Memorandum submitted by the Chartered
Institute of Taxation
The Low Incomes Tax Reform Group
is an initiative of the Chartered Institute of Taxation to give
a voice to the unrepresented in the tax system. Our concern in
making this submission is to draw the Committee's attention to
the particular complexities of the benefits system caused by its
interaction with the tax and tax credits systems, and to recommend
opportunities for simplification.
The administration of welfare support
in this country is now divided between two departmentsthe
DWP and HMRCwhich with their different policies, practices
and culture often adopt different approaches to the same mutual
customer in the same situation. This causes not only needless
system complexity but also confusion to the individual claimant.
This complexity and confusion can
be reduced, if not minimised, by the two departments consulting
each other when framing policy and procedures, and working together
In this submission we analyse certain
areas where a greater co-operation or co-ordination between HMRC
and the DWP would greatly improve the experiences of the common
low-income customer base, and simplify the system all round. We
back up our findings with case histories and recommendations.
Our recommendations are grouped according
to the customer groupthose relating to disabled people,
to low-income workers, to pensioners, and issues common to all.
They appear in paras 10 to 13 of this submission.
1. The Low Incomes Tax Reform Group (LITRG)
is an initiative of the Chartered Institute of Taxation to give
a voice to the unrepresented taxpayer and tax credit claimant.
Part of our work involves examining the interactions between tax
and benefits, particularly in the "hybrid" tax credits
system which is intended to deliver certain mainstream welfare
support through the tax administration. Since HM Revenue and Customs
(HMRC) now administers child benefit in addition to child tax
credit, that Department has main responsibility for and control
over the delivery of support for children.
2. We believe that a major cause of complexity
in the welfare system is the fact that it is now split between
two different Government departments, each with its own policies,
practices and culture developed, for the most part, without reference
to the other. The fact that DWP and HMRC can adopt a different
approach to the same mutual customer, in the same situation, can
only result in confusing the customer as to what they are entitled
to, and what their obligations are.
3. In this submission we aim to analyse
certain areas where a greater co-operation or co-ordination between
HMRC and the DWP would greatly improve the experiences of the
common low income customer base, and simplify the system all round.
This is particularly so where tax and benefits interact, whether
in assessing entitlement to benefits on net or gross income, or
whether determining the tax status of benefits (taxable or non-taxable).
4. In the Annex we describe a selection
of cases where claimants have been disadvantaged by the effects
of differences, even inconsistencies, in approach between DWP
5. Over the last few years developments
affecting the low income customers of the DWP and HMRC have made
close inter-departmental working a prerequisite for the delivery
of excellent customer service.
6. These developments include the following.
Tax allowances have failed to keep
pace with income inflation so that someone having income of £100
per week (in 2007-08) can be in the tax net, while being below
the relative poverty threshold.
Child benefit, tax credits, National
Insurance, NMW enforcement have come within the control of HMRC
whilst responsibility for most other "poverty" measures
rests with the DWP (including local government).
There are complex passporting rules
for customer benefits spanning both departments, but neither department
takes primary responsibility for co-ordinated policy, or joined-up
advice, on passported benefits.
7. Greater co-ordinated effort will produce
the following benefits:
appropriate joined-up information
will get to the mutual customer base;
customers will not be required to
duplicate the information they give to each department;
matching and comparing information
on customers held within each department will result in more accurate
computations of their entitlement;
customers will be less confused about
who is responsible for what services, payments or claims.
8. With that background we now turn to the
issues affecting various customer groupingsnamely disabled
people, low-income workers or jobseekers, and pensioners. We do
not pretend that the lists are exhaustive, or that the issues
are of equal importance, but what we do recommend are that the
issues should be on the agenda of both departments, who should
have a timetabled programme for dealing with each issue raised.
9. There are inevitably some issues which
apply equally to all categories of customer and to save repetition
we are setting out these first.
10. COMMON ISSUES
1. The DWP have a freephone 0800 telephone
helpline for their lowest income customers, HMRC charge their
most vulnerable customers using 0845 numbers. Customers are required
to contact both Departments frequently to notify changes in circumstances.
