We welcome the opportunity to submit a supplementary memorandum to build on the issues raised in our submission of 14 May in the light of the questions asked by the Committee on 21 May.
Extending eligibility to working tax credit
Q55 Carers
1. We wish to reinforce the point made in our earlier submissions that carers should be eligible to claim working tax credit when working sixteen hours or more. Families with children and disabled people qualify at 16 hours; extending this eligibility to carers would recognise that the caring responsibilities of this group limit their ability to work full time.
2. Eligibility could be based on either: entitlement to Carers Allowance (but may be earning too much to actually receive it), OR their caring role being verified by social workers or other health professionals.
Q40 Under 25s
3. We would also press for the removal of the age rule which excludes low paid workers aged under 25 from eligibility for WTC. There are no age differentials in the tax system and no justification for them in the tax credit system. It is estimated that more than half of the 0.9 million who are yet to be fully compensated for the loss of the 10p tax rate will be single workers under 251. Whilst most under 25s live in households with other adults, it is not fair to assume that the household income is shared or that some are subsidised, nor that the other adults in the house are on higher incomes. Ever since the introduction of tax credits in 2003, bureaux have highlighted the discrimination experienced by low paid workers under 25. Seeking advice and support with financial problems, they are frustrated that they are unable to benefit from working tax credit solely because of their age, even though their living costs are no less than an older worker.
A Berkshire CAB helped a single woman aged 19 with her money problems. She was working full-time and living in privately-rented one bedroom flat in rural area. She had a gross annual income of around £9000. Her financial statement prepared by the bureau showed that she had a £200 a month deficit of income against expenditure. This was due to the different treatment of under 25 year olds in the benefit system. If she was over 25 she would have been entitled to approximately £1,500 in working tax credit per annum. Her applicable amount for HB and CTB was also only £46.85 a week and would have been £59.15 if she was over 25. The bureau added that private rented accommodation in West Berkshire was very costly and rents had increased further since the floods last summer which made rented accommodation even more scarce.
A Midlands CAB reported a woman who was single, aged 24 years and worked part-time. She lived alone in private rented accommodation but had got into arrears with all high priority expenditure because of living on such little income. Being under 25 she was entitled to less housing benefit. Even if she managed to increase her working hours she would still not be entitled to working tax credit. She had debt which she felt existed in large part due to her age.
4. The following calculations illustrate what a difference few years can make1
- Weekly earnings for a 21 year old working 35 hours at Minimum Wage ‘development rate’ of £4.60 (£8372 gross pa) – Tax and NI at new personal allowance = £7585.93 take home.
- Weekly earnings for a 24 year old working 35 hours at Minimum Wage of £5.52 an hour(£10,046.40 gross pa) – Tax and NI =£8741.27
- Weekly earnings for a 25 year old working 35 hours at Minimum Wage – tax and NI and tax credits £9867.27 take home
5. Under 25s also get less housing benefit as they are subject to single room rent restrictions (i.e. there is an assumption that they share a property, and HB only covers the cost of renting a single room). In reality this often means they are more likely than over 25s to have to make up the shortfall in the rent they must pay from their earnings.
6. We recognise that compliance with the tax credit regime is difficult for claimants whose household and working time arrangements are subject to regular change, and the lifestyles of many younger people may fit this description, but this in itself is no reason to exclude them from eligibility. Indeed flexible working patterns - which might result in individuals having fluctuations in their hours of work and rates of pay - have been actively promoted by the present Government.
7. We would argue that the tax credit system should provide more effective support to people whose work and circumstances change regularly to enable them to comply with the system.
Q56 Improving the take-up of working tax credit by households without children
8. The Government’s stated objectives for tax credits are to tackle child poverty and make work pay. The focus of government policy on achieving the child poverty target has meant that priority has been given to ensuring high take up amongst working families. Focus on the abolition of the 10p tax rate has raised awareness of entitlement to working tax credit for households without children but specific initiatives to boost take up by this group are also very important. We welcome the Government’s publication of a discussion paper outlining proposals aimed at improving delivery and choice in the tax credits system3. In it they state that improving take up by households without children is one of their main priorities. Recent initiatives aimed at improving take-up include:
- work with employers and unions in sectors with high eligibility and;
- leafleting in 35 selected areas to specific postcodes where eligibility is high and take up known to be low.
