Written evidence submitted by Low Incomes
Tax Reform Group
1. EXECUTIVE
SUMMARY
1.1 We welcome the concept of one benefit administered
by one Government department. However, we caution against assuming
this will deliver greater simplicity, particularly as so much
of the detailed policy and design is yet to be decided. We are
also sceptical whether the IT systems can be ready in time for
a 2013 launch.
1.2 We note the aim of Universal Credit to ensure
that people are always better off in work. But we are concerned
about certain gaps in the proposals, and fear that work incentives
may in some cases be eroded rather than enhanced. In particular:
- An income floor for the self-employed will detract
from the support currently available through the recognition of
losses in working tax credit, which is especially helpful in the
early years of a business or in difficult periods.
- We fear that insufficient thought may have been
given to the role of passported benefits in work incentives, and
the need to account for the costs associated with work (eg travel).
- The White Paper lacks detail about support for
disabled people, or for pensioners in work or who care for children,
or for those who need support with rent.
- Childcare support is an essential part of work
incentives. We welcome plans to remove the 16 hour working week
requirement, and hope that this increase in provision will not
be balanced by a reduction in the level of support. We remain
concerned about the lack of firm plans for childcare support.
- We note that marginal deduction rates will fall
for some, but increase for others.
- Proposed earnings disregards, while generous
in some cases, seem less generous for some than under the current
system.
- There are likely to be high levels of inaccuracy
in the transmission of real-time information from HMRC to DWP
for use in establishing entitlement to Universal Credit. This
creates concern about suggestions that claimants may themselves
be made to carry the cost of official error.
- It is unclear whether Universal Credit will do
anything to ameliorate the couple penalty.
2. INTRODUCTION
2.1 About us
2.1.1 The Low Incomes Tax Reform Group (LITRG)
is an initiative of the Chartered Institute of Taxation (CIOT)
to give a voice to the unrepresented. Since 1998 LITRG has been
working to improve the policy and processes of the tax, tax credits
and associated welfare systems for the benefit of those on low
incomes.
2.1.2 The CIOT is a charity and the leading professional
body in the United Kingdom concerned solely with taxation. The
CIOT's primary purpose is to promote education and study of the
administration and practice of taxation. One of the key aims is
to achieve a better, more efficient, tax system for all affected
by it - taxpayers, advisers and the authorities.
2.2 General Comments
2.2.1 We welcome this opportunity to give evidence
to the Committee on the proposals set out in the Government's
White Paper "Universal Credit: welfare that works".
2.2.2 The proposals in the paper represent a
massive reform of the welfare system. Whilst in principle we support
the aim of a single benefit, administered by one Government department,
the White Paper still gives insufficient detail and leaves many
important questions unanswered. It is consequently extremely difficult
to analyse how effective Universal Credit will be in addressing
the problems of the current system.
2.2.3 The hallmark of the system seems to be
that "Universal Credit will mean that people will be consistently
and transparently better off for each hour that they work".
Whilst this vision is welcome, we are unsure what yardsticks are
used to determine if someone is better off. If no account is taken
of passported benefits and work-related costs, then a person may
not overall be any better off in work.
2.2.4 Our concerns are heightened given the proposed
ambitious timetable to introduce Universal Credit and the real
time earnings data system that will support it. The remainder
of this evidence briefly identifies those areas which give us
greatest cause for concern.
3. SPECIFIC ISSUES
3.1 Self Employed
3.1.1 There is only brief mention of this large
group of people. It is important, especially in the current climate
when more people may be considering self employment in the absence
of employed work, that the needs of the self employed are fully
considered both in terms of financial benefit and administrative
complexity.
3.1.2 In particular, we note that the White Paper
(Annex 3) proposes an income floor for the self employed attributing
to them a wage equal to the number of hours they work at National
Minimum Wage even if their actual income is much less or they
make a loss. This proposal seems to work against policies of other
Government departments, such as the Annual Investment Allowance,
which encourage self-employment. We are concerned that those starting
in business, or experiencing a difficult year, will not receive
the support that they would have under the current tax credit
system where income definitions are better aligned with the tax
system. This would seriously diminish the work incentives in working
tax credit.
3.1.3 Further consideration must be given to
how income information and working hours will be obtained for
the self employed, as they will be outside of the PAYE real time
data information.
3.2 Disability
3.2.1 There is very little detail in the White
Paper about those with disabilities. It states that they will
receive a higher earnings disregard, but no information is given
as to what the qualification criteria will be and therefore there
is no way to assess whether this is more or less generous than
in the current system. With the proposed reform of Disability
Living Allowance and the closure of the Independent Living Fund,
we are concerned about the reduction in future support for disabled
people.
3.2.2 We also have concerns regarding service
delivery. The White Paper suggests that Universal Credit will
mainly be administered online, reducing reliance on telephone
contact and further minimising face to face contact. Whilst online
accounts can be advantageous for those with the necessary equipment
and skills, many vulnerable groups, including some people with
disabilities, may not be able to access these services. It is
therefore vital that they are not disadvantaged in any way and
adequate provision is made.
