CVPA Briefing on Tax-Free Childcare

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CVPA Briefing: Childcare Payments Bill

On 18th March 2014 the Government outlined its proposals for Tax-free Childcare (TFC) and the Childcare Payments Bill, giving effect to the scheme, was introduced in Parliament on 5th June 2014. The Childcare Voucher Providers Association (CVPA) has welcomed elements of the proposed TFC scheme, notably extending support to the self-employed and those on the national minimum wage. 

However, the CVPA continues to hold strong concerns regarding the introduction of TFC. The CVPA believes the way the Government has designed TFC, and how it plans to deliver it, call into question the Government’s ability to ensure working parents receive the financial support they are entitled to.

Our concerns

The CVPA is particularly concerned about the following aspects of the TFC scheme:

·      All parents in a household must be working in order to claim TFC:

    Unlike the existing system of Employer-supported Childcare (or ‘childcare vouchers’), all parents in a household will have to be working in order to claim support under TFC

    With childcare vouchers, households that have a parent who is not working are entitled to some support and households with all parents working are entitled to a greater level of support.

       Under TFC, households where there is a parent who is caring for a relative or who is in education or training will not be entitled to any support whatsoever.

     The government’s decision to offer support under TFC only to those households where all parents are working suggests the government is making unhelpful value-judgements about families where one or both parents may not be in work, including those where one parent is in education or training. 

·      TFC is more regressive than the existing childcare vouchers system:

        Although the Government is providing more money for childcare, the proposed Tax-free Childcare system is more regressive than the existing system of childcare vouchers.

        The level of support parents can access through the current childcare vouchers scheme is dependent on their income – basic rate tax-payers (80% of the users of the current scheme) are able to claim more than higher rate tax-payers. The support that will be available through TFC, however, will be dependent on their childcare costs per child, rather than their income. In order to qualify for the full £2,000 a year level of support, their childcare costs for one child would have to be £10,000 a year. This significantly exceeds the average spend on childcare (currently estimated by the Department for Education to be £5,030) – particularly for three- and four-year-olds who have access to 15 hours a week of free childcare. A two-parent working family with two children and a combined income of £290,000 would be able to access more support than a one-child family with a combined income of £40,000.

–      The CVPA conducted a survey of working parents and received over 23,000 responses from voucher users, which showed that only 18 per cent expect that they will be better off under TFC, compared to the current childcare vouchers scheme. 

        The Family and Childcare Trust’s report ‘Where next for childcare: Learning from the last ten years of childcare policy’ warns that the impact of new support will be substantially reduced by price inflation; while the proportion of costs paid by families will reduce, the cost burden for many families will increase. As the level of support available to parents will be tied to how much they spend on childcare, childcare providers will take the opportunity to increase their costs.

·      TFC will place a greater burden on parents:

     The success of the childcare vouchers scheme is based on its use of a closed-loop salary sacrifice mechanism, operated by childcare voucher providers. This makes the scheme simple for parents, removes the possibility of fraud and error for Government and the taxpayer, and crucially ensures that payments are received promptly by childcare providers. Equally as vital, there is no financial burden to employers, as they save on their employer National Insurance Contributions (NICs).

      TFC will shift the administrative burden onto parents, who will have to open and maintain accounts through a Government portal, provide information to confirm their eligibility, and validate information on a quarterly basis. The Childcare Payments Bill (Clause 15) proposes that separate accounts will have to be maintained, and funds ringfenced, for each child in a family that support is being claimed for. This represents a significant burden for working parents, and a far more onerous customer journey than exists under the childcare voucher system. Childcare voucher providers have, through years of experience and the existence of competitive pressures, provided parents and employers with a high standard of customer service.

        The CVPA’s survey of childcare voucher users has found that almost one-fifth of parents find the GOV.UK website ‘difficult’ or ‘very difficult’ to navigate.

