Welfare Reform and Work Bill Committee

Written evidence submitted by Low Incomes Tax Reform Group (LITRG) (WRW 34)

Welfare Reform and Work Bill 2015-16 – Clause 11

1 Background

1.1 Clause 11 implements two Budget measures in relation to child tax credit (CTC) from 6 April 2017. Broadly, the clause:

· removes the family element of CTC in certain cases; and

· introduces a two child restriction for the individual element of CTC for new claims and births from April 2017.

1.2 The Government announced changes to CTC and the corresponding elements in universal credit (UC) in the Summer Budget. Clause 11 seeks to implement these changes by amending Section 9 Tax Credits Act 2002.

1.3 The Government has indicated that there will be no corresponding changes to child benefit (CB) or the childcare element of working tax credit (WTC).

2 Removal of the family element

2.1 Proposed amendment:

Clause 11(2)(a), in line 38, after ‘either or both of whom is or are,’ insert ‘or have at any time in the immediately preceding six calendar months been’.

2.2 Clause 11(2)(a) seeks to limit the family element of tax credits. Currently, everyone entitled to CTC receives the family element which is currently £545 a year. There is one family element per claim no matter how many children are part of the claim.

2.3 Example

Christopher and Diana have twins born on 6 April 2017. Under the current rules, their tax credits award would have been around £6,105. However, because of the new rules they will receive no more than around £5,560 in 2017/18. The reduction is due to the removal of the family element.

2.4 The Summer Budget said that:

‘those starting a family after April 2017 will no longer be eligible for the Family Element in tax credits. The equivalent in Universal Credit, known as the first child premium, will also not be available for new claims after April 2017’ (Paragraph 1.147)


‘From April 2017, the Family Element in tax credits and the equivalent in Universal Credit will no longer be awarded when a first child is born. This will also apply for families with children making their first claim to Universal Credit’ (Paragraph 2.107)

2.5 Both paragraphs seem to suggest that the Government’s intention was that existing claimants should retain entitlement to the family element.

2.6 However, Clause 11(2)(a) does not implement the change in this way and the chosen wording means that some existing claimants could lose the family element if they have a second or subsequent child born on or after 6 April 2017.

2.7 For example, consider a situation where a couple have responsibility for an 18 year old (the daughter of Partner A from a previous marriage) and they subsequently have a child together in May 2017. Their older daughter is due to start a University course in September 2017. Based on the Budget announcement, one would expect them to retain entitlement to the family element of tax credits because they have not started their family after April 2017.

2.8 Due to the way Clause 11(2)(a) is drafted, they would lose the family element when their older daughter goes to University and drops off the CTC claim. This is because Clause 11(2)(a) awards the family element only to those who are responsible for a child or qualifying young person who was born before 6 April 2017. Under the Child Tax Credit Regulations 2002 (SI 2002/2007), a parent is no longer responsible for a child once they leave full time-non advanced education and so this couple would not meet the definition inserted by Clause 11(2)(a). This would also impact families who lose responsibility for a child for some other reason – for example the death of a child in the family or where a child goes to live with another parent/family member.

3 The two child limit

3.1 Ministers have proposed on the basis that people receiving tax credits should face ‘the same financial choices about having children as those supporting themselves solely through work’. An impact assessment noted that ‘people may respond to the incentives that this policy provides and may have fewer children’.

3.2 We do not generally comment on levels of taxation or welfare benefits, and we do not make any representation here about whether it is right in principle to limit support provided through the tax credits system in this way. However, we do have an interest in the impact of any change of policy on low-income families. In particular we are concerned about the potential impact on children from families who do go on to have more than two children, especially when coupled with the impact of other cuts to tax credits from April 2016.

3.3 The effect of clause 11 is that from 2017/18, where a claimant is responsible for a child or qualifying young person (we use "child" to mean either child or qualifying young person below) born on or after 6 April 2017, there is no individual element for that child unless either:

· the claimant is claiming the individual element for no more than one other child, or

· a "prescribed exception" applies.

3.4 A DWP explanatory note said the two child limit will be applied on a "rolling basis" so that when the eldest child ceases to be eligible for CTC, if there is a third child born on or after 6 April 2017 that third child will become eligible.

