Select Committee on Work and Pensions Written Evidence

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 departments—the DWP and HMRC—which 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 more.

    —  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 group—those 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 and HMRC.


  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 groupings—namely 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.


  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 nor—unless they have children of their own—can 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 support.

  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 to work

  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 benefits—eg 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 accordingly.

  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 credit—and 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.

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