9. We believe that targeted take-up campaigns accompanied by improvements in personalised support for claimants and improved service delivery can increase take-up rates of working tax credit. Bureaux take-up projects are successful because they are able to offer ongoing support to claimants at times of change – advisers report that it is sometimes only this commitment to provide further support and advice that convinces the individual to submit a claim.
10. Since 2005, HMRC have provided a total of £353,090 for Citizens Advice Bureaux to run take-up projects and for Citizens Advice to produce a tax credits take up campaign pack – which is available to all bureaux and advice agencies. A total of 52 individual bureaux have been involved in delivering campaigns at a local level in the past three years. All bureaux campaigns have been targeted at particular hard to reach groups, including ethnic minorities and migrant workers. We estimate that they have reached over two million individuals and assisted clients to claim over £2.5 million in tax credits they had not previously claimed.
11. Two particular examples in 2007/08 are a North Yorkshire CAB who assisted clients to extra entitlement of £387,932 and a London CAB who assisted clients to claim an extra £258,166. Brent estimated that in just ten months of months of campaigning they gained £32 for every £1 put in by HM Revenue & Customs.
12. Improved service delivery and personalised support are essential as many households in low paid work have no choice but to work changeable work patterns which can mean frequent reporting of changes to HMRC, and following that, to housing benefit departments. This increases the risks of overpayments of both, or - worse still - delays in processing can result in rent arrears and ultimately eviction. These risks are known to discourage take up.
13. Half of the respondents of a Citizens Advice4 online survey in 2007 said that their negative experience of claiming tax credits meant that they were less likely to want to claim them in the future. Following radio coverage of our evidence session with the Committee last week, we received correspondence from a tax credit claimant seeking our help. His story illustrates both the difficulties faced by households with changeable hours and the anxiety caused by poor administration: After notification of overpayments in 2006, coupled with administration problems leading to manual payments, he wrote:
“We continue to receive tax credits but have been wary of using them to supplement our income since we are never sure if we would be told to pay them back. My fears were justified; despite being given the impression in 2006 that any demand for repayment was an error and should be ignored we are now facing the demand to repay £2409.32”
He went on to say:
‘I’m anxious to be honest and accurate but find the forms complex, not least when submitting the number of hours worked.’
14. The man and his wife are both self employed and his work as an organist at a crematorium involves fewer hours in the summer when death rates are lower. It is still not even clear whether he owes the £2500 or not. Having disputed recovery in October he is still waiting for a response – his last contact was in April when he was told his case was with the specialist team. In the meantime he had received a statement in February summarising his award and payments for 2007/08 concluding that he was no longer entitled to tax credits, and had no overpayment. This still made no sense as he was still receiving regular payments. He concludes that whilst he is sure that he is entitled to help with council tax and free prescriptions he feels he ‘can’t face any more forms.’
15. Tax credits are a vital part of the Government’s strategy for making work pay. It is not acceptable that the inflexibility of the system results in individuals choosing to remove themselves from it.
16. The tax credit transformation programme has introduced some important initiatives aimed at improving the operation of the tax credit system and the quality of support to specific claimant groups. The system must be made to work for people on low incomes whose lives change frequently. Further tailored support must be offered to these claimants to help them manage their claims, avoiding under and overpayments of tax credits as well as other affected benefits such as housing benefit.
Q35
17. We know that closer working between Jobcentre Plus, HMRC and local authorities can also significantly improve the experience of low income households. In 2007 the government trialled projects to join up the services by these departments to improve the service for claimants who frequently moved in and out of work5. Individuals were only required to report the change to one agency and the information would be passed on. The pilots were found not only to improve the experiences of individuals but to be more efficient for the departments themselves. Citizens Advice recommends further roll out of these initiatives to improve the stability of income for these households, thereby improving work incentives.