        The Childcare Payments Bill (Clauses 41 – 47) outlines the penalties of up to £3,000 which can be imposed on parents by HMRC for making inaccurate declarations, failing to comply with information notices, or providing inaccurate information or documents. The Bill (Clause 50) also allows HMRC to charge interest on recoverable top-up payments or outstanding penalties. Unlike childcare voucher providers, the majority of parents are not used to dealing with the bureaucracy that is involved with maintaining childcare accounts and the CVPA is concerned that working parents may incur penalties for failing to correctly carry out the revalidation every quarter.

·      TFC will remove the valuable role that employers currently have:

        Through operating as a salary sacrifice employee benefit, childcare vouchers have played a vital role in encouraging businesses to play a more active role supporting employees’ childcare needs. TFC removes this employer-link and risks undermining existing engagement from businesses in proactively assisting their staff who need to return to, or remain in, paid employment.

        The existing employer-supported childcare scheme initiates an important dialogue between employers and their staff around family friendly working practices. Removing employers will have a detrimental impact on their recruitment and retention strategies. Similarly, employers are vital in promoting childcare vouchers, and therefore increasing their uptake. Not including them in the take-up of TFC will remove this promotion of the scheme, potentially impacting take-up.

    Employers save money on their NICS under the current system of childcare vouchers. TFC will remove this support and cost employers an average of £402 per employee. The loss of this money will have an impact on businesses. For example, many public sector employers, such as NHS trusts, who offer childcare vouchers the loss of this funding will further exacerbate stretched budgets.

         The CVPA’s survey of voucher users found that fewer than nine per cent of parents think that removing the role of the employer is a good thing.

·      The Government has selected NS&I to deliver TFC:

    Going against independent economic advice that it paid over £37,000 for, the Government has selected National Savings and Investments (NS&I) as the sole operator of the TFC scheme.

        The Government has not published a cost-benefit analysis to support its decision. This represents a worrying lack of transparency and potentially a failing to deliver best value for money for the taxpayer.

       The selection of NS&I stands in contrast to stated Government policy to support SMEs at a time of economic uncertainty through providing greater access to public sector procurement.

        63 per cent of parents want to have a choice of childcare benefit providers, with only 36 per cent opting for a single HMRC-led provider such as NS&I.

       A CVPA survey of childcare providers received over 900 responses and found that 56 per cent believe that the risk of payment failure will be increased if there is a single, public sector, provider of TFC.

        Furthermore, over 71 per cent of childcare providers believe that it would be beneficial to have TFC delivered in a competitive market, rather than by a single provider.

·      NS&I will need to build the IT systems to deliver TFC:

        Unlike the providers operating in the childcare voucher market, it is questionable whether NS&I has the necessary IT infrastructure to deliver TFC. This infrastructure will have to be delivered before autumn 2015 in order for TFC to be implemented on time. Any budget overruns in building the IT infrastructure risks taxpayer’s money.

        The IT systems required to deliver TFC will have to be capable of receiving funding from both Government and parents, and paying money to childcare providers. Furthermore, these IT systems will have to be able to interoperate with the existing childcare voucher system and the universal credit IT systems.

·      TFC will be delivered by Atos:

        NS&I outsources 90 per cent of its operations to Atos. Atos have been forced to abandon its contract in delivering the Government’s Work Capability Assessments due to poor performance.

Call to action

Not all parents will be better off under TFC and the scheme, as currently designed by Government, will be burdensome for parents to administer. Furthermore, it’s unclear that the scheme can be delivered by autumn 2015.

Therefore the CVPA is calling for the existing childcare vouchers system to be allowed to continue in operation. There are currently around 600,000 parents that use childcare vouchers every month. Social Market Foundation research, based on the Family Resources Survey, has demonstrated that 83% of childcare voucher users are basic rate taxpayers, with the largest take up being among manual and unskilled workers.

By removing Clauses 62 and 63 of the Childcare Payments Bill, the Employer-supported childcare voucher system would be able to continue in operation, giving parents and employers choice and ensuring that everybody can access a childcare support scheme that meets their needs.

Contact

For any further information, please contact the Childcare Voucher Providers Association.   [email protected]

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