Could you start by setting out your views on the move away from employer-supported child care towards the so-called tax-free child care system that is set out in this Bill?
Julian Foster: Certainly. The Childcare Voucher Providers Association is an industry body that was established to represent the views of voucher provider companies. We welcome the announcement of the additional support for working families that tax-free child care represents, particularly the expansion of the scheme to include the self-employed and those on the national minimum wage, which is something that we have been campaigning for for some time.
We are also pleased that the Government acknowledged the success of the existing employer-supported child care scheme with their intention to build on the framework that that had established with the new scheme. However, we have a few concerns about the implementation and design of the scheme, particularly around things like the removal of the valuable role that the employers play in the existing scheme, the comparative lack of progressivity in the new scheme, and the fact that many parents will not be eligible to receive the benefits of the new scheme or would be worse off under it. Finally, we are concerned about the complexity of the scheme itself and how it would operate.
Thank you. One of the concerns is that the new system will remove the role of employers within the scheme. In what way do you feel the current scheme supports and encourages family-friendly practices in businesses, and how should the Government look at the implementation of this new system to ensure that that is not lost?
Julian Foster: When we surveyed them, 94% of employers said that they feel they have a key role to play in ensuring that parents are aware of the support that they can receive through both the existing scheme and the new one. Parents have told us that they believe the employers should also be involved in the scheme. Only 9% of parents were in favour of the removal of the employer. Child care vouchers as they stand at the moment play a vital part in family-friendly policies in companies and are a key aspect of companies’ policies to help mothers return to work after maternity.
Given that the new scheme is likely in time to replace the voucher scheme completely, how could the benefits from the current scheme not be lost under the new scheme?
Julian Foster: I think that the role of the employers should be reviewed. I understand that there were concerns about whether it was an additional burden for employers, but certainly the employers we have spoken to—both small and medium-sized enterprises and multinational corporations—feel that it is something they should be involved in. Over 70% of companies tell us that they spend less than 30 minutes a month administering their existing scheme, so it is not a large administrative burden for them. Around 65% told us that they would wish to be involved even without a national insurance contribution saving such as there is on the current scheme. We feel that they have a vital role to play in this. It is not something that they would only do if they had a national insurance relief saving, as they do at the moment. They feel it is important to help them encourage mothers to come back to work after maternity leave and to be seen as having family-friendly policies within their company.
It is interesting that you mention the amount of time that employees currently spend administering the system. Obviously parents also spend some time administering it from their end. But I think it forms a useful comparison, because as yet the sort of time scales that might be involved in administering the new system are unclear. Regardless of that, are you aware of the views of parents about whether they would be better off under the voucher system or the proposed new system?
Julian Foster: We collected responses from more than 23,000 parents. Only 18% of them told us that they would be better off under the new system. That tallies with our expectations.
The extension to the self-employed is welcome. That is a group that has never had access to the scheme before. In the current scheme, over 80% of users are basic rate taxpayers. Broadly, 19.5% are higher rate taxpayers. We think that the way that the new scheme is structured, so that it is a match for what you are spending on child care, means that it will reward people who spend more on child care, who are generally the higher earners. If you are a basic rate taxpayer, your child care spend needs to be more than £9,330 a year for your family’s child care costs to be better under the new scheme. You would receive a match of £1 for every £4 on that spend of £9,330. At the moment, if you are basic rate taxpayers, you are both able to salary-sacrifice £243 a month, and that would give you a combined saving of £1,866, but on a much lower spend so ultimately, it is the basic rate taxpayers who are able to benefit significantly more than the higher rate taxpayers.
The average child care spend, according to the Department for Education’s own statistics, is just over £5,000 a year. I think the Family and Childcare Trust suggests that it is about £5,700, so we believe it is broadly within that ballpark. Anybody spending around that much on child care is unlikely to be better off under the new scheme than they are in the current one.
Julian, when you look at the basics of your business model, it is about taking a cut of a tax break designed to support families to fund your business. Can you tell the Committee how much of your profits come from that Government tax break?
Julian Foster: In terms of the UK business and the business unit that specifically runs child care vouchers, quite a large percentage of the profits is derived from that. I think the national insurance relief cost is about £138 million a year, based on the level of participation in the market as a whole. All of that goes to companies, but they invest a large percentage of that in other family-friendly policies. The average rates that are paid for child care voucher schemes at the moment are broadly 3% to 3.5% in the market, and it is driving down constantly.
Okay, that would be really helpful.
The thing that we were hearing about this morning from the National Day Nurseries Association and other people giving evidence was that the market is complicated and that parents have a lot to juggle, so they want a system that is easier. Parents really want to have something that is simple and straightforward. I do not know whether I am misinterpreting your proposals, but I do not see that they make life easier for parents; they seem to perhaps ignore that need for simplicity.