Q56 Improving take-up of housing benefit by working households
18. Currently only half of all eligible households in work claim housing benefit, and boosting take-up would improve work incentives. Compliance with the housing benefit system is very costly for families, and the stakes are high: everychange in their incomes and childcare costs has to be reported, which can mean weekly reporting, often resulting in the risk of rent arrears when housing benefit administration doesn't keep up. The interaction of housing benefit and tax credits is also very complicated for claimants – for example, families can lose out on housing benefit just because they have received overpayments on tax credits. The review of housing benefit for working households announced in the 2008 budget is therefore very welcome.
The importance of maintaining current time limits for backdating claims for housing benefit, council tax benefit and pension credit
19. In giving evidence to the Committee, Citizens Advice stressed the importance of ensuring that people are getting all the benefits that they are entitled to. As we said in our evidence, higher rates of benefit take up will be key to helping people manage rising fuel and food bills in the current financial environment.
20. Bureaux experience of the cut to the 10p tax rate, in April and May this year, has been to see many people seeking advice on the implications. Advisers have been able to do a full benefits check and find that clients are entitled to housing benefit, council tax benefit and other benefits that they hadn’t previously been claiming.
21. Within this context, the CAB service very much regrets that the DWP is once again proposing to cut the time limits for backdating claims to housing benefit (HB) and council tax benefit (CTB), and additionally, pension credit (PC). A similar proposal was made in 2000 only to be withdrawn in the face of strong opposition and a highly critical report from the Social Security Advisory Committee.
22. The proposals contain an improved pension credit package, which will benefit many older people. In order to simplify the claims process, however, they would align the backdating rules for PC and HB/CTB, even though these benefits perform different functions within the system, and decisions are made by different decision makers.
23. The result will be to cut entitlement to backdated HB for working age claimants without any compensating benefit for this group. We do not consider that these proposals represent coherent policy making. Whatever the merits of the whole pension credit (PC) package, we do not believe this should be funded by cuts to housing benefit entitlement for either working age or pensioner claimants, since the consequences will be felt by some of the most vulnerable claimants who may end up facing homelessness as a result.
24. A major part of bureaux work involves helping clients with housing debt, taking all possible steps to help them sustain their tenancies and avoid eviction and homelessness. (This is a key aim of the National Homelessness Advice Service (NHAS) which the DCLG funds the CAB service to deliver). In 2006/7 bureaux dealt with over 80,000 enquiries on rent arrears. This clearly shows that, despite improvements in HB administration, HB problems continue to be a major feature in rent arrears cases, and the facility to get a claim backdated by up to one year is therefore a very valuable tool in the fight against homelessness. In 2006/7 bureaux dealt with over 8,000 inquiries relating to HB backdating, and over 5,000 inquiries about backdating of CTB. Moreover, because of the requirement to prove good cause, there is no doubt that this provision is targeted on vulnerable claimants who most need it:
A CAB in the south west reported a client who has been pursuing backdated housing benefit for a two month period when he failed to complete his housing benefit application because he was sectioned and hospitalised. The CAB has been helping the client with his claim but he has repeatedly lost contact and had to start again. As a result the whole process has taken well over three months. When the client is well he is fully capable of managing his own affairs. However more severe periods seem to occur without warning and he often loses contact with family at these times.
A CAB client in her sixties living in Surrey was struggling to cope since her husband had died suddenly over a year earlier. This led to mental health problems which resulted in her failing to complete HB review forms or to claim pension credit despite efforts by her local authority landlord to help. She was therefore living on approximately £47.00 per week retirement pension and was eventually evicted from her home for rent arrears. At this point she was referred to the CAB by the local authority. The bureau adviser realised that she was entitled to a considerable amount of backdated HB, and persuaded the landlord to agree to let her return to the property if the arrears were cleared before they re-let it. The bureau helped her successfully claim seven months backdated HB/CTB and PC, which completely cleared her rent arrears and court costs. She was then granted a new tenancy with a clear rent record.
