Work and Pensions Committee - Universal Credit implementation: meeting the needs of vulnerable claimantsWritten evidence submitted by Low Incomes Tax Reform Group

Who We Are

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.

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.

Executive summary

2.1 There are five aspects of the implementation of Universal Credit (UC) to which we wish to draw the Committee’s attention.

The accumulation and transition of tax credit debt. HM Revenue and Customs (HMRC) and Department for Work and Pensions (DWP) need a clear and well thought-out strategy to ensure that the start of UC is not blighted by inheriting the £6.5 billion debt that may have accumulated in Tax Credits by 201415.

The situation of claimants who will be self employed. The proposed treatment of the self employed under UC will represent a massively retrograde step from current practice under Working Tax Credits (WTC). The combination of the proposed system of accounting for profit and the minimum income floor will give a wholly distorted view of how the business is actually doing; the monthly reporting will add greatly to burdens on small business; and the definition of “gainful” self employment could deter claimants from starting and building up their business by engaging in it part time while being employed the rest of the time.

The potential difficulties inherent in a substantial shift to online claiming. In order to maximise take-up of UC, it will be necessary to pursue a multi-channel approach, encouraging and supporting people to transact online but continuing to offer robust alternatives. This is particularly important for the self employed, whose reporting requirements under UC are much more significant than their employed counterparts.

Aspects of the RTI (Real Time Information) feed from HMRC to DWP, looking particularly at claimants who will fall outside RTI or whose payment patterns will not be conducive to RTI. This includes people who are treated as self-employed by their employer (probably as a ruse to avoid RTI) but are in reality employed; those who are paid weekly, or at irregular intervals other than a month; and those whose employers are digitally excluded small and micro-businesses.

The impact of the civil penalty where claimants’ PAYE data is erroneous. There is a danger that the civil penalty could be used to penalise claimants who fail to spot errors in the PAYE codes which are fed through to RTI data thereby giving rise to overpayments of UC.

2.2 Our colleagues at the Chartered Institute of Taxation are responding separately and in detail about self-employment and RTI.1

Accumulation of Tax Credit Debt in Universal Credit

3.1 The HMRC accounts for 2011122 disclose that by 201415 claimants could be in debt to HMRC by some £6.5 billion. The way in which Tax Credits was designed—on the basis of pay now, fix entitlement later—has contributed to the current debt levels, as have both claimant and departmental error and delay.

3.2 There are provisions in the accounts for HMRC to write off tax credit debt that has accumulated as a result of HMRC not meeting their responsibilities (ie official, or administrative, error), or debt that is judged irrecoverable. In 201112 HMRC wrote off £1.7 billion, some £1.2 billion being written off in respect of old debts where no recovery action had been taken in the previous 12 months. That write-off brings outstanding debt to within HMRC’s target of £4 billion at 31 March 2012, although some £2.3 billion of that is regarded as unlikely ever to be recoverable.

3.3 Tax Credit debt of £1.8 billion accrued in 201112 and HMRC estimates another £1.6 billion will accrue in 201213 in part due to recent Budget changes. By the very nature of Tax Credits, this debt will be largely owed by low income families. An unspecified part of this debt is likely to be due to compliance initiatives (ie checks, enquiries and other investigations by HMRC into possible error or fraud by claimants). Yet in 201011 the amount of error and fraud in the system increased in comparison with 200910 which is worrying.

3.4 Accumulated Tax Credit debt will become UC debt on transition. The basic design of UC is less likely to attract debt in the same way that Tax Credits did. But nor is it simple; its own complexities contain massive scope for claimant and official error. The last thing it needs is an importation, right at the outset, of a legacy of outstanding debt from the very system it is intended to replace. A clear and well thought-out strategy on how to manage this inherited debt needs to be in place long before the transition actually goes ahead.

Claimants Who are Self-Employed

4.1 Hitherto, Working Tax Credit has been relatively effective at supporting the newly self employed. We are very concerned indeed that the proposed arrangements for self employed claimants of UC will be a massively retrograde step in the way the welfare system supports those who choose the self employed work option.

