© Institute for Fiscal Studies

The childcare tax creditMike Brewer

Daycare Trust seminar, September 16 2010

Overview

• What’s wrong with the childcare tax credit

• Subsidising childcare through a Universal Credit

• Need clarity on what trying to achieve

© Institute for Fiscal Studies

What’s wrong with the childcare tax credit (1)

• Given its objectives, it is complicated (administratively and structurally)

• Administrative complexity mostly through definition of “average weekly childcare costs”, and of keeping HMRC up to date– Leads to overpayments & losses to fraud and error

• Structural complexity because subsidy is a complicated function of family income, number of children and spending on childcare– Must surely makes accurate BOCs difficult (impossible?)

© Institute for Fiscal Studies

Why is the childcare tax credit so difficult to get right?

• Because it tries to be too “responsive” – CCTC entitlements supposed to depend on CURRENT

childcare costs and CURRENT family income. Neither of these are known by government in real-time

• To be simpler, try one or more of the following:– Entitlements based on past income– Entitlements based on past childcare costs– Pass part of cash-flow problems onto providers (eg replace

CCTC with a voucher (£/wk or % discount); providers are responsible for getting money from HMRC)

© Institute for Fiscal Studies

It is complicated to calculate entitlement...

© Institute for Fiscal Studies

It is complicated to calculate entitlement...

© Institute for Fiscal Studies

What’s wrong with the childcare tax credit (2)

• One can also quibble with its (presumed) objectives. Previous Govt stressed two things (with relative importance varying over time)– Help families (mothers) be able to afford to work– Makes formal childcare cheaper, which may benefit children

• But does each imperfectly– Doesn’t help families who don’t use formal childcare– Doesn’t help children of single-earner, no-earner or rich

families access formal childcare ; NB not conclusive that all forms of formal childcare beneficial for children (relative to parental care)

• So alternatives have been suggested– Replace (part of) it with higher WTC or even CTC– Replace (part of) it with higher, unconditional support for

high-quality formal care© Institute for Fiscal Studies

Subsidising childcare through a Universal Credit

• “21st Century Welfare” was very vague, but DWP very attracted to integrating all benefits and tax credits for working-age adults, including WTC

• Integration would require change to delivery. Ch5 outlines ideal system– Employers tell HMRC about earnings in real-time (monthly)– HMRC calculates liability to income tax and net entitlement

to UC– Overpayments should be much smaller; mostly for those

with other sources of income

• Hard to see how existing CCTC would easily fit into such a system– HMRC would need to know actual childcare costs in real-

time (perhaps providers could tell them?)

• Fall-back position is “a series of fixed-period awards”© Institute for Fiscal Studies

So where are we going?

• Absolutely no idea…• Would be nice to know how childcare pilots got on, but

Govt now distracted by weightier matters (ie reform of entire benefit and tax credit system)

• Probably makes sense to design Universal Credit and then see if a way of subsiding childcare costs for working families can be added on

• If Govt wishes something like CCTC to continue, then perhaps might have scheme where UC entitlement passports families to a % discount voucher, which providers responsible for cashing in

• But there many alternatives, and no reason to rule out more dramatic changes if new Government has different objectives.

• Whatever happens, need clarity on what trying to achieve© Institute for Fiscal Studies