Written evidence submitted by the Low
Incomes Tax Reform Group |
1.1 We welcome this inquiry into the migration
from Incapacity Benefit (IB) to Employment and Support Allowance
(ESA) as it allows us to reiterate concerns about how the migration
process impacts on the tax liabilities, tax credit entitlement
and passported benefits position of a migrated claimant. We are
particularly concerned with those former invalidity benefit (IVB)
claimants who, on migration to CBESA, will lose their transitional
1.2 So far, despite our repeated requests, neither
DWP nor HMRC has given adequate guidance to those in the migration
process, despite the potentially serious consequences on their
1.3 We therefore urge the Committee to press
DWP and HMRC for commitments to:
together to provide adequate guidance to individuals caught up
in the migration process, particularly those former invalidity
benefit (IVB) claimants for whom tax and tax credits matters need
to be carefully considered. This is because the transfer from
their formerly non-taxable IB to taxable contributory ESA could
have serious financial impacts on their household income;
that processes are in place to issue correct PAYE codes to all
individuals moving from a hitherto non-taxable benefit to one
which is taxable;
together to identify those former IVB claimants who are also claiming
tax credits and write off any tax credits overpayments which have
arisen as a result of the departments' contributory error, ie
their failure to provide adequate guidance as to the potential
tax credits consequences of the migration;
that the impact on passported benefits is also adequately explained;
with the Committee and stakeholders on their staff guidance, in
particular ensuring that HMRC staff deal sympathetically and speedily
with claimants who may come within the tax net for the first time
in many years.
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
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 Our response
2.2.1 We welcome this opportunity to comment
on the inquiry into migration of Incapacity Benefit (IB) claimants
to Employment and Support Allowance (ESA). There are many organisations
which are better placed than us to comment on the work capability
assessment, decision-making and appeals processes and overall
outcomes for claimants. Our response will therefore focus on how
the migration process interacts with the tax and tax credits systems.
3.1 Transitional protection for invalidity
3.1.1 Incapacity Benefit was introduced in April
1995 as a replacement for Invalidity Benefit (IVB). One of the
crucial differences between IVB and IB is that the former was
non-taxable, whilst the latter is primarily taxable.
3.1.2 IB has
lower rate which was non-taxable (paid for the first 28 weeks
of a new claim - not available since the introduction of ESA in
higher rate which is taxable.
rate which is taxable.
3.1.3 In order to give protection to those moving
from non-taxable IVB to taxable IB in 1995, transitional tax protection
was given meaning that their IB, although long-term, is non-taxable.
This protection is given under Section 663 Income Tax (Earnings
and Pensions Act) 2003.
3.2 Interaction with tax credits
3.2.1 The tax credits system generally follows
the tax system when determining what counts as income for tax
credits purposes. If income is taxable it will normally be income
for tax credits purposes (although there are some exceptions)
and if non-taxable it will not be included as income.
3.2.2 For IB, tax credits follow the tax treatment
and therefore both the short-term lower rate and long-term IB
for those previously in receipt of IVB are not taken into account
4. THE IMPACT
TO ESA ON
4.1 The tax position
4.1.1 Those IB claimants who successfully meet
the requirements will be migrated to contribution-based ESA (CBESA)
which is a taxable benefit.
4.1.2 It has been confirmed that there will be
no transitional protection for those currently in receipt of non-taxable
IB (old IVB claimants) and therefore they will move from a non-taxable
to taxable benefit.
4.2 The impact on claimants
4.2.1 The explanatory memorandum to the ESA transitional
states that "the Government will ensure that no customers
whose benefit rates are higher than the ESA rate will experience
a cash reduction in their benefit on migration to ESA, by transitionally
protecting their existing level of benefit". In addition,
in went on to say that "Anyone receiving Housing Benefit
and Council Tax Benefit at the point of migration will not see
a reduction in overall benefit income as a result of migration
due to transitional protection in Housing Benefit and Council
4.2.2 Whilst this commitment was welcome, we
pointed out in our evidence to the Social Security Advisory Committee's
review of these regulations, that it is still possible for some
claimants to be worse off as a result of migration by virtue of
a hitherto non-taxable benefit becoming taxable. As well as decreasing
net income due to an increase in tax payable, in turn it could
lead to a substantial reduction in tax credits and the loss of
4.2.3 In a discussion about the Employment
and Support Allowance Regulations 2008 in the House of Lords
it was said
that most claimants who receive only CBESA will not be liable
to tax because their income is likely to be under the personal
allowance. However, the documents provided by DWP to SSAC
show that DWP estimate 50,000 claimants will be affected by the
loss of transitional protection with an average income tax liability
of £1,000 a year. The rationale given for this is that "these
will be customers with the highest incomes, the vast majority
of whom are already liable for tax".
