Work doesn't pay for some after Council Tax policy change
11 March 2014
The Public Accounts Committee publishes its 48th Report on Council Tax support.
The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:
"When the Government transferred responsibility for Council Tax support to 326 local authorities in April 2013 it intended that the reform supported the work incentives it seeks from its wider welfare reform.
But we found in 19 local authority areas, up to 225,000 people could lose more of their earnings – as a result of Income Tax and National Insurance contributions combined with the withdrawal of Council Tax Benefit and Housing Benefit – than under the previous national scheme.
This just goes to show, for some, work simply doesn’t pay under the new scheme. For them, work incentives have actually weakened rather than strengthened – the opposite of what the Government intended.
Some of those 225,000 people stand to lose 97p for every extra £1 earned – a fundamentally perverse result.
When the scheme was introduced, local authorities were also tasked with protecting vulnerable people such as poorer families, despite the fact that savings had to be made.
However, many local authorities have passed on some or all of their reduction in funding for Council Tax support to local claimants by reducing entitlement to support.
Around 230 local authorities introduced schemes which required claimants to pay minimum Council Tax payments. Of these, 133 local authorities offered no protection to vulnerable groups, other than pensioners and war pensioners.
DWP on the one hand wants to simplify benefits by merging six benefits into the new Universal Credit. Yet here DWP and DCLG are complicating matters by localising Council Tax support. They will have their work cut out to make sure the 326 separate Council Tax support schemes interact effectively with Universal Credit.
DCLG must set out a timetable and terms of reference for the independent review it plans, taking in the important points we have raised."
Margaret Hodge was speaking as the Committee published its 48th Report of this Session which, on the basis of evidence from the Department for Communities and Local Government (the Department), examined Council Tax support.
In April 2013, the Department transferred responsibility for Council Tax support to 326 local authorities. The Department had four main objectives for this policy: to transfer the system to local control; to make savings; to protect vulnerable people; and to support work incentives for claimants created by the Government’s wider welfare reforms. Each local authority now has a duty to design and implement a local Council Tax support scheme.
Previously Council Tax Benefit, a national scheme, had been claimed by five million people in 2011-12, at a cost of £4.3 billion. Alongside transferring responsibility, the Department also reduced funding to local authorities for Council Tax support by 10% in 2013-14, delivering a £414 million saving for central government. Local authorities have differed in how much of the reduced funding they have passed on to claimants through reduced entitlements.
The Department’s interventions to ensure that local authorities’ Council Tax support schemes support all four of its policy objectives have been inconsistent. Contrary to the Department’s intentions, many local authority schemes have not protected vulnerable groups other than pensioners and war pensioners, while some have weakened work incentives, undermining Government’s determination to reform welfare to make work pay. In 19 local authority areas, individuals will lose more - through the combined impact of Income Tax and National Insurance contributions and the withdrawal of Council Tax Benefit and Housing Benefit – than under the previous scheme, with some losing 97p for every extra £1 earned. However, we were unclear in what circumstances the Department would intervene. Although the Department told us that scheme designs are a local decision, it did intervene in 2012-13 with a Transitional Grant when it realised that many planned local schemes would significantly reduce the support for vulnerable claimants. It also told us it was dissatisfied that 22 local authorities had introduced schemes that counted child maintenance payments as income when calculating Council Tax support entitlements, but it had no plans to intervene in these cases.
Recommendation: The Department should develop a coherent set of guidelines which set out the extent of local authorities’ discretions and obligations, and how the Department will respond when it considers that local authorities’ actions jeopardise the achievement of its objectives, especially on welfare reform and incentives to work.
