Childcare Payments Bill

Written evidence submitted by Citizens Advice (CP 04)

Introduction

1. Citizens Advice welcomes the opportunity to give evidence to the Childcare Payments Bill Committee. In 2013/14 the Citizens Advice service, empowered by 22,000 volunteers, provided advice from 319 independent advice centres across more than 3,500 community locations in England and Wales, to over 2 million people face to face and over the phone.

2. How any support is delivered is central to a great deal of the work we do. Much of the work our advisers do is assisting people to understand the support that is available to them, to help them access that support and enable them to sort out problems when things go wrong. We are therefore in a very strong position to identify the aspects of a process that will be supportive and helpful and the aspects of a process that are likely to lead to confusion and cause problems.

Summary

3. Citizens Advice welcomes the extra financial support in the tax-free childcare scheme for families who need to pay for childcare in order to work. We are however concerned that the interaction between support for childcare costs in tax-free childcare, in tax credits, and in housing benefit within the current means tested system is complex, as is the interaction between tax free childcare and universal credit, and neither of these interactions have been adequately considered. This complexity is likely to lead to confusion for claimants and difficulty for them in making good financial decisions. Our evidence focuses on these issues.

4. The amount payable under the tax-free childcare scheme is not means tested. However universal credit, tax credits and housing benefit are all means tested so amounts payable will vary with income and circumstances. Which system is financially right for someone will depend on many different factors and will be difficult or impossible for some claimants to work out.

5. Part of the complexity around these interactions is created by the lack of parity between tax-free childcare and the means tested systems. For example, compared to the other systems, in tax-free childcare the cap on total costs taken into account is higher, there is no limit on the number of children for whom extra costs can be claimed, and the costs can be averaged over a three month period. Having to understand different rules because you have been offered a few hours extra work does not create a smooth journey off benefits.

6. There are a number of anomalies as to who can and can’t claim that further increase the complexity. Claimants of tax credits are not allowed to claim tax-free childcare even if they are receiving no help with their childcare costs because they are not working sufficient hours. On the other hand there is no mention in the Bill of what happens to a claim for housing benefit if the housing benefit is being increased to take account of childcare costs.

7. For some who are at the overlap between systems, the complexity will be even greater. For many of these, especially those with a fluctuating income such as the self-employed, or those likely to have a change in circumstances later in the year, the complexity will be so great that it is likely to be impossible to provide a better off calculator that can cover many of the situations in which claimants will find themselves.

8. The delivery of the different systems is perhaps our greatest concern. In tax credits childcare costs are paid in advance which enables claimants to work but has caused some overpayment problems. Under universal credit, childcare costs will be paid in arrears and only if the claimant reports in time. Citizens Advice believes that current proposals for how this will work are likely to cause significant difficulties. One solution we would like to see explored is to allow universal credit claimants to use childcare accounts to receive their payments of childcare costs from DWP in advance.

9. Citizens Advice believes that consideration should also be given to the possibility of making the system as a whole simpler by paying 70% of childcare costs through universal credit and passporting through automatically to a further 20% in tax-free childcare [1] . As the means tested support in universal credit tapers out with increasing income, the 20 % in tax-free childcare would remain in place, making the journey off benefits even smoother.

10. Citizens Advice believes that the Bill, without slowing the progress of the delivery of tax-free childcare, needs amending to allow the time to consult and assess more fully how the scheme will interact with universal credit and with the current system.

A more detailed analysis of the interaction between systems of childcare support

Amount payable

11. Under the tax-free childcare scheme 20% of childcare costs will be paid by the government up to a maximum payment of £500 for each child in any three month period. The amount someone receives is not means tested so will not reduce as their income rises as long as neither parent earns more than £150,000 a year. The scheme will be available to working families who don’t receive either tax credits or universal credit.

12. Under the current benefit and tax credit system, up to 70% of childcare costs are paid through the childcare element of tax credits and a further 20% through an increase in the amount of housing benefit payable and 5% through an increase in council tax support. Those eligible for housing benefit but not tax credits will be receiving help with 65% of their childcare costs. (All of this support is means tested so the percentages only indicate the maximum payable. The amount received decreases as earnings increase.) For tax credits the claimant has to estimate the likely costs over the year and then average the costs. If there is a change in costs for at least 4 weeks of £10 a week or more then the change must be reported.