3.5 Example 2: Two child limit from April 2017

Peter and Claire have one child born before 6 April 2017 and one child born in May 2017. They are entitled to the individual element as follows.

2016/17 – One individual element, for the child born before 6 April 2017.

2017/18 – Two individual elements. One for the elder child, and a second element for the younger child because the claimants are claiming for no more than one other child.

3.6 Example 3: Two child limit from April 2017

Andy and Fiona have two children born before 6 April 2017 and one child born in May 2017. They are entitled to the individual element as follows.

2016/17 – Two individual elements, for the children born before 6 April 2017.

2017/18 – Two individual elements, for the children born before 6 April 2017. There is no individual element for the child born in May 2017 because the claimants are already claiming for more than one other child.

3.7 As well as providing transitional protection for families already receiving the individual element for third and subsequent children born before 6 April 2017, the government intends to provide protection for "exceptional circumstances" including multiple births.

3.8 The Summer Budget announced that the Department for Work and Pensions (DWP) and HM Revenue & Customs (HMRC) would "develop protections for women who have a third child as the result of rape, or other exceptional circumstances". An impact assessment published on 20 July said details of these protections would be set out following consultation with stakeholders.

3.9 We have welcomed the announcement of these protections but very careful thought will need to be given to:

· The range of circumstances to be covered – in particular there are a number of situations where claimants may find themselves responsible for a third child in circumstances that give them little choice. Thought will also need to be given to a child or qualifying young person who has a child of their own as tax credit rules currently allow the claimant (often the grandparent of the new child) to claim for their child and their grandchild.

· The wording used to specify the circumstances in secondary legislation.

· The administration of the exceptions including the evidence required from claimants.

3.10 We share the serious concerns expressed in recent weeks by several commentators about the potential rape exception. There are several potential issues including:

· The possibility that if a mother is known to be receiving CTC for three children, some people may assume that the third child was born as a result of rape. This might arise in dealings with agencies other than HMRC, for example regarding passported benefits. In some cases a child may discover the circumstances at some stage because of the tax credit award.

· Given that most women do not report rape, and that concerns continue to be expressed about conviction rates, any suggestion that a conviction is required would be unacceptable. In the absence of a conviction, however, it is very difficult imagine what evidence HMRC might reasonably require in support of a claim. It should also be borne in mind that the rape may have been committed as part of an ongoing pattern of domestic abuse. Many potential claimants, having been unable to face telling family or friends about their ordeal, will be unlikely to claim the exception. Although not asking for any evidence opens up the possibility of false claims, in this instance we believe this is a risk that HMRC should accept.

· Careful thought needs to be given to other difficult situations that may merit protection, such as where people find themselves taking responsibility for a child due to some unforeseen reason (for example death of a parent or illness). It is important that such people should not be penalised as there is a risk that family may be less likely to step in and help if they will receive no financial support.

4 Tax credit cuts from April 2016

4.1 For the sake of completeness, and to put the above measures in context, we should mention that many families will see significant reductions in their tax credits from April 2016 as a result of a number of measures that are outside the scope of the Bill.

4.2 The individual element of CTC is set at £2,780 a year (£53.46 a week) per child for 2015/16 and clause 10 provides that this maximum amount will remain unchanged for each of the tax years 2016/17, 2017/18, 2018/19 and 2019/20. For many claimants the amount actually received will be considerably less than this because tax credits are reduced once income goes above a certain threshold

4.3 In addition to this four-year freeze, the Summer Budget proposed significant cuts to tax credits from April 2016, by means of:

· reductions in the income thresholds;

· an increase in the rate of taper, where income exceeds the thresholds, from 41% to 48%; and

· a reduction in the income disregard where income increases from one year to the next.

5 About Us

5.1 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. Everything we do is aimed at improving the tax and benefits experience of low income workers, pensioners, migrants, students, disabled people and carers.

5.2 LITRG works extensively with HM Revenue &Customs (HMRC) and other government departments, commenting on proposals and putting forward our own ideas for improving the system. Too often the tax and related welfare laws and administrative systems are not designed with the low-income user in mind and this often makes life difficult for those we try to help.

5.3 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.

September 2015

Prepared 18th September 2015