When dealing with their tax credits customers at or around means-tested
benefits levels, we recommend that HMRC should offer 0800 numbers.
2. Opportunities are not taken by one or
other of the two departments to emphasise the other department's
imperatives. For example, there is no opportunity for HMRC low-income
customers to receive messages about claiming Council Tax Benefit.
Such campaigns should be conducted by both departments in tandem
so as to reach all in receipt of welfare.
3. DWP clearly consider it important to
publish material in major migrant languages for their low-income
customers, whilst HMRC only publish in English and Welsh. Either
it is important for non-English speakers to receive written material
in their own language, in which case HMRC should follow DWP practice;
or it is not, in which case DWP should confine their leaflets
to English and Welsh and use the freed-up resources on other priorities.
4. We recommend that publications to low-income
customers should be produced around recognisable life events for
that population. For example, starting work, birth of a child,
retirement or bereavement. We also advocate that these should
be, at a minimum, productions with a core team from the DWP and
HMRC, enriched by contributions from the voluntary sector.
5. It is very confusing and irrational to
have differential rules between the DWP and HMRC about who can
act on behalf of a low-income customer and what evidence is needed
for that purpose. There should be consistency between the two
departments on communication with agents and intermediaries.
6. Different definitions are frequently
applied by the different departments to the same thing. For example,
a married couple is differently defined for tax and tax credits
purposes than for purposes of social security benefits. Other
examples are given below. We recommend a review of definitions
throughout the tax and benefits system, and that consideration
be given to harmonising them where conducive to greater simplicity.
7. Many independent organisations provide
the public and their advisers with calculators to do calculations
of government-provided benefits. The DWP and to a lesser extent
HMRC do the same. We recommend that Government should provide
one, definitive calculator covering both HMRC and DWP administered
benefits, so that members of the public can plan their working
lives, child care arrangements and so forth, accordingly.
11. Issues for those with disabilities
1. Incapacity benefit is sometimes taxable,
sometimes tax-free. Neither HMRC nor DWP communicates appropriately
to customers the tax status of the particular benefit they receive.
Accordingly many individuals pay tax when they should not. We
recommend that in the transition to Employment Support Allowance
particular thought should be given both to how the new benefits
are to be taxed, so that there are no losers, and to how their
tax status is clearly communicated to recipients.
2. The lack of coherence between benefits
and tax credits for people who for family or health reasons need
to work reduced hours. For example, carers who have earnings above
the lower threshold cannot get carer's allowance, but norunless
they have children of their owncan they get working tax
credit until they work at least 30 hours a week on top of their
caring responsibilities. We recommend that HMRC and DWP institute
a joint review of the in-work support available for carers, with
a view to creating a seamless move from carer's allowance to work-related
3. While the DWP increase their home visits,
HMRC withdraws from them. A consistent approach is needed from
both departments on the availability of home visits for disabled
and older people.
12. Issues for those on low incomes seeking
1. Seasonal workers have been treated differently
as to definitions of recognised cycles of work for Income Support
and Working Tax Credit.
2. There are differences of approach towards
Maternity Grants depending upon whether the qualifying benefit
is IS/JSA or CTC.
3. People who experience a trading loss,
or who invest in essential business equipment, can have it recognised
for tax credits, but not for certain other benefitseg council
tax benefit. As we observed in 10.6 above, a simpler and less
confusing system can be achieved by harmonising the definitions
in use by each department.
4. JobcentrePlus staff are not sufficiently
knowledgeable on WTC and the qualifying conditions. There is also
duplication of processes with HMRC staff on a claimant moving
into work. These issues lead to incorrect advice with consequential
overpayments and delays. We recommend improved training of JobcentrePlus
staff and a rationalisation of procedures between the two departments.
5. Immigration status issues are confused
and applied differentially between the DWP and HMRC. Delays to
the issue of National Insurance numbers compounds the problem.