The Department does not yet fully understand the combined impact of the new Council Tax support schemes and other welfare changes on the demand for local services and the funding of local authorities. Council Tax support is one of several welfare changes, such as the benefit cap, which the Government has recently introduced, which, along with the localisation of and funding reduction for Council Tax support, do not affect all local authorities equally. We are concerned that the combined impact of welfare changes can lead to increased demand for local services, such as temporary accommodation and housing. There is a risk that local authorities do not have sufficient flexibility to manage demand, given the wider reductions to their funding. The Department has started working with the Department for Work & Pensions and local authorities to understand the cumulative impact of these changes, but it has not yet calculated their effect on local authorities’ costs, to inform government’s decisions on future local authority funding.
Recommendation: The Department should assess the combined impact of Council Tax support and other welfare changes on demand for local authority services and the funding of local authorities to help inform government’s future decisions on funding changes affecting local authorities, including how the impact varies across local authorities.
The Department’s funding of local authorities’ additional costs resulting from the introduction of local Council Tax support is based on estimates that do not cover all the costs. The Department is committed to funding local authorities for their additional costs resulting from the design, implementation and administration of Council Tax support schemes, and it is paying them £98 million of ‘new burdens’ funding for the first two years of the policy. However, this funding is based on an estimate the Department made in 2012, before local authorities had a firm understanding of the actual extra implementation and administration costs. In addition, the Department did not include local authorities’ increased Council Tax collection costs in its estimate, even though evidence suggests that these costs are increasing because, in many areas, Council Tax is now being collected from people who were previously exempt from paying under the former Council Tax Benefit. The Department is planning to reassess the funding now that better data are available.
Recommendation: The Department should work with local authorities, using data from the first year of schemes, to recalculate its funding of local authorities’ additional burdens, including recurrent increases in collection costs.
The Department does not have enough information about what impact local scheme choices have had on vulnerable groups. We are concerned that some local authorities’ schemes have had an adverse impact on vulnerable groups, such as poorer families. In 2013-14, an estimated 230 local authorities (71%) introduced schemes which required minimum Council Tax payments from claimants. Of these, 133 local authorities offered no protection to vulnerable groups, other than pensioners and war pensioners. And despite the incentive offered by the Transitional Grant to limit minimum Council Tax payments to 8.5% of an individual’s Council Tax bill, 114 local authorities implemented schemes with minimum payments between 12% and 33%. The Department, however, has not collected detailed information about local schemes and is therefore not well placed to understand the breadth of schemes and their impacts on vulnerable groups.
Recommendation: The Department should collect information that supports a comprehensive analysis of the financial impact of Council Tax support schemes on vulnerable groups, including the number of people and types of claimants affected, and regional variations.
Ensuring that Council Tax support schemes interact effectively with Universal Credit is a significant challenge for the departments involved. The Department for Work & Pensions currently expects process efficiencies within local authorities of up to £565 million per year once Universal Credit has been implemented. This saving depends on local authorities having access to Universal Credit assessment data when calculating Council Tax support entitlements, thereby removing the need to duplicate the whole assessment process. The Department for Communities and Local Government recognises that establishing effective data sharing arrangements between Universal Credit and 326 Council Tax support schemes will be a complex task, but it has not set out any plans for how it will achieve this.
Recommendation: The Department and the Department for Work & Pensions must develop and publish clear plans for establishing data sharing arrangements between Universal Credit and Council Tax support schemes.
The Department’s planned review of Council Tax support is an opportunity for it to reassess the programme and ensure it meets the Department’s objectives. The Local Government Finance Act 2012 requires the Department to set up an independent review of Council Tax support schemes within three years of the Act coming into effect. The review will consider the efficiency and effectiveness of schemes, their impact in terms of localism, and the interaction of Council Tax support schemes with Universal Credit. However, the Department has not yet established the precise timetable for the review. As the Department does not currently collect detailed information about local schemes, it is not well placed to understand the full impact of the policy on claimants.
Recommendation: The Department must set out a timetable and terms of reference for the independent review, which should include coverage of the points we have raised. It must also establish and collect the information the review will need, both to answer the questions set by legislation, and to assess the extent to which the Department has met its policy objectives for this reform.