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The childcare tax credit. Mike 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. What’s wrong with the childcare tax credit (1).
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The childcare tax credit Mike 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
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?)
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)
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
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”
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
