New Tax Credits

Published on 14 January 2004

LITRG's response to the Inland Revenue's July 2001 consultative document 'New Tax Credits: Supporting families, making work pay and tackling poverty' - 12 October 2001.

Summary

The Low Incomes Tax Reform Group (LITRG) has been involved in consultations on the tax credits since their inception and has commented regularly upon their interaction with the income tax system. We broadly welcome this consultative document and its objective of producing a more coherent system of support. In this response, we build on our earlier representations and also draw on the experience of the charity TaxAid.

Our response is limited by two principal factors. First, we do not know how far the Government intends to integrate tax and benefits in the long term. We have based this response on our understanding that it is intended at this stage to integrate tax and tax credits only to the extent of providing work incentives and alleviating child poverty. We do not know whether the ultimate goal is a fully blown negative income tax system, or alternatively at what point it is intended to halt the process. Secondly, it is hard to comment helpfully on certain questions of detail, such as those on the interaction of the new tax credits with pension credit, housing benefit and council tax benefit, when we are not given any indicative figures for rates and tapers. We trust that there will be further consultation when these are available.

We have reservations about the nomenclature ‘tax credits’, which is widely misunderstood among low-income groups, and we fear such misunderstanding could lead to confusion and consequently lack of take-up.

We believe that the inherent conflicts within an integrated system between the two units of assessment, independent taxation and family or household aggregation, must be resolved if inconsistencies and inequities such as those in the present regime are to be avoided. The system must target support fairly, not only as between lone parents and couples, but also between dual earner and single earner couples, quite possibly by adjusting the basic tax credits by reference to some equivalisation scale. It must also recognise the right of the caring parent (usually the mother) to choose what sort of childcare she wants to provide without a disproportionately strong incentive to take paid work.

We broadly welcome the proposals to align the tax credits definition of income with that for income tax as far as is possible, subject to the caveat that alignment should not be to the detriment of people on the lowest incomes. For instance, the proposal to remove capital limits altogether could be seen as conflicting with the Government’s stated policy of targeting help where it is most needed, particularly where the removal of capital limits will benefit owners of non-income producing assets such as second homes. Care should also be taken not to disadvantage those at the other end of the scale who have hitherto benefited from a de minimis exception for small amounts of capital.

Similarly, we welcome the proposal to align periods of assessment, but believe that many on low incomes and unsettled work patterns will find the preceding year basis a difficult concept to apply, and are more likely to opt for the in-year reassessment if eligible. We therefore recommend that the current year option is supported by good customer service support including accessible, functional better-off calculations, clear leaflets, informed helplines, and expert face-to-face help in all points of contact between Government and claimants.

We welcome the enlightened attitude to the special problems facing disabled people, but believe that more flexible requirements in the eligibility tests for the disabled and for employment tax credit would support the policy behind the Government’s job retention programmes. Similarly, relaxing the working hours rule would be advantageous especially for the disabled who would be enabled to return to work at their own pace.

We endorse the recommendation of the Social Security Committee that introduction of the new tax credits should only take place once computer systems at the Inland Revenue (including the Child Benefit Agency), JobcentrePlus and the Pensions Service are fully compatible and operational. We recommend also that the new legislation, both primary and secondary, be written in accordance with Tax Law Rewrite principles, and be subject to free and open consultation before and during its passage through Parliament.

We believe it is vital to manage the interfaces between tax credits and other areas of the benefits system, particularly housing benefit and council tax benefit, in such a way as to minimise the incidence of high marginal deduction rates. Similarly, the interaction between employment tax credit and pension credit must ensure seamlessness between the two so as not to discourage older workers, or disadvantage older people who have care of children.

We look forward to participating in further consultations.

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LITRG response

(14-01-2004)