Work and Pensions Committee - Universal Credit implementation: meeting the needs of vulnerable claimantsWritten evidence submitted by Jamie Black

Introduction

1. Jamie Black carried out a piece of independent research for the All-Party Parliamentary Taxation Group (APPTG) culminating in a report entitled “PAYE at the Crossroads”.1 He has since left his position as Head of Research to become a Fellow at The Tikvah Fund in New York. Jamie will continue with the APPTG in an informal advisory capacity.

2. This submission is based on the research undertaken between December 2011 and July 2012 on behalf of the APPTG, particularly in relation to interviews that were conducted with HMRC and DWP officials. It reflects the views of Jamie Black in a personal capacity, rather than on behalf of the APPTG Taxation. It is also submitted with the permission of Ian Liddell-Grainger MP, Chairman of the APPTG.

3. This submission is narrow in scope. Its sole objective is to demonstrate the essential role of accurate and timely earnings information to the delivery of Universal Credit’s policy objectives and therefore highlight the fundamental importance of HMRC’s PAYE Real Time Information (RTI) programme to this end.

Universal Credit and Earnings

4. The policy ideas underlying the Government’s welfare reform programme—Universal Credit—were developed prior to the 2010 General Election under the stewardship of Iain Duncan Smith (now the Secretary of State for Work and Pensions) and Dr Stephen Brien (now an Expert Advisor at DWP) through the Centre for Social Justice.2 The policy was originally conceived as “Dynamic Benefit” and its fundamental feature is that benefits are dynamic—ie responsive to earnings in order to provide financial incentives for working. Now Universal Credit, to this end, the DWP stated that “the key mechanisms for making work pay will be a single taper to withdraw support as earnings rise”.3

5. Universal Credit’s policy objectives rest on the DWP’s ability to withdraw benefit according to earnings in a timely and accurate manner. A taper that is not responsive in terms of time or inaccurate in terms of the benefit withdrawn will not provide Universal Credit’s intended financial incentives for work. This is because the dynamicity of taper has a direct effect on the delivery of Universal Credit’s objectives. The more dynamic the taper, the more successful the policy will be; and therefore, the accuracy and timing of earnings information provided to DWP is absolutely fundamental to Universal Credit. Without accurate and timely earnings information the policy objectives cannot be delivered.

Universal Credit and Reform of the PAYE System

6. In the build up to the 2010 General Election, the Conservative party began thinking about the implementation of Dynamic Benefit (ie Universal Credit). Its requirement for timely and accurate earnings information was problematic as the government only receives this information once a year. The government has been historically limited in its ability to deliver earnings related benefits, which is well illustrated by the delivery of tax credits: as they’re based on the previous year’s earnings; with highly levels of fraud and error; and are highly inefficient to administer.

7. Separate to this, the PAYE Improvement Team in HMRC had been looking at radical ideas for improving the PAYE system since 2005 and had developed the idea of using the payments infrastructure to reform the PAYE system in a way that would provide live and accurate earnings information to government. Their preferred model (later known as Centralised Deductions) would also allow the government to automatically reconcile benefits with tax deductions at the source of payment.

8. In opposition, the Conservative Party realised that PAYE reform would be necessary for welfare reform. Therefore, in June 2010 almost immediately after the Coalition Government was formed, it was announced the PAYE system would be looked at. This statement was followed by an HMRC discussion document entitled “Improving the Operation of PAYE” in July 2010 and a consultation in December 2010.

9. The result of the consultation was RTI. Under RTI employers will submit information to HMRC every time they pay an employee, at-or-before the point of payment (ie in real time). Information will be submitted to HMRC via payroll software. The Government made it clear from the outset that RTI would be used to facilitate Universal Credit by providing a feed of earnings information to DWP. Moreover, RTI’s implementation timetable was designed to facilitate Universal Credit by October 2013 and HMRC has delivered RTI through the Interim Solution in order to meet this timetable.

Universal Credit and Self-Reporting

10. Separate to RTI, DWP will use a self-reporting regime to determine earnings for claimants in self-employment and employees under PAYE who’re experiencing problems with their RTI returns (ie as a backup method of reporting). Self-reporting was not covered as part of the research for “PAYE at the Crossroads” and the precise interaction between RTI and self-reporting is also unclear.

11. However, self-reporting is an inherently weaker form of reporting. It a generally accepted principle of tax withholding that third parties report income more accurately than first parties, as there is considerably less of an incentive to understate income and therefore minimise tax liability (or in this case understate income to maximise benefit receipt). Universal Credit could in theory be implemented using only self-reporting, but it is highly unlikely that earnings information would be accurate or timely on a macro scale and therefore it would not be dynamic.

RTI

12. The timing and accuracy of earnings information provided to DWP through RTI is absolutely essential to the delivery of Universal Credit. However, the APPTG’s report “PAYE at the Crossroads” raises significant concerns about the accuracy of earnings information under RTI’s Interim Solution.

13. HMRC initially proposed that employers would send RTI to HMRC using the payments infrastructure (known as the Strategic Solution), as an RTI file would be attached to the payment instructions. Tying the two together into a single process and channel is essential from a compliance perspective, as the information would be attached to a payment instruction and therefore, the timing and accuracy is virtually guaranteed.

14. However, HMRC decided that it did not have sufficient time to implement RTI using the Strategic Solution and opted for an Interim Solution. However, the Interim Solution is problematic because it splits apart the RTI file from the payment instruction, which HMRC has previously asserted is “fundamental to the RTI concept”.4 As a result, there is no guarantee that an RTI file will be sent to HMRC at-or-before the point of payment and the RTI file cannot be instantly corroborated by the payment instruction. Separation of the two allows a host of possible scenarios that are problematic for compliance.

15. Under the Interim Solution, HMRC will be able to cross-reference data from an RTI file with the relevant payments. It will allow HMRC to check that the RTI file is timely and accurate. The cross-reference consists of a hash included in an RTI return and a random string inserted into the Bacs payment instruction. However, the payments information will be delivered seven days later, which means that HMRC can either pass unchecked data on time to the DWP or pass on checked data at a minimum of a week later. Therefore, under Interim RTI, HMRC cannot pass on timely and checked data to DWP.

16. HMRC has been piloting RTI since April and released figures shortly after the RTI pilot began showing a matching rate of 96%. However, this figure was comprised of RTI returns that were filed by a small number of employers with a high level of assistance from HMRC. The amount of data HMRC has received since the 96% figure has increased dramatically and could provide more of an indication of the level of accuracy and timeliness of the data that DWP could expect. HMRC is yet to publish this data.

Strategic Solution

17. The Strategic Solution is essential for delivering accurate and timely earnings information for Universal Credit. Therefore, from a DWP perspective the Strategic Solution is essential, where as from an HMRC perspective a move to the Strategic Solution is less pressing. HMRC have already delayed the implementation of the Strategic Solution on two occasions and under the current position it will not be implemented until after April 2016. However, HMRC’s current position on the Strategic Solution is unclear and contradictory. On the one hand, HMRC’s “long term goal remains to introduce the strategic solution”;5 whilst on the other hand “no decisions have been made yet”.6

22 August 2012