Submission from the Low Incomes Tax Reform Group (LITRG) (1)
(Please note that we have continued our submission in a separate entry, marked (2)).
This is a response from the Low Incomes Tax Reform Group (LITRG), 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.
You can read more about us on our website, www.litrg.org.uk/about-us.
We welcome the dialogue in relation to how to ensure that all people in Scotland have an adequate income for living – that is, how to ensure that people are supported properly, at the same time as retaining (or improving) work incentives.
The Scottish and UK Governments will need to work together to enable Scotland to introduce a MIG. There will be many interactions between policy areas, both devolved and reserved; working to together will be essential to identify and deal with these interactions and unintended consequences.
There will be a number of considerations in relation to eligibility criteria, including whether entitlement should take into account income (gross or net, individual or household), wealth, and certain types of debt and expenditure, and whether it should be self assessed by an applicant. In addition, there will need to be a decision about the frequency of assessments and the degree to which rules which provide a MIG can or should flex to take account of variations in the individual’s own income levels.
There are likely to be risks in relation to perception, for example if some MIG recipients appear to be better off (taking into account financial and non-financial aspects of a MIG) than individuals or households not eligible for the MIG. This could lead to a removal of incentives to take on more work or stay in work.
In designing a MIG, we think there should be a focus on groups that may prove more difficult to reach or who may be less likely to claim the benefits to which they are entitled. This should cover thinking about how it might be possible to encourage them to claim and considering how to make it straightforward for them to claim. This might include those who feel a stigma associated with claiming social security benefits, but also those for whom English is not their first language and others who may find it difficult to actually make a claim in terms of completing the requisite forms.
It is important to think about administrative and operational matters of payment delivery at an early stage. Consideration will need to be given to issues like frequency of payments, delivery of payments, and flexibility. There will also need to be robust systems for dealing with both under- and overpayments, clear, fair and accessible processes for appeals and clear guidance. By its very nature, the MIG as proposed will need to involve means-testing. This can be complex and expensive to operate, with various practicalities to consider, and is therefore likely to reduce the efficiency of a MIG.
It will be necessary to give thought to the funding of a MIG. The Scottish Budget consists of three key elements: revenues from Scottish taxes, the block grant and limited borrowing. Existing devolved national tax powers do not offer much scope for raising significant additional revenues. The reform of council tax to make it more progressive might assist in raising more revenues for local authorities, but could also be used to provide elements of a MIG.
This is a response from the Low Incomes Tax Reform Group (LITRG), 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.
You can read more about us on our website, www.litrg.org.uk/about-us.
We welcome the dialogue in relation to how to ensure that all people in Scotland have an adequate income for living – that is, how to ensure that people are supported properly, at the same time as retaining (or improving) work incentives.
The Scottish and UK Governments will need to work together to enable Scotland to introduce a MIG. There will be many interactions between policy areas, both devolved and reserved; working to together will be essential to identify and deal with these interactions and unintended consequences.
There will be a number of considerations in relation to eligibility criteria, including whether entitlement should take into account income (gross or net, individual or household), wealth, and certain types of debt and expenditure, and whether it should be self assessed by an applicant. In addition, there will need to be a decision about the frequency of assessments and the degree to which rules which provide a MIG can or should flex to take account of variations in the individual’s own income levels.
There are likely to be risks in relation to perception, for example if some MIG recipients appear to be better off (taking into account financial and non-financial aspects of a MIG) than individuals or households not eligible for the MIG. This could lead to a removal of incentives to take on more work or stay in work.
In designing a MIG, we think there should be a focus on groups that may prove more difficult to reach or who may be less likely to claim the benefits to which they are entitled. This should cover thinking about how it might be possible to encourage them to claim and considering how to make it straightforward for them to claim. This might include those who feel a stigma associated with claiming social security benefits, but also those for whom English is not their first language and others who may find it difficult to actually make a claim in terms of completing the requisite forms.
It is important to think about administrative and operational matters of payment delivery at an early stage. Consideration will need to be given to issues like frequency of payments, delivery of payments, and flexibility. There will also need to be robust systems for dealing with both under- and overpayments, clear, fair and accessible processes for appeals and clear guidance. By its very nature, the MIG as proposed will need to involve means-testing. This can be complex and expensive to operate, with various practicalities to consider, and is therefore likely to reduce the efficiency of a MIG.
It will be necessary to give thought to the funding of a MIG. The Scottish Budget consists of three key elements: revenues from Scottish taxes, the block grant and limited borrowing. Existing devolved national tax powers do not offer much scope for raising significant additional revenues. The reform of council tax to make it more progressive might assist in raising more revenues for local authorities, but could also be used to provide elements of a MIG.
