White Paper on Universal Credit

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 (e.g. 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 [1] .

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 [2] 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