Julian Foster: The feedback that we have got, as far as parents are concerned, is that the scheme is very easy to use. They join through the company that their employer has appointed, so there is only one place that they would go to join. Once they have joined they elect a voucher amount, which is then deducted from their salary. There is actually no involvement from them in terms of making payments across to the voucher provider; it goes automatically. They set up regular standing payments to their carers in the same way that you would set up a standing order from your bank account, or they can make one-off payments. For most parents, there is actually no interaction on a regular basis at all.
Under the new scheme, not only would they then decide what that contribution was going to be when split down between their children, because they would have to operate a sub-account per child, they would also have a more complicated eligibility process to navigate. I think there is an A4 page detailing the information and the documents that they would have to provide to join. At the moment, the information that they provide to us is validated by the employer and so is not onerous for the parents. They would have to recertify on a quarterly basis that that was still the case, whereas at the moment they do not have to do any of that. All of their vouchers are accredited to one account, and they can choose to spend it for whichever child they wish, however they wish. Going forward, it is going to be ring-fenced on a per-child basis. I think that is more difficult for working families and parents to juggle and manage than simply joining through an employer’s scheme and having it deducted from their salary.
I guess what I was pressing at was having a multitude of different ways into getting tax breaks rather than having one way, which would be to have the tax-free child care through an account—
Apologies. What I was really pressing at was that parents want simplicity in the number of ways to get tax-free child care. One thing that some voucher providers have talked about—I think your organisation has as well—is actually delivering tax-free child care accounts themselves. We were hearing this morning from National Savings and Investments about the volume that this could entail: up to 1.9 million potential applicants. Indeed, that number could be even higher if applicants have more than one child. Are you sure that you can deliver that scale of operation, given that the number of people who currently get child care vouchers is significantly lower than that?
Julian Foster: Certainly. If you are looking at us and thinking that we are small or medium-sized enterprise, as a number of the voucher providers are, then that is a misapprehension. We are the world’s largest share registration company; we manage millions of records on behalf of multinational plcs around the world; we manage the deposit protection service for the Government; and we look after the Treasury gilts register. So we are quite capable—
Hi, Julian. I will declare an interest: I am a child care voucher user. It is a simple scheme for a large number of people who use it. On transferring that to the proposed scheme, have you done any analysis about the clearest loser group—single-earner families? Do you have any figures on how many single-earner families currently receive child care vouchers? As a sub-group of that, do you know how many families there are where one person works and the other is in training or education, who will therefore lose out under this scheme?
Julian Foster: We have not been able to get public statistics, but, based on the information that we have received from parents when we have asked them that question—23,000 responded to us—about 20% said that they already knew that they would not be eligible for the new scheme when it comes in. On the basis of existing child care voucher users, that is about 125,000 people. At the same time, one in five parents told us that if they could not continue to receive child care vouchers, they or their partner would have to give up work, and about 38% said that they would have to reduce their hours. There is a significant economic impact that needs to be taken into consideration.
You were talking earlier about how the new scheme will work—how people pay into it and get out of it, revalidation and so on. Many families use the current scheme to pay for school holidays: they pay in throughout the year and then have a large outgoing during the summer holidays. Will people be able to do that to the same degree under the new scheme?
Julian Foster: Yes. On the basis of discussions that we have had and the information that we have been provided with, it looks like that aspect of the scheme will continue to operate. Parents will receive the benefit for the amount of contribution they are putting in at the time they put it in. However, there is one key difference, which is the proposal that if funds are not used after 12 months, the subsidy will be clawed back. At the moment, if you are lucky enough to have some support from family and you do not use all of your voucher allowance, you can build it up to use for specific events, and people have been known to do that for a number of years. That has not necessarily been done just within one year to use it all in the summer holidays. It is true to say, though, that the majority of people use their vouchers for pre-school care—it is 40% with childminders and in the high 30s with nurseries.
Julian, I was just trying to understand what your objection is. At the moment you have a voucher system and the Government will be targeting this much more at the child care costs of hard-working parents. What do you object to other than the political choice being made?
Julian Foster: I do not particularly disagree with the choice being made at all. As I said, we are very supportive of tax-free child care as a policy. We have some concerns about how it is going to be implemented. It was intended to be simple and easy to use. The complexity around the sub-account per child, the need to ring-fence the spend per child, the eligibility process and the need for recertification are all unnecessary. That is my point. We have welcomed tax-free child care and the expansion to the self-employed and those on the national minimum wage.