Why the contribution is important
Q. What do you see as being the key elements of a Minimum Income Guarantee?
The aim of a MIG appears to be to ensure that all people in Scotland have an income that allows them to access all their needs, thus resulting in a minimum acceptable standard of living for all.
As such, we think two of the key elements relate to the social security system and the tax system. This is not to the exclusion of other elements that may be able to play a role. In order to realise the aims of a MIG, it will be particularly important to consider how the tax and social security systems interact, both in terms of devolved powers and reserved powers.
Q. What do you see as the main benefits, challenges and risks of a Minimum Income Guarantee in Scotland?
As noted above, it will be necessary to carefully consider interactions between the tax and social security systems, both in a devolved and reserved powers context. This will undoubtedly pose a huge challenge, in order to prevent or minimise unintended consequences. Bearing in mind these interactions, the plan for a MIG needs both the Scottish and UK Governments to work together. We set out in the following paragraphs some specific areas that are likely to pose challenges.
Where benefits claimants have overpayments from earlier awards or arrears in relation to certain types of bills (including tax debt), they can face automatic deductions from their benefits. When establishing the level of a MIG, it will be important to consider (and explain) whether the level of MIG is a secure and reliable minimum amount or whether it will be vulnerable to any types of deductions. In addition, consideration would have to be given as to how a MIG would operate where a benefit such as Universal Credit is reduced by the recovery of a tax credit debt. The recovery of a tax credit debt would reduce the amount of UC received – would a MIG increase to compensate for this?
Similarly, in existing regimes, there are measures which withhold payment of benefit (to varying degrees) where there are matters relating to non-compliance with the eligibility rules, (for example, universal credit sanctions). When establishing the principles around a MIG, it will be important to establish whether penalty measures will be imposed that may reduce the level of MIG in any particular circumstance and, if so, whether there are any options to mitigate the loss of ‘cash’ with alternatives.
It should be noted that where an individual has taxable income that is less than the income tax personal allowance (£12,570 for 2021/22), income tax reliefs (which are not currently within the control of the Scottish Parliament) will not be of assistance. Similarly, the introduction of a nil rate band of tax (currently within the power of the Scottish Parliament to do) to effectively raise the level of the personal allowance, would not assist non-taxpayers. Moreover, a nil rate band alone would be poorly targeted, as it would benefit all Scottish income taxpayers.
Consideration needs to be given as to whether net income (after income tax and National Insurance contributions) or gross income is to be taken into account when determining eligibility for the MIG. If a taper rate is included as part of the MIG, as suggested in the report published by the IPPR, there are likely to be further complications in terms of the interactions between the income tax system and the MIG system, for example when there are changes to the income tax personal allowance or when a claimant’s level of earnings changes.
Where eligibility is reliant on income, it will be important to establish how the income level is measured, what income is relevant, whether any types of expenditure are relevant, and how temporary variations in income might affect eligibility. Also key, if using income as a qualifying measure, will be to establish whether the individual self-declares their income or whether other sources of income data are to be used, for example Government data held by HMRC or DWP.
There are likely to be challenges/risks around perception. There may be a perception of unfairness, particularly if some MIG recipients appear to be better off (taking into account financial and non-financial aspects of a MIG) than individuals or households not eligible for the MIG. This is likely to be a particular issue where there are cliff edge cut offs. There is also therefore a risk that it may remove incentives to take on more work or to stay in work for those currently in work at the lower end of the income spectrum.
As a result, it will be necessary to ensure there is a finely tuned balance between providing a reliable safety net and demonstrating the benefit of, say, moving into work or taking on more work.
It will be helpful to understand how and how often assessments will be made to establish payments. This can bring some challenges in terms of flexibility and short- and long-term changes of income circumstances.
It may be beneficial to ensure eligibility for the MIG is sufficiently flexible to tolerate some level of variations in circumstances which can come with the uncertainties of insecure work, those with variable capacity to undertake work and, sometimes, those who are self-employed who are susceptible to fluctuations in their income at any particular point in the year. Anecdotally, we hear from individuals that where support stops and starts each time there is a short-term spike in income (for example, a moderate bonus or overtime payment) this can be disruptive to household finances and can potentially lead to disincentives to take up opportunities for additional work/earnings.
Depending on the design and degree of support it is intended to provide, having a MIG could potentially result in unintended consequences. For example, if housing costs play a role in the level of support provided to determine the MIG this could bring inflationary pressures on housing costs etc. as landlords, for example, will be aware of the MIG and may adjust their rents accordingly. It may be possible to mitigate this type of effect by designing the composition of the MIG such that, where appropriate and viable, it is delivered through non-cash elements.
