Band aid for Council Tax Reduction?

January 29, 2019 – Phil Agulnik
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This article originally appear in the Institute of Revenues Rating and Valuation's Benefits Advisory Service magazine February 2019 issue. 

The growth in the number of people on Universal Credit (UC), and greater understanding of its effects, means many local authorities have decided to change their Council Tax Reduction (CTR) scheme this April.

The problem: administration costs under UC

The most pressing effect of UC on CTR schemes is that it means administration costs become a much more significant burden than was the case under legacy benefits.  The reasons are largely technical, as detailed below, but the result is that local authorities need to ‘delink’ their CTR scheme from UC to keep administration costs down to sensible levels.

There are two reasons why CTR administration costs are more significant under UC. The first is that because Housing Benefit and CTR are no longer co-administered, arithmetically it is bound to be the case that administration costs become a higher proportion of the total. In other words, because the value of Council Tax is substantially lower than the cost of rent, fixed administration costs are spread over a lower benefit spend and so rise as a percentage. In effect, an unintended consequences of UC is that it has left help with Council Tax orphaned, no longer able to ‘piggy-back’ on Housing Benefit.

The second reason is that, unless a way is found to untie the CTR scheme’s income assessment from UC, costs per claim are likely to be higher for UC cases. The reason is that, where a claimant is receiving UC, income for CTR is determined by UC’s monthly assessment system. However, as has been well documented, UC relies on a monthly earnings period that does not allow for any form of averaging from month-to-month. This often has the effect of creating variations in earnings (as measured for UC/CTR) as an artefact of UC’s measurement period. 

For instance, monthly earnings for UC systematically vary for anyone who is paid weekly, owing to the fact that some months have 5 weeks and some have 4 weeks. As there is no averaging provision in UC, this therefore creates automatically-generated variations in reported earnings from month to month for everyone paid weekly, even when their actual earnings are constant. As the issue also affects people who are paid monthly at a date that does not synchronise with UC, such as people who are paid on the last Friday of the month, this problem of artificial earnings variation under UC is far from trivial.

There is also an issue with the administration system DWP uses to communicate changes of circumstance. Wolverhampton’s consultation on changes to their scheme made the following comment that neatly sums up the problem: “If we do nothing, there would be a significant increase in workload from recalculating council tax support every time UC changes…..Every change in income or circumstance of any member of the household triggers a reassessment of council tax support, regardless of whether it leads to a change in entitlement. Any change in entitlement, regardless of how small, triggers a revised council tax bill and potentially resetting of recovery action.” However, DWP have recognised this issue and claim that the problem of redundant change of circumstance notifications being sent out will be dealt with through an imminent software change.

Are income-banded CTR schemes the solution?

The key idea behind income-banded CTR schemes is that they create an easier way of administering help for people who are in work. As we have seen, the problem is that UC creates too many occasions where an intervention has to be made to alter the CTR assessment that is either completely irrelevant or too small to be worth administering. To get round this, income-banded schemes replace the benefit withdrawal taper with income bands so that gradual changes in entitlement, as earnings change, are replaced by a series of plateaus and cliff-edges. Variations in earnings that do not cause the claimant to cross an income band can therefore be ignored, hence reducing the cost of administering in-work CTR claims.

Clearly income-banded CTR schemes are one way of dealing with the issues created by UC, but there are numerous alternatives. One change that focuses on the problem of there being too many changes of circumstance notifications is to introduce a de minimis rule, as Wolverhampton have done.  This deals with administrative burden of UC through making it easier to ignore notifications from DWP, with local CTR policy making it possible for staff to use common-sense when assessing whether they need to reassess an award.

Another way of dealing with the issues created by UC is to change the basis for measuring earnings. Rather than measuring claimant earnings through the information coming from UC, earnings could instead by defined by the CTR scheme itself. This allows administrators to use longstanding mechanisms for averaging earnings, which have been lost under UC, to avoid constant re-adjustments for in-work claimants. More radically, earnings could be measured over a longer period, at the extreme moving to an annual assessment using HMRC definitions for income and earnings.

A final way of dealing with the issues created by UC would be to get rid of the earnings taper altogether and just make CTR a passported benefit, like free school meals or the NHS low income scheme. The problem facing CTR schemes under UC is that they are not really big enough to merit a full-blown means-test. As the amount of Council Tax relieved by CTR is generally below £20 a week, the same amount as the value of free school meals for two children, it is not difficult to argue that the benefit is small enough to be passported. In the end the simplest income-banded scheme could just involve a single earnings cut-off set at the same level as free school meals, £7,400 a year in England. Certainly it would be unfair to people just over the cut-off, and would do nothing for work incentives, but it would at least be simple to understand and cheap to run.

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