4.2 Many aspects of the changes will create huge extra administrative burdens for small businesses, and force many small business proprietors to report to the DWP on the basis of a distorted view of how their business is really doing in economic terms. We cover these in detail in our response to the SSAC (Social Security Advisory Committee) consultation on the draft regulations3 but we would like to draw the Committee’s attention particularly to the following:

the proposal to make businesses account for their “profits” month by month on a basis that differs significantly from that used by HMRC for income tax self-assessment or for VAT, and bears no relation to generally accepted accounting practice principles as it ought;

the choice of a monthly assessment period which in most cases will be aligned neither with the PAYE (Pay as You Earn) period nor with the accounting period of the business simply adds to the complexity; and

distortions arising from applying a monthly cash basis with no provision for carry-forward of negative results (ie losses), and the added complication of a minimum income floor which will turn what is in fact a negative result into a wholly artificial profit for the period. This is an accounting nonsense.

4.3 The minimum income floor (MIF) is itself a major obstacle to anyone hoping to set up in business on their own. The start-up period is too short for most businesses; the denial of a second or subsequent start-up period is a serious practical disincentive to anyone to setting up in self employment more than once in a lifetime; and there is simply no recognition of when businesses experience a genuine “dip” in profits, or reinvesting to expand or taking on a new employee.

4.4 The examples in Appendix A show how a self-employed claimant can earn the same amount as an employed claimant, but receive less UC because of the distorting effect of the MIF.

4.5 In addition, the rigid definition of “gainful self employment” risks forcing people into work search requirements if they, for example, choose to work part time in an employed capacity and part time (but slightly less than their expected number of working hours) building up their own business.

4.6 We recommend that:

(1)The same definition of self employed earnings, or profits, should apply for both tax and benefit purposes; or at the very least, negative results (ie losses) should be capable of being carried forward and set against profits of future assessment periods; or an annual reconciliation should take place so that by the end of each year, a business’s earnings for DWP purposes should at least bear some relation to its actual results.

(2)The minimum income floor should be restricted to cases where there is manipulation of profit in order to maximise entitlement to UC. At the very least, its application should be suspended or restricted during periods of economic difficulty.

(3)The rules on “gainful self employment” and conditionality should be flexibly applied where, say, a claimant is in employment part time and spending the rest of the working week developing a business. It is critical to a successful economy to recognise these new working patterns and build them into the rules which should be clear and unambiguous.

Online Claiming

5.1 Many claimants will benefit from accessing UC through their own individual online account. There will of course be a significant minority of claimants who may be unable, or find it too difficult, to claim online or manage their account online because they do not have access (or have only limited access) to a computer or the internet. Among those who are able to access the internet, many will not have the skills or confidence to set up or manage an account online. Some claimants may have security concerns which deter them from using an online channel.

5.2 We understand that the DWP envisage some form of “assistance to digital”. In our view, such assistance must have two strands: encouraging and helping claimants to go online where they possibly can, and offering robust alternative channels to those who cannot.

5.3 In our report Digital Exclusion (May 2012)4 LITRG found that nearly half of those seeking help on tax and tax credit issues did not have access to a computer. Of those without access less than a quarter would want to carry out personal business online, even if barriers such as affordability could be overcome. This suggests any substantial shift to claiming and managing one’s claim online will have to make allowance for substantial numbers of “paper and post” hold-outs for some time to come, particularly as the demographic of UC claimants will be similar to the majority of Tax Credit claimants, and will comprise the sector of the population that most frequently needs help in their interactions with Government.

5.4 Our report found that the most common determinant in digital exclusion was age, but other significant factors, often combined with low income, included a disability, learning difficulties, location, culture and language. Digital exclusion was prevalent among small businesses and the self employed. Lack of inclination and lack of expertise were the most common reasons for not wanting to carry out personal business online; doubts over security and affordability were also significant deterrents. Digital exclusion will continue to persist—a “hard core” group will remain excluded for some time to come.

5.5 While doing business online wherever possible makes good economic and administrative sense for both state and citizen, it is vital to ensure that the shift to online claiming does not result in UC becoming any less available to those digitally excluded groups than to claimants who are IT literate and have a decent internet connection. The approach must be an inclusive one at all levels.