3.3 Pensioners
3.3.1 The White Paper focuses on working age
people with little mention of the growing pensioner population
and the diminishing demarcation between working and pension age.
It does state that provision will need to be made to replace child
tax credit for pensioners who are responsible for children and
housing benefit for those who pay rent, but the mechanism for
how this will be done and the knock-on effects are not yet clear.
3.3.2 Pensioners in receipt of working tax credit
will also need some provision, and the White Paper suggests that
those pensioners who continue to work can elect to remain on Universal
Credit. Whatever solution is chosen, this large group of people
should not be considered in isolation and we have called for an
urgent review.[142]
3.4 IT Capability
3.4.1 In a previous session before the Work and
Pensions Select Committee, the Secretary of State gave evidence
that the IT changes required would not constitute a major project
and the White Paper suggests it will be along the lines of that
used for employment and support allowance.
3.4.2 We are sceptical not only about this claim,
but also about the timescale given for the introduction of Universal
Credit especially given its reliance on HMRC's ability to PAYE
real time data in place.
3.4.3 In the past, systems have been launched
before they were ready to unrealistic timetables and at times
in the knowledge they were flawed. This has led to a situation
where IT has driven policy rather than policy driving the IT.
We are concerned that given the tight timetable, Universal Credit
could follow this pattern. We fully endorse Lord Carter's recommendation
that systems should be launched only when they have been fully
tested and confirmed to be fit for purpose and believe that this
principle must be adhered to if the mistakes of the past are to
be avoided.
3.5 Joined up working
3.5.1 We welcome the fact that Universal Credit
brings together several benefits and will be administered primarily
by one Government department. However, there will always be interactions
that cut across many areas of Government, be it one large department
working in silos or a number of smaller departments.
3.5.2 Joined-up working is also important in
the context of the advice sector. As much warning as possible
is needed to ensure the sector is adequately prepared to help
claimants with the new system and to be able to get their own
systems in place to cope with the new IT and rules of Universal
Credit.
3.6 Passported benefits
3.6.1 We often raise the issue of passported
benefits in our reports and submissions. In the current system,
these benefits can often be the deciding factor in whether someone
is better off in work. It is therefore welcome that the White
Paper includes a section on passported benefits.
3.6.2 That said, although the White Paper contains
limited detail, it seems to suggest that there will remain a series
of income levels at which passported benefits are lost and therefore
cliff edges will continue to exist (although the actual income
levels at which the benefits are lost will be staggered). As well
as creating complexity by having different cut offs, we are concerned
that the impact of passported benefits on Marginal Deduction Rates
(MDR) has not been considered. In our experience, passported benefits
can be responsible for increasing MDR significantly. If this continues
to happen in Universal Credit, work will not necessarily pay once
account is taken of the loss of these benefits.
3.7 Council Tax Benefit
3.7.1 It seems that no decision has been taken
as to how Universal Credit will replace Council Tax Benefit, although
we have been assured by DWP officials that Council Tax Benefit
was considered when the taper rate and MDR figures were calculated
for the White Paper. It should also be noted that council tax
benefit is extremely important for pensioners.
3.7.2 Council Tax Benefit is a key benefit for
many people. Any replacement needs to ensure that claiming is
as administratively straight forward as possible and therefore
any plan which takes the administration outside Universal Credit
adds additional complexity for claimants as well as causing some
current problems, such as duplication of data, to continue. The
plans for couples in which one is above and one below women's
state pension age need to be clarified.
3.8 Childcare
3.8.1 Without doubt, childcare is one of the
most important work incentives and it is therefore concerning
that no firm plans have been made as to how the childcare element
of Working Tax Credit and other childcare support delivered by
Jobcentre Plus will be delivered within Universal Credit.
3.8.2 The childcare element of Working Tax Credit
supports many parents move into work from benefits. Without this
support, they would be unable to work. We welcome the Government's
plans to remove the 16 hour work requirement in order to claim
childcare support, but have concerns that the percentage of help
available may be less generous than the current system to balance
this increase of provision.
3.8.3 Most importantly in respect of childcare
is the impact that childcare costs have on the MDR and Participation
Tax Rate (PTR). As with passported benefits, the cost and availability
of childcare can be major barriers to work and we therefore urge
the Government to consult widely with representative bodies to
ensure that whatever model of childcare is chosen ensures that
the incentive to work is not eroded.
3.9 Marginal Deduction Rates
3.9.1 The White Paper outlines in several places
how Universal Credit will impact on MDR. As noted above, we are
concerned that no account has been taken of passported benefits
and childcare on the MDR quoted in the paper.
3.9.2 We would particularly like to draw attention
to the MDR tables in Chapter 7 of the White Paper which seem to
suggest that although MDR will fall for many, they will increase
for an equal number of people.
3.10 Earnings Disregards
3.10.1 We welcome the generous earnings disregards
proposed in Universal Credit, at least for certain groups.
3.10.2 We are however concerned about single
people (without disabilities or responsibility for children) who
will receive no earnings disregard. This could erode work incentives
for that group if, as we think likely, the result turns out to
be less generous than the current Working Tax Credit disregard.
