withdrawal rate for working tax credit, let alone
tax and NIC. We are concerned that this means that people on low
incomes can be left little better off as a result of extra income
from employment.
8. Those who do not benefit from automatic
passport to full CTB are also disadvantaged by the interaction
with tax credit overpayments. CTB is calculated using actual tax
credits received. If a tax credit claimant is being paid too much
in tax credits, CTB will be reduced accordingly. While the overpayment
is being recovered from the ongoing award, CTB will increase accordingly.
CTB paid therefore balances out in relation to tax credit overpaid
or recovered. However, where a tax credit award has finished and
the former claimant is having to repay any overpayment on their
previous award directly to HMRC, CTB does not take into account
any repayments made. While the overpayment is being directly repaid:
CTB is no longer increased to compensate. The result, for CTB
purposes, is unequal treatment as between those with tax credit
overpayments being collected from ongoing awards, and those whose
overpayments are being collected from them by direct payment.
Council tax debt
9. People on low incomes who fall behind
with their CT are liable to incur additional costs because of
the vigorous enforcement of arrears collection that the government
requires of local authorities. Court costs and bailiffs' charges
can add greatly to the financial burden of CT for low income households
as well as causing a great deal of stress. We consider that collection
of CT arrears should follow the more measured approach to arrears
and overpayments adopted by DWP and HMRC; that local authorities
should be instructed to refer council tax arrears to bailiffs
only as a last resort; and that they should be expected and given
power to seek recovery through modest deductions from contributory
benefits in place of the use of bailiffs, as is already the case
for means tested benefits.
SPECIFIC ISSUES
RAISED BY
THE COMMITTEE
Rebranding CTB as a "rebate"
10. The current concept of CTB being a "benefit"
for which people must apply in order to reduce the amount of CT
they must pay is administratively cumbersome, ineffective as take-up
shows and out of line with Government approaches in other areas,
such as income tax or tax credits. No-one suggests that income
tax should be based on a flat rate charge and then every citizen
should put in a claim for allowances and reliefs in order to receive
a rebate. If the principle is that a householder's liability to
pay CT should be related to his or her means then the state should
only demand the amount that is appropriate to those means. Calling
the help available a "rebate" is a step in the right
direction but is not enough in itself.
11. The change of name should be accompanied
by a changed onus upon the local authority, so that it should
be responsible for ensuring that people on low incomes only pay
CT in the first place at a level appropriate to their financial
circumstances.
The role of the Government in increasing CTB uptake
12. The efforts that the Government has
made to increase CTB uptake are welcome. When introducing the
new tax credits, the Government wanted to move to a situation
where the entitlement was universal based on income levels and
the support of children. It wanted to remove the stigma of applying
cap in hand for a benefit. This has largely been achieved and
take-up rates are high despite some of the administrative failings
that have occurred.
13. The claim process for pension credit
has long included seeking to record information for a HB and CTB
claim, and we are given to understand that by Spring 2008 these
processes will become more effective with less responsibility
on the claimant to claim CTB. This has now also been introduced
into the claim process for working age benefits. These are useful
developments, but the low take-up figures suggest that they do
not go far enough. In particular more needs to be done to ensure
that people on low incomes, who are not in receipt of means-tested
benefits, are aware that they may be eligible for help with their
CT. This is why it is so important that the concept of a "rebate"
of CT should be introduced, and it should be made clear that this
rebate is an entitlement for those on low incomes.
14. While we are aware of work already in
progress to institute automatic awards of CTB, we suggest that
putting the onus on the local authority to check whether an automatic
rebate is due might make it clearer to all concerned that this
process is all part of the authority arriving at the "right
amount of tax" to be paid.
The Pension Service as a portal for CT rebates,
and data sharing
15. The failure of the Pension Service to
meet its take-up targets for pension credit (PC) demonstrates
how difficult it can be to persuade older people to apply for
money to which they are entitled, and also suggests that the PC
claimline will not be approached by all the pensioners with a
CTB entitlement. Nevertheless, we welcome anything that the PC
claimline can do to ensure that low income pensioners receive
any CT rebate to which they are entitled, even if they do not
qualify for PC. It should be possible for the PC claimline to
gather the information for a CTB claim and to pass this on to
the local authority for these people, just as they do at present
for people awarded PC. We recommend that the Pension Service should
introduce this.
16. Virtually everyone claims state retirement
pension, usually now by telephone. We have not seen the scripts
for these calls, but we suggest that the Pension Service should
consider how they could provide the opportunity to try to generate
a claim for CTB, as well as for State Retirement Pension and PC.
Clearly, the caller is more likely to be positive about seeking
relief from their CT burden if they are told that this is by means
of a "rebate" and an "entitlement" rather
than a "benefit".