5.6 Any such strategy should take into account accessibility of computers and internet connections for low-income households. It is sometimes suggested that public computers in libraries or internet cafes are generally available, but at a cost in terms of security and increased incidence of fraud and error. People carrying out financial transactions on public computers are more vulnerable to being watched by strangers, or if they fail to close and log out of a session completely they leave themselves open to fraud. And with libraries closing, the chances of there being a public computer with internet access within easy walking distance of all UC claimants, or at the very least a short journey by public transport, are slim. Such considerations must not be glossed over when devising a strategy.

5.7 Digital exclusion does not just denote inability to use computers; it can also embrace those whose computer skills, or functional skills, are inadequate for particular tasks. Between the digitally competent at one end of the spectrum, and the hard core who will never make it online at the other, falls a range of users who are comfortable using online channels for some things but not for others—for example, they may use a computer for emails and social media but not for internet banking. To assist such people and encourage them to use the digital channels, online claiming should be made as simple as possible, must be accompanied by easy to access guidance and customer support, and must be robust and secure. Savings resulting from reduced delivery costs of online claiming should be reinvested in recognising the role of intermediaries and the voluntary sector in supporting such groups of claimants.

5.8 In summary, to maximise take-up of UC, it will be necessary to pursue a multi-channel approach, encouraging and supporting people to transact online but continuing to offer robust alternatives. This is particularly important for the self-employed, whose reporting requirements under UC are much more significant than their employed counterparts.

Aspects of the RTI Feed

6.1 Again, in our response to the SSAC we set out our concerns about those with employed earnings who fall both within and outside RTI in some detail. We would draw the following significant and worrying issues in particular to the Committee’s attention.

“Bogus” self-employment

6.2 There will be those claimants whose employers treat them as self employed, even though the relationship between the worker and the engager is in reality one of employment. The workers have no real choice in the matter—either they work for that employer on those terms, or they look elsewhere for work and face whatever sanctions are imposed for failure to take up the work that is offered.

6.3 The incidence of what is sometimes referred to as “bogus self employment” is likely to increase where employers find RTI impossible or unduly burdensome and seek to avoid it by treating their workers as self employed. It will be important to minimise this risk as far as possible.

6.4 Alternatively, the nature of the engagement might not be fully understood by the “employer” or worker or might be borderline employment/self employment, leading to a decision rightly or wrongly that the status of the worker is self employed.

6.5 In either case, by the time HMRC compliance teams catch up with the employer and re-categorise the workers as employees, the workers may already have been treated as self employed for a period with all that that entails—attending gateway interviews, monthly self-reporting of earnings, minimum income floor, and so forth. They may then face retrospective adjustment of their tax and PAYE position—although it is unlikely that their UC position will be retrospectively adjusted even though while nominally self employed they will have been subject to a minimum income floor and other restrictions which do not apply to employed earners.

6.6 These workers are in a seriously vulnerable position and are likely to get caught up in the cross-fire between HMRC compliance teams and the rogue employers.

Employees who are paid irregularly, or at intervals other than a month

6.7 For those who are paid weekly, or at regular intervals other than a month, or at irregular intervals, the choice of a monthly assessment period could result in “lumpy” and irregular patterns of UC entitlement, given that their UC entitlement will be based upon actual PAYE receipts during a UC assessment period which will normally be different from their pay period. This effect could be avoided by aligning the UC assessment period with the PAYE month, rather than the rather arbitrary alternative proposed. Their position may be further exacerbated by the RTI requirement that the employer account to HMRC “on or before” paying the employee—we understand that HMRC may relax this strict rule, but there will remain the problem of UC being based on RTI data relevant to a different period.

The position of claimants whose employers are digitally excluded

6.8 The success of UC will depend on the success of RTI. All the signs are that HMRC will apply the full rigour of their enforcement procedures to deter non-compliance with RTI. There is however a distinction between those who can comply but choose not to, and those who cannot. Within the latter category are a sizeable minority of digitally excluded micro-businesses who cannot, or find it excessively difficult, to use or access computers or the internet. An initial rigorous application of penalties in this area to the wrong people will be hugely damaging to trust.