(Our response continues in a second submission).
The aim of a MIG appears to be to ensure that all people in Scotland have an income that allows them to access all their needs, thus resulting in a minimum acceptable standard of living for all.
As such, we think two of the key elements relate to the social security system and the tax system. This is not to the exclusion of other elements that may be able to play a role. In order to realise the aims of a MIG, it will be particularly important to consider how the tax and social security systems interact, both in terms of devolved powers and reserved powers.
Q. What do you see as the main benefits, challenges and risks of a Minimum Income Guarantee in Scotland?
As noted above, it will be necessary to carefully consider interactions between the tax and social security systems, both in a devolved and reserved powers context. This will undoubtedly pose a huge challenge, in order to prevent or minimise unintended consequences. Bearing in mind these interactions, the plan for a MIG needs both the Scottish and UK Governments to work together. We set out in the following paragraphs some specific areas that are likely to pose challenges.
Where benefits claimants have overpayments from earlier awards or arrears in relation to certain types of bills (including tax debt), they can face automatic deductions from their benefits. When establishing the level of a MIG, it will be important to consider (and explain) whether the level of MIG is a secure and reliable minimum amount or whether it will be vulnerable to any types of deductions. In addition, consideration would have to be given as to how a MIG would operate where a benefit such as Universal Credit is reduced by the recovery of a tax credit debt. The recovery of a tax credit debt would reduce the amount of UC received – would a MIG increase to compensate for this?
Similarly, in existing regimes, there are measures which withhold payment of benefit (to varying degrees) where there are matters relating to non-compliance with the eligibility rules, (for example, universal credit sanctions). When establishing the principles around a MIG, it will be important to establish whether penalty measures will be imposed that may reduce the level of MIG in any particular circumstance and, if so, whether there are any options to mitigate the loss of ‘cash’ with alternatives.
It should be noted that where an individual has taxable income that is less than the income tax personal allowance (£12,570 for 2021/22), income tax reliefs (which are not currently within the control of the Scottish Parliament) will not be of assistance. Similarly, the introduction of a nil rate band of tax (currently within the power of the Scottish Parliament to do) to effectively raise the level of the personal allowance, would not assist non-taxpayers. Moreover, a nil rate band alone would be poorly targeted, as it would benefit all Scottish income taxpayers.
Consideration needs to be given as to whether net income (after income tax and National Insurance contributions) or gross income is to be taken into account when determining eligibility for the MIG. If a taper rate is included as part of the MIG, as suggested in the report published by the IPPR, there are likely to be further complications in terms of the interactions between the income tax system and the MIG system, for example when there are changes to the income tax personal allowance or when a claimant’s level of earnings changes.
Where eligibility is reliant on income, it will be important to establish how the income level is measured, what income is relevant, whether any types of expenditure are relevant, and how temporary variations in income might affect eligibility. Also key, if using income as a qualifying measure, will be to establish whether the individual self-declares their income or whether other sources of income data are to be used, for example Government data held by HMRC or DWP.
There are likely to be challenges/risks around perception. There may be a perception of unfairness, particularly if some MIG recipients appear to be better off (taking into account financial and non-financial aspects of a MIG) than individuals or households not eligible for the MIG. This is likely to be a particular issue where there are cliff edge cut offs. There is also therefore a risk that it may remove incentives to take on more work or to stay in work for those currently in work at the lower end of the income spectrum.
As a result, it will be necessary to ensure there is a finely tuned balance between providing a reliable safety net and demonstrating the benefit of, say, moving into work or taking on more work.
It will be helpful to understand how and how often assessments will be made to establish payments. This can bring some challenges in terms of flexibility and short- and long-term changes of income circumstances.
It may be beneficial to ensure eligibility for the MIG is sufficiently flexible to tolerate some level of variations in circumstances which can come with the uncertainties of insecure work, those with variable capacity to undertake work and, sometimes, those who are self-employed who are susceptible to fluctuations in their income at any particular point in the year. Anecdotally, we hear from individuals that where support stops and starts each time there is a short-term spike in income (for example, a moderate bonus or overtime payment) this can be disruptive to household finances and can potentially lead to disincentives to take up opportunities for additional work/earnings.
Depending on the design and degree of support it is intended to provide, having a MIG could potentially result in unintended consequences. For example, if housing costs play a role in the level of support provided to determine the MIG this could bring inflationary pressures on housing costs etc. as landlords, for example, will be aware of the MIG and may adjust their rents accordingly. It may be possible to mitigate this type of effect by designing the composition of the MIG such that, where appropriate and viable, it is delivered through non-cash elements.
(Our response continues in a second submission).
by LITRG on September 15, 2021 at 12:59PM
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