Growing numbers of nursery providers claim that working tax credits are having a negative impact on their businesses and are failing to help the parents and children they are designed for.
Since they were introduced in 2003, credits have been dogged by poor administration, complex systems, poor explanatory information, long delays in resolving problems and high levels of overpayment and recovery.
Despite some recent administrative improvements, many claimants still experience great difficulty in accessing tax credits and many who would benefit from them most are now deterred by the possibility of having to pay large sums of money back.
On the supply side, the experience has been equally fraught. Some nurseries have run into thousands of pounds' worth of debt because parents have hit problems of overpayment or failed to pass their contributions on.
But something is now being done to examine this unhappy state of affairs. At the beginning of June, HM Revenue and Customs (HMRC) announced a consultation to explore a range of reforms to the tax credit system, including an option to pay credits directly to childcare providers themselves.
In the 'Tax credits: improving delivery and choice' consultation, HMRC looks at a number of options which could potentially improve the tax credit system. These include aligning the entitlement with the school year to give greater stability for parents, basing entitlement on the previous year's income, and making payments directly to the childcare provider through a voucher or credit system, or even direct funding.
The National Day Nurseries Association was the first to welcome proposed changes to the system - particularly that there should be a move to supply-side funding. However, it also recognises that there are many issues to be resolved, not least with regard to administration.
Funding nightmare
NDNA chief executive Purnima Tanuku emphasises that her organisation has long been campaigning for a better system, on the basis that the existing one does not seem to be working effectively for anyone involved.
'Parents who need credits still don't take them up,' she says. 'On the other side of the coin, there is also a lot of fraud, where parents are booking places, not taking them up and using the money for something else.
'An issue for us is that nurseries are currently having to cope with so many different funding streams - including credits, childcare vouchers and the NEG - and it is creating an administrative nightmare.'
Ms Tanuku acknowledges that tax credits present a complicated scenario. 'There are no clear answers at the moment as to how credits could best be handled. It is important there is no stigma attached to parents in claiming their credits and it's important that more parents are encouraged to benefit from them.
'The very fact that the Treasury has recognised there is a problem at least means we can move forward. It is a case of investigating all the possibilities and finding out what our members want, and what they think might work.'
Mounting debts
Despite administrative issues that still need to be resolved, the NDNA remains firm in its belief that making payments directly to providers is the way to go. The experience of many members over the years proves that tax credits are losing them money, rather than helping them to be sustainable.
At Tiny Tots Nursery in Prestatyn, north Wales, manager Tina Jones says, 'Parents come and book their children in, they pay for a week and then we don't see them again.
'They are claiming for a full place but not fulfilling it, and as a result the provider is running up huge bills. We currently have nine claims going through the small claims court. It is a huge waste of time, money and nursery places.'
Ms Jones says the tax credit factor has been single-handedly responsible for running up debt in her business.
'We had no experience of debt before tax credits were introduced, but in the past year we have had to write off £2,000, and have spent a lot going through the small claims court. It seems there are huge loopholes for parents to get away with using the money for other things.'
Those other things can be holidays and anything but childcare, according to Karen Veitch, who runs the Emerald Nursery in County Durham.
'The situation for my nursery and many others in the surrounding area is frustrating,' she says. 'There are two extremes in our experience. There are the parents who are genuinely stressed because they have been told they have been overpaid and are struggling to deal with that, and those who are fraudulent.'
More flexible system
Nurseries who have encountered difficulties with tax credits are not yet clear on the kind of system that might work best for them.
Ms Veitch says, 'They are already coping with a variety of funding streams - from Care to Learn, for young parents who are in training, the Nursery Education Grant and nursery vouchers. Most of them say, don't give us any more administration.
'What we need is a highly responsive, flexible system that allows parents choice. At the same time, nurseries have to be prepared to be a part of that system which will involve their input and willingness to be flexible as well.'
On balance, Tina Jones at Tiny Tots Nursery says she is is in favour of supply-side funding, 'providing it is carried out more efficiently than the voucher system. Identification needs to be much stronger so that it is easy to process payments.'
Purnima Tanuku reiterates that any solution to the tax credits tangle will have to be approached with caution.
'While we do welcome payments being made directly to the provider, it is important that implementation and processes are carefully considered to ensure that it does not become a huge administrative burden, with providers spending excessive time sorting issues and payments,' she says.
At the end of the day, tax credits are there to benefit children and provide quality care.
But Ms Jones worries about what is happening to the children when parents are claiming the full amount of their tax credits and only using 80 per cent of it on childcare. 'It is cause for concern when children come to the nursery for just a few days and then do not appear any more,' she says.
'You wonder how they are being cared for and who is looking after them, when parents have claimed the money and it is being spent elsewhere.'
ALTERNATIVE SYSTEMS
The NDNA recently held a national forum to gather views from its members about reforms to the tax credits system. They were overwhelmingly in favour of a move to supply-side funding.
Options which HMRC is consulting on include:
- Basing childcare support on actual costs incurred, making it easier for customers to calculate the amount of support they are entitled to. This would mean providing more information to HMRC, more frequently
- Income bands, making it easier for customers to calculate the amount of childcare support they are entitled to receive. But, depending on the width of income bands, this could create some disincentives to progress in work.
- Aligning with the school year and basing entitlement on the previous year's income makes it easier for customers to calculate the amount they are entitled to, and provides more certainty. It could result in loss of responsiveness to income falls.
- Making payments directly to the provider, ensuring childcare support is only spent on registered childcare providers and giving customers more security in knowing that childcare is registered and approved. But this takes financial control for childcare support away from the parent, and there is a potential for stigma.
- Making payments to customers through a voucher or credit system, ensuring childcare support is only spent on registered and approved childcare providers. This has potential for stigma by making support visible to providers. It could also create risk of fraud through a secondary market.
The consultation closes on 5 September. Go to www.hm-treasury.gov.uk/media/D/3/tax_credits-no12.pdf.