6.9 Employees of small business falling within those categories are at risk of being excluded from RTI, unless departmental strategies are designed with the needs of such enterprises in mind.

Where the efficacy of a welfare system such as UC depends so much on online engagement, both HMRC and DWP must have an effective and joined-up strategy to deal with the digitally excluded. Such a strategy must be educative rather than compliance-driven; penalising people who cannot use online channels for their inability to use them, which is the strategy practised by HMRC at present, will not help them achieve the impossible. It simply creates hard cases—and hard cases make bad law.

6.10 Part of the problem is an inadequate assessment by HMRC of the risks presented by digital exclusion.5 HMRC’s Tax Information and Impact Note6 recognises the difficulties faced by care and support employers and those who are digitally excluded because of their location. But it says nothing about the broader categories of digitally excluded employers, such as those whose digital exclusion derives from their age or a disability. It is essential that HMRC and DWP recognise those categories, and provide a coherent and joined-up strategy for small and micro-employers based on helping them go online where possible, and alternative channels (such as telephone or paper) where that is not possible. Otherwise there is a risk that HMRC will be in breach of equality law.

Consequences of Errors in RTI Data or Where System Does Not Work or is Inaccessible

7.1 The civil penalty for negligent mis-statement,7 or for failure to provide information (whether negligent or unintentional) which results in an overpayment, is likely to compromise claimants who fail to spot that there is an error in the RTI data used to calculate their UC. Their failure may be due to no more than a lack understanding of the PAYE system and PAYE documentation and a general lack of numeracy.

Example

Peter has two jobs, working 25 hours a week in the first and 20 hours a week in the second, each at £6.50 an hour. The first job is on a personal tax code (we assume 910L for 201314), the second is on a basic rate (“BR”) code.

Peter’s monthly pay and tax (ignoring employee national insurance) is:

£700 in job 1 (no tax as his personal allowance will be over £750 a month)

£560 in job 2 (tax at 20% is £112)

In November 2013, Peter loses job 1 when his employer becomes insolvent. The employer does not submit final RTI data and no immediate notification is made to HMRC of Peter’s job loss. Peter’s second job continues and basic rate tax deductions continue to apply, as Peter does not understand that he can contact HMRC to get his personal allowance allocated to job 2.

From November 2013 to March 2014, Peter therefore pays too much tax. His net pay reported to DWP for UC purposes will be artificially low. This is only picked up after 5 April 2014 when HMRC reconcile his record and issue him a refund for the overpaid tax. This refund will not be taken into account for the purposes of Peter’s UC income calculation, as the draft regulations only provide for PAYE deducted or refunded by the employer to be taken into account.

7.2 It is essential that the penalty processes should concentrate on deterring deliberate or reckless default, and not stray into penalising errors that are not the fault of the claimant.

APPENDIX A

Example 1

Claimant A, who is in employment, earns £10,125 in a tax year after deduction of tax and National Insurance, while claimant B, who is self employed, earns £10,096. The employed claimant’s UC is based on net income of £10,125. However, assuming a MIF equal to 35 hours work at the national minimum wage (NMW), the self-employed claimant’s UC will be based on an income of £11,166, which is £1,042 more than Claimant A even though Claimant B’s net income is the lesser of the two.

Example 2

Claimant C (employed) and Claimant D (self employed) each earn £939 gross in the month of January 20xx. Using (for the sake of argument) figures for the tax year 201213, Claimant C will pay income tax via PAYE of £51 and Class 1 national insurance of £36, leaving a net income for UC purposes of £852. Claimant D’s self-assessment payment on account for the tax year is due in January, so Claimant D pays £466 income tax and £13 Class 2 national insurance, leaving a net income of £460. However, because UC requires Claimant D to take the higher of actual results or the MIF, Claimant D’s income for UC purposes for the month of January will be £939 (NMW at 35 hours a week). Thus the self-employed claimant, with the same gross income but a lower net income than the employed claimant, will be deemed to earn £87 more than the employed claimant in a single month because the MIF is applied to net income (rather than gross income).

17 August 2012