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Tax credits are a key part of the government's drive to reduce child poverty by a quarter by 2004 and to abolish it by 2020. There is no doubting the huge investment in the new tax credits - an extra £7.5bn on financial support for families compared with what was being spent in 1997. Yet even with 90 per cent of families entitled, many of whom have seen a big leap in their income, experts still question whether the working tax credit and the child tax credit will solve child poverty. The opposition has also attacked them as cumbersome and complex, but has yet to say what it would do.

Tax credits are paid to people with children and some without children - mostly over-25s, those in low-paid work or those who satisfy additional rules about long-term illness or disability. The sum paid depends on circumstances -Êthe number of children, type of disability, of income and child care costs. The government's target is that six million families (an 82 per cent take-up rate) will receive tax credits in the first year. It envisages an eventual take-up rate of 90 per cent among those entitled.

From next April, child tax credit replaces the children's personal allowances in income support and other benefits, so we can expect to see an increase in the number receiving tax credits. Unusually, the calculation is based on the previous year's income (or, for this year only, the last but one tax year's income) and entitlement is unaffected by any increase in income of up to £2,500 a year.

Figures from the Inland Revenue suggest that 5.8 million families are now "benefiting from" tax credits. Paymaster general Dawn Primarolo hailed these figures as "further evidence of the huge success of tax credits" and announced that the government was on track to hit its take-up target.

But the Institute for Fiscal Studies (IFS) has carried out a detailed analysis of the tax credits and has highlighted some important issues. For instance, the IFS questions whether the 90 per cent take-up figure is easily achievable -Êthe latest estimates show that the old working families tax credit only managed a take-up rate of 65 per cent.

Martin Barnes, director of Child Poverty Action Group, says: "Take-up is better than some people expected but this still leaves 700,000 families missing out. The government needs to look at different strategies and to involve advice agencies so they reach everyone. Also, we don't know how many of those who have been awarded are being underpaid or overpaid."

Other doubts have been cast on the government's claims of early success. The headline figure of 5.8 million included 1.2 million families with children receiving income support or income-based jobseekers allowance without child tax credit. It also has been alleged that the number entitled to tax credits was adjusted, which made the target easier to hit.

Experts are further concerned that problems in administering tax credits -Êsuch as computer failures, unanswered phone calls and an official inquiry into how things have gone wrong - deter more people from claiming. While matters have improved, advisers report that there are still significant problems with the Inland Revenue's service. And experience shows that, past a certain percentage, it is more difficult to significantly improve take-up of means-tested benefits so, "huge success" or otherwise, there is no cause for complacency.

Next year's "reconciliation" process is also already causing anxiety. While some people will have a windfall because they were underpaid, the government estimates that about a million families will have to repay some tax credits next year (about quarter of those who now receive them). This could not only deter people from claiming again but can also cause them hardship -Êespecially for families who rely on tax credits as a major part of their income.

The reconciliation process became a political issue in the Australian tax credit system in 2001 and the government there had to grant an amnesty, in effect, to manage widespread discontent. In the UK, the rules allow an increase in income of up to £2,500 a year without an overpayment being generated and this reduces the chances of an Australian-style reaction. But matters may still become volatile next summer when reconciliation notices are issued. In response to these concerns, the Treasury has made assurances that the Inland Revenue will be "flexible".


There is also anxiety about the need for some families to claim both child tax credits and income support from next April. Although the IFS believes that a big selling point of the tax credits is that the sytem is simpler than before, people may still become confused by the new rules. The Department for Work and Pensions will also have to ensure that their staff are well trained and are allowed enough time to give sound and helpful advice and support with claiming multiple benefits and tax credits -Ênot areas where they have a good record.

The principles underpinning tax credits do receive some support. Mike Brewer, senior research economist at the IFS, says: "The 'per child' element of tax credits is very well targeted at poor households and is more effective then a simple increase in child benefit. However, this assumes there is very good take-up by those entitled and there is still a need to increase the tax credit rates in order to hit the child poverty targets." Barnes echoes this: "Although we would prefer a solution which wasn't based on means tests, we welcome the tax credits." But he adds: "The child elements of the tax credits need to be at least £5 higher a week if they are to be effective in addressing poverty." To highlight this, the Child Poverty Action Group has launched a campaign called Make it a Fiver Gordon. The Treasury says this is being considered.

Other concerns centre on the poverty trap effects of the means test - where people's income increases but they lose benefits, leaving them little or no better off. The IFS concludes that tax credits provide financial incentives to work that are "relatively small in magnitude". The DWP's own data show there are now fewer people in the poverty trap than in 1997, but many people moving into even modestly paid work still see only marginal gains in real income. It has long been acknowledged that non-means-tested benefits are more effective at removing the poverty trap because they do not decrease as income rises.

So what is the early verdict on the maiden voyage of the government's child poverty flagship? It has made it out of the harbour, having hit some boats, but might run short of fuel. Beware icebergs.

Neil Bateman is a freelance writer, trainer and adviser specialising in welfare rights and social policy issues. www.neilbateman.co.uk


Tax credits

• The working families' tax credit, the children's tax credit and the disabled person's tax credit were replaced in April by the child tax credit and the working tax credit.
• The child tax credit is for families with at least one child. It is paid at a higher rate if the child is disabled and at an enhanced rate in the case of severe disability. The child tax credit, with the child care element of the working tax credit, brings together all income-related support for children into a single payment.
• The working tax credit is for people in paid employment. It is paid to parents on low to medium wages who work at least 16 hours a week. Within it is an element that can be used to pay for child care as long as it is provided outside the home and in a registered setting, such as a childminder, a school club or a day nursery. The tax credit meets up to 70 per cent of the cost of child care, up to £135 for one child and £200 for two or more children a week. The working tax credit goes directly to the main carer rather than through the salary of the main earner.