4.2.4 Given that the personal allowance for 2011-12
is set at £7,475, many claimants who have income over this
amount, for example because they have a small occupational pension
or because they do "permitted work", may well already
pay tax but to say they are on the "highest incomes"
is not accurate given that we are talking about people in relative
poverty. The impact of the increased tax bill, which could be
around £19 per week for someone with a small private pension
and CBESA, should not be underestimated.
4.3 The tax credits position
4.3.1 Tax credits play a crucial part in reducing
child poverty, supporting families with children and helping low-income
workers move into and remain in work.
4.3.2 At present, tax credits rules broadly follow
the tax system. Therefore, if income is taxable it is generally
counted as income for tax credits and if it is non-taxable it
is generally not counted as income for tax credits. Under the
current tax credits rules, those who receive non-taxable LTIB
(former invalidity benefit claimants) do not have this counted
as income for the purposes of their tax credits claim.
4.3.3 However, if these claimants are moved to
taxable CBESA it follows that their CBESA would become income
for tax credits. For most claimants on low incomes, this would
eventually mean a loss of tax credits of 41p for every £1
of CBESA income.
4.3.4 In 2007, we wrote to Lord Kirkwood outlining
our concerns about the transfer of claimants to ESA and particularly
about the implications for tax credits. As a result of that letter,
DWP replied stating that "the likelihood of people on
low incomes facing loss of tax credits as a result of receipt
of contributory ESA is limited when you consider that, as with
the current system, people will not receive both Employment and
Support Allowance and Working Tax Credit at the same time as the
qualifying conditions are mutually exclusive". It went
on to conclude that "this means that the people facing
receipt of ESA and withdrawal of tax credits at the same time
would be those with children".
4.3.5 As stated to SSAC in our response to their
consultation on the ESA regulations, we believe that presumption
is incorrect because it is indeed possible in some circumstances
to receive both ESA and Working Tax Credit (WTC). Although admittedly
this is generally not possible in the case of those on LTIB moving
to ESA, it is possible that claimants of LTIB (non-taxable) will
be part of a couple claiming WTC jointly. It follows therefore
that in such cases there will be an increase in the joint household
income when there is a change from non-taxable to taxable benefit.
4.3.6 For example, let us consider a couple with
no children where one partner works 32 hours per week in a low-paid
job, and the other is on LTIB (non-taxable). Their WTC award will
presently be based only on the employment income of the working
partner. If no transitional protection is given, when LTIB is
converted to CBESA under the current rules it will be classed
as income for tax credits purposes, thus eventually resulting
in a significant reduction in the tax credits award. Based on
2011-12 rates of ESA, if CBESA is paid at £94.25 per week,
loss of tax credits could be as much as £2,010 per year or
about £39 per week. Whilst there may be no loss from ESA,
there is a substantial loss of WTC as a result of the transfer
from IB to CBESA.
4.3.7 We acknowledge the role of the disregard
in tax credits, so that the impact of the change from non-taxable
LTIB to CBESA may not be seen immediately where claimants' awards
are based on previous year income. However, in the second and
subsequent years (applying the current rules) the income from
CBESA will have to be taken into account. For tax credits claimants
who are already paid their tax credits on an estimated current
year basis, any change in income would impact on their award immediately
and may create an overpayment.
4.3.8 Similarly, low-income families with children
may also see a fall in tax credits where a parent moves from non-taxable
IB to taxable CBESA. This will run counter to the Government's
broader child poverty agenda.