Q45 Child benefit disregard in HB/CTB
25. We have welcomed the Government announcement that from October 2008/09, child benefit will be ignored in housing and council tax benefit calculations for households in work. (The disregard for HB helps those in rented accommodation, while disregarding CB for CTB ensures that low income owner occupiers also get some help). By effectively allowing families to keep more of their income on returning to work, this will significantly boost work incomes for families. The maximum additional gain from this measure for a lone parent with two children is £27.67 a week – 85 per cent of her child benefit income which would otherwise have been clawed back by reductions to housing and council tax benefit entitlement. This will undoubtedly help low income families with children and it will provide greater help for families with more children - which is important as they face an increased risk of poverty. It will effectively serve to increase earnings disregards for families and therefore increase incentives to move into work. They will however still face the 85% taper on any additional income and families will face different earnings disregards depending on the number of children they have, which will add an element of complexity.
Q27 Uncollected tax on small pensions
26. It is estimated that income tax totalling around £135 million per annum is not being collected from the small pensions of around 420,000 pensioners, because of government oversights dating back to the 1980s. HMRC plans to tell people about their past tax liability during the current tax year and to collect tax for 2007-08 and 2008-09 within the tax year 2009/10, and then by adjusting tax codes for future years. The amounts are likely to average £642 per person. We have been advised that HMRC will not seek to collect tax from earlier years.
27. We have been told that HMRC has received legal advice indicating tax must be collected from 2007-08 onwards. However LITRG has subsequently obtained advice from a leading tax and human rights barrister which states that HMRC do have the discretion not to collect tax in circumstances such as this. There are precedents for writing off debt for people when HMRC make errors (tax credits overpayments are an obvious example) and we strongly believe that in this instance, these precedents should be followed.
28. Citizens Advice, in collaboration with The Low Income Tax Reform Group (LITRG), Age Concern, Help the Aged and Tax Help for Older People, understands and accepts the need to remedy this situation for the future. However, we believe that the current plans to collect past liabilities back to April 2007 are both impracticable and at odds with the Government’s wider agenda of tackling pensioner poverty. We think the Government should only apply this prospectively for the following reasons:
- The majority of the 420,000 individuals affected will be low income pensioners. Those affected are likely to include some aged under 65 who will already be facing a higher tax liability due to the abolition of the 10 pence tax rate (even after the compensation package announced on the 13 May). They are currently accumulating a debt of which they know nothing and about which they will only be informed in August 2008 at the earliest.
- Many of these older people are likely to be careful budgeters for whom having a sudden debt will cause great worry and stress; for some, the underpayment debt may be enough to tip them into poverty (and entitlement to pension credit) for 08/09 and 09/10. This does not fit with the Government’s wider and overarching policy to tackle pensioner poverty and promote the wellbeing of older people (PSA 17).
29. The other problem with a policy that applies tax liability retrospectively is the interaction with the means tested benefits system. People may need to be assessed or re-assessed for income related benefits over a period of three years – had they been required to pay the tax in the appropriate year they may have qualified for greater assistance from welfare benefits. The Government will have to do many thousands of benefits checks and great administrative complexity, all of which would be very costly. In addition we can see the nonsense of the DWP reimbursing to pensioners the tax debt levied by HMRC.
30. The explanation of these complex processes will undoubtedly cause great confusion and anger amongst pensioners, resulting in further demand for resources to support advice services, as well as undesirable negative publicity.
1. IFS press release 21 May 2008
2. These calculations take account of working income, national insurance, tax and tax credit entitlement only. They are based on minimum wage levels as at May 2008 and tax and NI for 2008/09 taking account of the £600 increase in the personal allowance.:
3. Tax credits: improving delivery and choice, May 2008, HMRC, HMT
4. Tax credits: The current picture, Citizens Advice, September 2007
5. This was known as the Wallsend project as this is where the first pilot took place
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