Fair share of – the credit?

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.