4.4 Passported Benefits
4.4.1 Tax credits often act as a gateway for
entitlement to certain passported benefits. For example, exemption
from NHS health costs can be given if you receive:
Tax Credit (CTC) and your gross annual income used to calculate
your tax credits award does not exceed £15,276; or
and WTC and your gross annual income used to calculate your tax
credits award does not exceed £15,276; or
including a disability or severe disability element and your gross
annual income used to calculate your tax credits award does not
exceed £15,276 per annum.
4.4.2 As well as receipt of WTC or CTC (or both)
there is often an income criteria attached to passported benefits.
Claimants moving from non-taxable LTIB to taxable CBESA will see
a rise in household income that may cause them to lose valuable
passported benefits because they no longer meet the criteria.
4.4.3 Although other benefits can also act as
a gateway to certain passported benefits, CBESA is not a benefit
which normally gives rise to such entitlements. For example, receipt
of CBESA would not give automatic exemption from NHS health costs.
A family which loses passported benefits as a result of their
tax credits income rising after transition would not be able to
use CBESA to keep their passported benefits.
4.4.4 As we have shown, the transition from a
non-taxable to taxable benefit can have serious financial consequences
both in relation to a fall in tax credits but also the potential
loss of related passported benefits.
5.1 Importance of good administration
5.1.1 In light of the potentially severe impact
on a claimant's tax and tax credits position, it is absolutely
crucial that accurate information is given to claimants so they
understand how the migration will impact upon them.
5.1.2 We stressed this in our submission to SSAC
in 2010, and urged DWP and HMRC to address the administrative
issues linked to tax and tax credits and to ensure that claimants
have adequate information about the impact of the migration on
their tax and tax credits position.
5.1.3 Unfortunately, as the pilot exercise has
ended and migration has rolled out nationally, neither DWP nor
HMRC seems to have adequately addressed these concerns.
5.2 Administration and tax
5.2.1 Although the letters we have seen indicate
that HMRC will be in touch with claimants, such contact is said
to be in the context of Income Tax. But we have seen no evidence
that there is a co-ordinated programme to ensure that HMRC will
provide individuals with an accurate PAYE code at the point of
migration. A failure to do this may add a tax underpayment to
an already confused and unsatisfactory position. We would ask
the Committee to obtain the appropriate training materials provided
to HMRC staff to ensure that they are equipped to understand the
nature of the migration issues and to deal sympathetically and
speedily with former IB claimants who may come within the tax
net for the first time in many years after losing transitional
5.3 Administration and tax credits
5.3.1 There appears to be little, if any, joint
working between DWP and HMRC despite the clear necessity for it.
As far as we are aware, the letters that are being sent to claimants
by DWP in relation to migration do not contain any reference to
tax credits. This needs to be corrected immediately.
5.3.2 At the time of writing this evidence,
we have had no information from HMRC as to how they are dealing
with those migrating from non-taxable IB to taxable ESA despite
5.3.3 The HMRC website contains no specific information
about the change, neither can we find any reference in HMRC's
series of tax credits leaflets. Those that are migrated mid-year
are unlikely to appreciate the need to inform HMRC for tax credits
purposes, due to the lack of information give to them by either
government department, therefore it is possible that an overpayment
could be building up. We urge HMRC to give a commitment that they
will write off any overpayments that occur in these circumstances
and that they undertake an exercise, with DWP, to identify those
affected and write off the overpayments without the need for the
claimant to dispute.
5.3.4 For those who are not impacted immediately,
due to the £10,000 income disregard in tax credits, HMRC
need to have processes in place to ensure that claimants who have
been migrated from non-taxable to taxable income are identified
so that their tax credits for 2012-13 are based on correct income.
As well as updating their materials immediately, they need to
be pro-active in contacting claimants. It is not acceptable to
rely on the claimant to understand the relevance of the change
from IB to ESA for tax credits when neither DWP nor HMRC has given
them any information.
5.3.5 DWP also need to ensure that their letters
are amended to include information about a potential loss of passported
10 Employment and Support Allowance (Transitional Provisions,
Housing Benefit and Council Tax Benefit) (Existing Awards) Regulations
2010 (SI 2010/875). Back
(22 May 2008, col 1649). Back