3.10.3 Also, the proposed disregards are quite
complex. The floors introduced by deducting housing costs mean
that it will not be straightforward for claimants to check their
disregard and therefore their overall entitlement.
3.10.4 It is also unclear what the criteria will
be for each of the disregards and we urge that the Government
give careful thought to these criteria particularly in relation
to the disability disregard.
3.11 Other work costs
3.11.1 We are disappointed that no reference
is made in the paper to the costs associated with work, which,
in combination with the loss of passported benefits, can mean
the difference between being better off on benefits than in work.
3.11.2 The main cost for people moving into work
is the cost of travel. No mention is made of this, nor the cost
and availability of childcare, particularly where registered or
approved childcare is not available or where other strict conditions
of the childcare element of working tax credit are not met.
3.11.3 Extra costs associated with disability
can be a further disincentive for disabled people to enter work
and unless these additional costs are addressed in some way they
will remain a major disincentive.
3.12 Complexity
3.12.1 Complexity is not necessarily a bad thing,
providing it remains behind the scenes away from claimants and
does not increase the risk of official error. No-one would argue
with the Government's assessment that the current system is extremely
complex; but the proposals for Universal Credit are already starting
to look quite intricate.
3.12.2 While we very much welcome the move to
replace several benefits by one benefit and to have that benefit
administered by one Government department, we think there is a
danger of going from a system involving several complex benefits
to having one benefit with several complex elements within it.
3.13 Overpayments
3.13.1 We are worried about the Government's
plans to increase their powers in respect of official error overpayments.
Whilst we understand that they have a duty to protect public money,
Government departments often contribute to overpayments through
official error and claimants are left with overpayments through
no fault of their own. It would be wrong to penalise people for
errors over which they have no control and which often they are
unable to identify due to the sheer complexity of the system.
3.13.2 Although Universal Credit is claimed to
be simpler than the existing system, there will still be considerable
complexity in the rules and the interactions between benefits
outside of Universal Credit. The use of real time earnings data
from HMRC gives rise to another possible area of error which is
once again outside the control of the claimant. Careful thought
should therefore be given to introducing safeguards for claimants,
such as those which exist in the tax system where employers do
not correctly follow PAYE regulations, to ensure that claimants
are not held responsible for employer or DWP mistakes.
3.13.3 We are also concerned that claimants may
receive conflicting messages about what to report and what not
to report. On the one hand, claimants will be told that some earnings
data is not needed and they don't need to report certain changes,
whilst on the other hand other income information will need to
be reported. This could cause confusion for claimants. It is also
unclear whether claimants will be expected to check the information
that their employers are passing to HMRC, and therefore careful
messaging needs to be used to ensure that claimants are absolutely
clear about their obligations.
3.14 Harmonisation of rules
3.14.1 In our view, structural reform alone will
not remove the problems caused by inconsistent rules and interactions
between various benefits. Harmonisation of rules is the only way
to resolve those problems.
3.14.2 Unfortunately we are still unclear about
the detail of how this harmonisation will take place. It is not
clear whether the rules in the current tax credit system will
be replicated within Universal Credit or whether the definitions
and criteria will remain distinct from benefits and closely follow
the tax system. It is also concerning that some rules seem to
being harmonised unfavourably for claimants, such as the White
Paper's statement that only 50% of pension contributions will
be an allowable deduction from earnings (compared to 100% in the
current tax credit system). We would urge the Government to provide
further information as soon as possible so that organisations
can contribute to policy development.
3.15 Real time earnings data
3.15.1 One of the "selling" points
of Universal Credit is the ability to use real time earnings data
provided by HMRC to allow awards to be adjusted when earnings
and circumstances linked to employment change. Although this may
be a sound principle, there is much that concerns us about the
use of real time data.
3.15.2 First, we are extremely sceptical whether
HMRC will be able to deliver a fully working real time data system
that will be able to feed DWP accurately within the timetable
set out. Secondly, the policy costings that accompanied the
Comprehensive Spending Review[143]
presumed that the real time earnings data would have a 90% accuracy
rate, leaving an error rate of 10%. This is unacceptably high,
particularly if powers in relation to recovering official error
overpayments are increased. Thirdly, there are many unanswered
questions about what information will be transferred from HMRC.
For example, HMRC have indicated that benefits in kind (covered
by P11D/P9D) are to be excluded. This means that DWP will need
to gather additional information otherwise awards will not be
correct.
3.16 The Couple Penalty
3.16.1 In their report Dynamic Benefits, the
Centre for Social Justice identified the couple penalty as one
of the problems with the current system. The Coalition agreement
(Section 14, 3rd Bullet) set out plans to reduce the couple penalty
in the tax credit system. It is therefore surprising that no mention
is made in the White Paper of the couple penalty.
3.16.2 The White Paper shows a higher proposed
disregard for lone parents than for couples. It is difficult to
establish at this stage, without full details, exactly what impact
the proposals will have on the couple penalty, but we are unconvinced
that it has been expunged from the new system.
December 2010
142 http://www.litrg.org.uk/News/2010/tax-policy-pensioners Back
143
http://cdn.hm-treasury.gov.uk/sr2010_policycostings.pdf Back
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