FactCheck: Would tax relief on childcare be fairer?
Updated on 20 June 2006
Universal tax relief could mean less for those who really need help.
The claim
"We must look at the fact that a working man can get tax relief on his mobile phone bill, but a working woman can't get tax relief for someone who looks after her child.
"Tax relief on childcare for working parents would end this unfair anomaly and this is something that our policy review will be investigating."
David Cameron, leader, Conservative Party
GMTV, 20 June 2006
Background
David Cameron made the claim ahead of a speech to the National Family and Parenting Institute in which he laid out the Conservative Party's plans for childcare and family-biased legislation.
In his speech he described the current system for childcare, based on childcare tax credits, as "symptomatic of a top-down approach".
He pointed out that less than a quarter of low income families that claim both the child tax credit and the working tax credit also claiming the childcare tax credit element too.
Mooting the need for a simpler system, he said that tax relief for childcare would end the current anomaly that tax can be claimed back for a mobile phone bill but not for childcare.
Analysis
Openly pinching policy from Germany's Chancellor Merkel the Tory party is reviewing the possibility of giving transferable tax allowances to married couples - and couples in civil partnerships with young children - and also introducing tax relief on childcare for working parents.
Specific ideas they may be, but anyone expecting more flesh on the bones will be disappointed.
"These ideas are not detailed policy," said Cameron's spokesperson. "We're floating an idea for discussion."
It is not clear at this stage whether tax relief for childcare would be universal, or indeed, whether more money would be made available to fund it.
Tax relief would mark a departure from current childcare policy, which revolves around Working Tax Credits, and is, in the main, targeted towards those (working) couples that need it most.
The childcare element of the Working Tax Credit scheme now helps with up to 80 per cent of the costs of childcare to a maximum cost of £175 a week for one child and £300 a week for two or more children. To claim the child care element a lone parent must work for over 16 hours a week. Couples claim if both work for over 16 hours a week or if one works for over 16 hours a week and the other is incapacitated, in hospital or in prison.
The system is fairly complicated and restrictive and those eligible cannot spend the money on informal childcare.
The only form of childcare-related tax relief currently available is an employee-based voucher system, introduced a year ago, which allows parents to get up to £55 a week to put towards childcare. Anecdotal estimates suggest around 100,000 people are claiming them. An employer needs to either provide childcare or purchase it on the parents behalf and some believe it is too admin-heavy for many employees.
While not direct tax-relief this is the nearest direct tax policy for childcare in the current system.
Benefits of more widespread tax relief for childcare would mean that the system would be simplified and that the types of childcare it was used towards could be broadened. Informal childcare, such as that provided by friends or relatives, could be included.
It is true that the current system is limited. Around £1bn is divided between just 375,000 families who get an average of £50 per week.
Since childcare tax credits were introduced the use of childcare has been increasing, but it is those in the middle income that are taking it up most.
Recent research from the IPPR shows that in a given week 52 per cent of families with a yearly income of £32,000 or more had used formal childcare compared to 31 per cent of those earning £10,000 or more.
"It's very generous but goes to only a relatively small number of people," said Mike Brewer, programme director of direct tax and welfare at the Institute of Fiscal Studies.
But broadening the system is not likely to make it fairer. Indeed in creating a simpler system based on tax relief there is a danger that it will benefit those who need it least, with those at the higher end of the income spectrum getting the highest level of tax relief.
If the Tories use the same pot of childcare funding currently available, expanded to support 3.2m working mums, each would get just £280 per year. Introducing informal childcare into the system would reduce the standard of childcare, the IPPR claims, and it does not believe that tax relief would make the current system fairer.
"If by fairness you mean those that need it most then the answer is no. If you mean fairness in that it improves the quality of childcare then the answer is no. If you mean a simpler system will be introduced then the answer is yes," says Graeme Cook, research assistant, social policy at the IPPR.
The IPPR has a more radical idea for expanding the current system to tax credits for childcare while targeting those in most need. It suggests that entitlement for financial support with childcare costs from the Working Tax Credit to the Child Tax Credit scheme.
It says that four categories of families are missing out under the current system - lone parent families, families that have children with special needs and need higher childcare costs, those living in workless households and those in large families. By widening help with the cost of childcare in this way, a further 4.7m families would be helped.
Verdict
Tax relief would expand the amount of people eligible for childcare and make the system simpler, but those that most need childcare are likely to be disadvantaged, while those earning more would be better off.
So David Cameron is entitled make a play of this 'unfair anomaly' between mobile phones and childcare but in proposing tax relief for childcare he may be introducing something that will ultimately be less fair than what we have today.
FactCheck Rating: 2.5 (How ratings work)
Sources
Reforms to Childcare Policy, Mike Brewer, Claire Crawford and Lorraine Dearden, Institute of Fiscal Studies, 2005
Hughes welcomes healthy childcare market, Department for Education and Skills press release, 25 May 2006
Equal access? Appropriate and affordable childcare for every child, Kate Stanley, Kate Bellamy and Graeme Cooke, IPPR, June 2006
Related links
Cameron proposes tax relief on childcare, 20 June 2006
Budget 2006 Special Report
Hewitt caught out in childcare claim, 31 March 2005
Your view
You've read the article, now have your say. We want to know your experiences and your views. We also want to know if there are any claims you want given the FactCheck treatment. Email factcheck@channel4.com
FactCheck will correct significant errors in a timely manner, Readers should direct their enquiries to the Editor at the email address above.