17. As the LITRG Report Older People
on Low IncomesThe Case for Tax Reform (May 2007) points
out, large numbers of older people need to have dealings with
HMRC over income tax matters. We see scope for HMRC, DWP and DCLG
to work together to ensure that opportunities are taken to use
these dealings to reinforce the view that people should only pay
what they need to pay based on their financial circumstances,
and to ensure that older people receive appropriate help and advice
about minimising their CT liabilities. See also para 25.
Eligibility criteria for CTB, the savings limit,
and alignment of CT rebate thresholds with other parts of the
tax system
18. It would be desirable to have changes
in the liability rules to make the system as simple as possible
for the public to understand and for local authorities to operate.
We suggest that the government should engage in consultation on
how to achieve this. Possible options for debate could be:
any household which is wholly
reliant on benefits for its income to have a nil CT liability
(thereby extending nil liability to people dependent on Incapacity
Benefit); and
any household with an income
of no more than, say, 110% of its applicable amount for means
tested benefits to have a nil CT liability.
19. Currently people of working age can
only get backdated CTB for up to 52 weeks if they can show they
have a good reason for not claiming earlier. People over 60 can
generally get 12 months backdating providing they can show that
they qualified for the whole period. There is no logic in this
age distinction. It means that people on low incomes, including
those who have been on means tested benefits, may find themselves
being pursued for CT arrears just because they did not apply for
CTB as soon as they would have qualified. We consider that the
rebate should be backdated for as long as the taxpayer has had
the low income which qualifies them for the rebate.
20. The supposed justification for the £16,000
saving limit in CTB is that there is a similar limit for income
support or income-based jobseekers allowance. This justification
becomes anomalous as PC has no such limit. Nor is there a saving
limit for CTB for recipients of guarantee pension credit, although,
strangely, the limit is retained for those people who receive
only savings pension credit. That leads to a cliff-edge situation
in which a change of £1 in income or savings can lead somebody
going from paying all their rent and CT, to paying none of itor
vice versa. Lyons called for the saving limit for pensioners to
be raised to £50,000 immediately and abolished in due course.
We recommend that the saving limit of £16,000 for CTB should
be removed both for people of working age and those over state
retirement age.
21. This will not lead to people with free
capital escaping CT, since savings will still generate an imputed
income. The levels imputed£2 a week per thousand for
over sixties, and £4 a week per thousand for people of working
age are much above the interest that they generate. We believe
that if CT is going to move to a closer alignment with income
tax principles and the ability to pay, the notional income rate
for savings should be specifically reviewed.
Alignment of rebate thresholds with other parts
of the tax system
22. The Committee requests evidence on the
case for aligning council tax rebate thresholds with other parts
of the tax system. We certainly regard it as undesirable that
rates and thresholds in different parts of the tax and benefits
systems should be fixed without reference to each other, and some
form of alignment is usually preferable where the bases of assessment
are the same.
23. On that basis there may be some merit
in aligning CT rebate thresholds with income tax allowances so
that people with no income tax liability are exempt from CT, and
vice versa. But full alignment is impossible while there are different
bases of assessment, with income tax being based on individual
income and CTB (or its successor) on a couple's joint income.
The difficulties of fully aligning tax and tax credits are illustrative
of the problem.
24. Moreover, personal allowances within
the income tax system give no additional consideration for those
with a disability (other than blindness) or dependants, children
etc, whereas the current CTB does at least vary the thresholds
to take account of such needs or responsibilities.
25. Alignment of rates and thresholds is
one thing: more useful from the point of view of people on low
incomes is compatibility of systems, so that there can be one
contact point with Government to which a citizen can give all
the personal information necessary to determine their liability
for tax (including CT) together with their eligibility for tax
credits, benefits and CT rebates. While such has been an aspiration
of Government for some time, practical attainment is still a long
way off; but our recommendation in the meantime would be for Government
to consider carefully what scope there may be for aligning systems
so that information already available for tax or benefits purposes
does not have to be collected yet again from CT rebate claimants.
26. We further recommend that whether or
not alignment of rates or thresholds of CT rebate with the tax
or any part of the benefits system is attainable or desirable,
those with policy responsibility for setting such rates or thresholds
be encouraged to look across to equivalents elsewhere in the tax,
tax credits and benefits systems with a view to achieving a coherent
and easily comprehensible rate structure across the board.
Non-dependent adults
27. There are complex rules about the effect
that a non-dependent adult (other than a spouse or civil partner)
in a household has on CTB. A particular anomaly is that people
who are not working and not getting means tested benefits are
expected to contribute £2.30 a week towards CT. We recommend
that these rules should be reviewed.
11 June 2007
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