Tripartite working with the Home Office is required.
A working group should be set up involving representatives
of both departments, the Home Office, and the voluntary sector
to review the treatment of migrant workers by each department
and work towards a consistent policy and approach.
6. The rules for voluntary workers as to
reimbursement of expenses are unnecessarily complex and different
between taxes/benefits administered by both departments. This
causes anomalies and confusion for recipients. An urgent review
is called for, with a view to putting in place a consistent approach.
13. Issues for the pensioner
1. Too many pensioners believe the State
Retirement Pension (SRP) is free of tax due to a lack of DWP emphasis
on tax issues. There are even cases of pensioners being informed
by DWP staff that their state retirement pension is not taxable.
This causes underpayment problems for taxation.
2. The tax status of exempt benefits such
as Attendance Allowance is not emphasised by the DWP, and is sometimes
unknown to HMRC processing staff, causing these benefits to be
taxed in error by Self Assessment taxpayers.
DWP staff should be thoroughly trained in the
tax status of the benefits they administer, and encouraged to
impart it to customers. In addition the DWP should issue annually
with the payment of each benefit a note of what is taxable, and
what is not taxable, in the year of assessment. Such measures
should reduce or eliminate the incidence of under or over-taxation.
3. There is a lack of co-ordination between
the HMRC/DWP/DirectGov websites on pensioner issues. Different
styles are used; often links between sites do not work; and issues
where the customer needs a holistic approach (for example on a
bereavement or on becoming a pensioner) are dealt with in departmental
silos. We recommend that an editorial panel from HMRC and the
DWP are joined by representatives of the voluntary sector in order
to oversee those areas of the websites which would benefit from
a co-ordinated approach.
4. Pensioners use the information communicated
by the DWP to their bank to derive the income figures for declaring
to HMRC. But the notation for the SRP is the same as for Winter
Fuel Allowance and the Christmas Bonus so these can get added
in and declared to HMRC who tax them incorrectly. Again, DWP should
state clearly which benefits are taxable and which are not.
5. The fact that Pension Credit is to be
calculated on the SRP after tax is neither explained nor implemented
by the DWP, and as a result many eligible pensioners are being
denied Pension Credit and the passported benefits that go with
it. The DWP online calculator produces incorrect results in such
cases. This has been known for two years by both Departments but
no serious efforts have taken place to resolve the issue. We recommend
that DWP forthwith implement the correct assessment of state pension
credit, ie on net after-tax income, and advise pensioner claimants
6. For a pensioner who is in receipt of
state pension credit and working, there is a passport to maximum
working tax credit; but working tax credit is counted as income
for the purposes of guarantee pension credit so that the pension
credit claim is lost. This can lead to the pensioner losing entitlement
to maximum working tax credit. But if the pensioner is also entitled
to maximum working tax credit through being on a low income, they
are again entitled to state pension credit, but again they are
taken out of guarantee state pension credit by being in receipt
of working tax creditand so on. This absurd circularity
can very easily be corrected by an appropriate change in the regulations,
and we so recommend.
7. SRP data that has been transferred from
the DWP to HMRC appears often to be not used by HMRC when being
included within coding notices. Instead estimates are used, which
are not disclosed as such by HMRC to its customers. Why should
this be so? We recommend that where the DWP supply HMRC with data
on the state retirement pension, HMRC should use it. HMRC should
also notify its customers when they use estimates.
8. Women pensioners aged 60 to 64 who only
have the SRP as their only source of income must complete a Self
Assessment tax return if their income is as low as £5,036
for 2006-07. It is ludicrous that a single source of government
income can trigger all the bureaucracy of Self Assessment. The
answer is for the DWP to be a normal pension payer in such circumstances
and operate PAYE on election by the taxpayer. Also the DWP should
issue a form P60 equivalent at the end of a tax year as do other
pension payers. We so recommend.
9. We recommend that the Pension Service
should provide simple awareness messages to pensioners on tax
matters relevant to the SRP and other DWP benefits as part of
their face-to-face service.