13. Under universal credit, from 2016, 85% of childcare costs will be included in a claimant’s maximum amount. (Any claimants on UC before 2016 will only receive 70% of their childcare costs). The amount a claimant actually receives is means tested and so reduces as their income rises (by 65p for every £1 of net earnings).

14. Implications As the amount payable under universal credit and under the current system is means tested amounts payable will vary with income and circumstances. Which system is financially right for someone will depend on many different factors and will be difficult or impossible for some claimants to work out.

Qualifying conditions

15. Under the tax-free childcare scheme the parent (or both parents in two parent households) have to be working and earning an average of at least £50 a week.

16. Under the current benefit and tax credit system single parents must be working for at least 16 hours a week to qualify for the childcare element of tax credits. In couple households (unless one of the partners is in an exempt category such as being a carer) both must work for at least 16 hours a week. The same rules apply to housing benefit and council tax support. [2]

17. Under universal credit any childcare costs are covered if incurred to enable the parent(s) in a household to take up paid work or carry on doing paid work. There is no minimum level of earnings or hours of work. If there are two parents in a household both parents must be in paid work.

18. Implications The purpose of the tax-free childcare scheme is to provide support for childcare costs to those who are not eligible for help from other sources that are funded by the state. However there appear to be a couple of anomalies:

19. Clause 29 makes clear that any tax credit award will be terminated when a valid claim for the tax free childcare scheme is made. Many couples who claim tax credits are both working and incurring childcare costs but are not entitled to claim the childcare element. To be entitled to the childcare element both parents have to be working at least 16 hours a week. [3] There will undoubtedly be some confusion for parents where for example one is working full-time and the other is working 12 hours a week and paying childcare costs. They will not be receiving the childcare element of tax credits so may reasonably expect that they can claim tax-free childcare in addition to tax credits. However if they claim tax-free childcare their tax credit claim will stop.

20. This will also have an impact on some single parents who are working less than 16 hours a week on average so aren’t entitled to the childcare element of working tax credit but are entitled to child tax credit.

21. However whilst tax credits will stop when a claim for tax-free childcare is made even if not receiving any support for their childcare there is no mention of what happens to a claim for housing benefit. Clause 13 excludes anyone who is receiving other relevant childcare support funded by the state. Those who are receiving housing benefit but not tax credits receive an increase in their housing benefit equivalent to 65% of their childcare costs but the Bill and regulations are silent on whether they will be excluded from the tax-free childcare scheme. If this group are excluded from tax-free childcare there is likely to be considerable confusion as this is not generally seen as childcare support.

Qualifying children

22. Under the tax free childcare scheme childcare costs are only covered up to the last day of the week in which the 1st September following their 11th birthday falls unless the child is disabled when it is 1st September following their 16th birthday.

23. Under the current benefit and tax credit system costs of childcare can be covered for a child up to 31st August following their 16th birthday.

24. Under universal credit the rules on qualifying children are the same as the current system

25. Implications: These differences may have some implications for needing to recheck entitlement when a child is no longer covered by tax-free childcare because of their age. It is also important that the messaging becomes more precise on the age at which children cease to qualify.

Cap on amount taken into account and flexibility to average costs to reduce impact of caps

26. Under tax-free childcare the maximum childcare costs that can be taken into account are £10,000 a year for each child. There is no limit on the number of children who can qualify. The costs can be averaged over a 3 monthly period.

27. Under the current benefit and tax credit system The cap for tax credits and housing benefit and council tax support is £175 a week (£9125 a year) if there is only one child and £300 a week (£15643 a year) if there is more than one child with childcare costs.

28. Under universal credit the maximum amount of childcare costs that can be taken into account is the same as in the current system. The cap is applied on a monthly basis so it is not possible to average costs.

29. Implications: Following the consultation on tax-free childcare the Government has agreed with stakeholders that a monthly cap "would be too restrictive for parents, particularly those with low or fluctuating incomes, and especially the self-employed. The top-up cap will therefore be applied on a quarterly basis, at £500 Government support per child." [4] For a lone parent with 3 children the cap in UC is more than £1000 lower a month than the cap for tax-free childcare – during school holidays this is likely to cause problems. Those on means tested benefits are by definition also more likely to be on a lower income. Yet under universal credit unlike tax-free childcare there will be no facility to average costs.

Delivery, reporting requirements and payment in advance or arrears

30. Under tax-free childcare parents can pay into their childcare account at any point and the government will top this payment up by a maximum of £500 in any three month period. This means that the HMRC payment is made in advance of having to pay the childcare provider. Parents will not be required to report changes in their personal circumstances in real time. Tax-free childcare will operate through quarterly entitlement periods. Once eligible, parents will continue to be entitled to support for three months, regardless of any changes in circumstances they may experience.

31. Under the current benefit and tax credit system support for childcare costs in tax credits is paid in advance. A claimant can claim for the childcare element when s/he first applies for WTC, even if the childcare has not started, as long as s/he has entered into an agreement for childcare to be provided, and will incur charges during the period of the WTC award. A client's eligibility for the childcare element will only start from the date s/he actually incurs childcare charges. The claimant has to estimate the likely costs over the year and then average the costs. If there is a change in costs claimed for at least 4 weeks of £10 a week or more then the change must be reported.

32. Under universal credit, payments of childcare costs will be made in arrears. Parents are usually required to pay childcare providers one month in advance so many claimants are likely to have to borrow this money. Depending on how the assessment period and the childcare payment date fall a further loan may be necessary the next month. If childcare costs are higher during school holidays then further loans of very significant sums of money may be required. Even if this cycle of loans was desirable, current rules for budgeting advances in universal credit do not allow this. Reporting requirements are also much greater than either tax credits or tax-free childcare. Failure to report during a period that will vary for each household depending on their payment day for universal credit and when they have to pay their childcare provider will lead to the loss of support. The complexity of this system is at odds with the aims of universal credit – claimants will be trapped in a continual cycle of debt and repayments – having to borrow not just one payment but possibly several times in succession. The potential losses of support on failure to report in time may make childcare costs unpayable and lead ultimately to job loss.

33. Implications: Under tax credits, payments are made in advance but the way it is operated has led to some claimants facing overpayments. To avoid this, payments of childcare costs under universal credit will be paid in arrears and only if the claimant reports in time. Our experience of reporting requirements in current benefits indicates that the way childcare costs will be paid in universal credit is likely to lead to multiple problems and disputes. The problem of avoiding overpayments whilst still paying in advance has been managed in the tax-free childcare scheme through the use of childcare accounts. The Government has promised that claimants of tax-free childcare will not have to pay for childcare accounts. They have been designed as a budgeting tool to "deliver a smooth and simple user experience, with a single point of contact for parents to register for the scheme, make payments into their account, and arrange payments to their childcare provider." [5] If universal credit claimants also had access to childcare accounts then DWP payments could be made in advance without risking overpayments.

Conclusion

34. Citizens Advice has strongly supported the simplification of the benefits system. The introduction of a completely separate system of support for childcare costs adds complexity back into the system and is likely to mean there is confusing messaging even for those who are not actually at the interface between systems. The amount payable under the tax-free childcare scheme is not means tested. However universal credit, tax credits and housing benefit are all means tested so amounts payable will vary with income and circumstances. The lack of parity between the systems is a further complication. Which system is financially right for someone will depend on many different factors and will be difficult or impossible for some claimants to work out.

35. The difference in the proposed delivery of childcare costs in universal credit and tax-free childcare is perhaps our greatest concern. Under universal credit, childcare costs will be paid in arrears and only if the claimant reports in time. In contrast, in tax credits, childcare costs are paid in advance which enables claimants to work because they are able to timeously meet their childcare bills. Citizens Advice believes that current proposals for how universal credit will pay childcare costs are likely to cause significant difficulties. One solution we would like to see explored is to allow universal credit claimants to use childcare accounts to receive their payments of childcare costs from DWP in advance.

36. Citizens Advice believes that consideration should also be given to the possibility of making the system as a whole simpler by paying 70% of childcare costs through universal credit and passporting through automatically to a further 20% in tax-free childcare. As the means tested support in universal credit tapers out with increasing income, the 20 % in tax-free childcare would remain in place, making the journey off benefits even smoother.

37. Citizens Advice believes that the Bill, without slowing the progress of the delivery of tax-free childcare, needs amending to allow the time to consult and assess more fully how the scheme will interact with universal credit and with the current system.

October 2014


[1] To ensure work pays, Citizens Advice has recommended that universal credit claimants receive 90% of their childcare costs. This system could of course work by paying 65% of costs through universal credit and 20% through tax-free childcare

[2] Decisions on council tax support and who qualifies are now decided by individual local authorities. Not all ill disregard childcare costs but the default scheme does.

[3] There are some exemptions to this rule eg if one of the parents is disabled or a carer

[4] Government’s response to the consultation on delivery of tax-free childcare

[5]

Prepared 15th October 2014