Julian Foster: Well, 15 million people have access to the current scheme through their employers. Over 50,000 companies operate it; they employ just over 15 million people, which is roughly 50% of the working population. As you say, the new scheme is targeted at 1.9 million working families. That is a policy decision—it is a political decision to make and is not something that we have any fixed view on.
Ultimately, we are looking at protecting the interests of the parents, the child care providers and the employers whom we act for at the moment, and representing their views. What they are telling us is that the new scheme looks a lot more complicated on the face of it than they think it needs to be. We are simply bringing those points to the fore.
Julian Foster: I do not think that 1.9 million working families—[Interruption.] It is targeted, as you said, and “targeted” generally means that the same tax spend is being used for a smaller group of people. Fifteen million people have access to the current scheme; 1.9 million will be eligible for the new one. Those are the numbers that I am aware of. I am not commenting on whether that is a social engineering decision or policy. It is simply that the statistics that we have been provided with show us that a smaller group of people will have access to the new scheme.
Julian Foster: The Government are entitled to appoint whomever they wish to operate the scheme. Our major concern with NS&I being appointed originally was that that was not an option that had ever been consulted on, so we were unhappy that the Government had chosen to do something outside their original consultation.
NS&I is a very well respected organisation that manages millions and billions of funds and accounts, respectively. However, it does not operate with child care providers. There is the emotional aspect of making payments for nurseries: if that payment is not there on time or the carer cannot reconcile it and does not understand that that payment is for such and such a child, parents will find difficulties with dropping their children off at school. That aspect of what we do is a large part of our administrative operations and is something that NS&I does not currently do.
The other point I would make is that we feel that, without going out to tender, the appointment of NS&I cannot be certain to ensure best value for taxpayers. Our objections are not about NS&I being appointed, but the failure to follow due process and go out to tender.
Julian Foster: As has already been mentioned, it is a significant size and a significant investment. With any IT infrastructure investment of that size needing support—something on that scale—there could always be complications. We would suggest to the Government that they should think about a plan B, to make sure that there is something there to offer parents when it goes live.
NS&I seems to me to have the benefit of a Government guarantee on parents’ money in a child care account. If parents were depositing their own money with a voucher provider how would it be guaranteed that their money was protected? A comparison might be the Farepak situation: the money had been deposited and then that particular provider went bust.
Julian Foster: I appreciate that. I would point out that a number of voucher providers ring-fence their deposits from working capital. That is part of the CVPA code of practice. Our company operates regulated funds in other areas of our business. We treat these in the same way as we would those. It would be quite easy for the Government either to require the provider to operate them through a trust, in escrow, or extend something like the financial services compensation scheme to encompass this type of product.
You have mentioned that one of the deficiencies you saw in the proposed scheme was that it was less progressive than what you would have had under the existing voucher scheme. Can you give us some detail on how you reached that conclusion?
Julian Foster: Under the existing scheme you can sacrifice an amount of salary, depending on your tax band, so the lower you are on the income scale, the more you can sacrifice. Basic rate taxpayers can sacrifice up to £243 a month. That will give them a tax and national insurance saving of £933 over the year. A higher rate taxpayer can sacrifice only £124 a month, giving them a lower overall saving of £623, and at additional rate they can contribute slightly less again, so that is £110, and they save £623 as well.
The old scheme allows basic rate taxpayers to receive greater support with their child care costs. Under the new scheme, because it is a flat rate of 20% or £1 for every £4 they put in, there is no distinction between where you are on the income scale, so people earning £149,999 can benefit the same as somebody earning £20,000.
Most commentators—including those who have given the evidence we have already heard in Committee—suggest that one consequence of the Bill will be a massive expansion of provision. From your point of view, I think you are saying that a significant proportion of people will be worse off under the scheme and that a significant number of people would no longer be able to take advantage of tax-supported child care and may therefore find themselves not being able to work as a result. Your view is that there will not be the massive demand that the providers expect.
Julian Foster: Indeed. I believe there are 4.5 million self-employed people working in the UK at the moment, and I think 1.25 million of them have children under the age of 16. The new scheme age is under 12. There are no statistics to tell me how many self-employed people there are, but it is reasonable to assume there are broadly 900,000 who have children, and they would be eligible. That group has never had access to support with child care before. I think there will certainly be a big uptake from people who are self-employed.
What we are saying is that, of the existing users—broadly about 600,000 users of the current scheme—over 80% are basic rate taxpayers. When you apply a comparison between the two schemes, the new scheme is not as favourable for them as the old scheme is, and that is the point I am highlighting. So I think there will be an uptake from people who are self-employed and the higher earners under the new scheme, but I think basic rate taxpayers will not be as advantaged. Clearly, single families where only one parent is in work will not be able to access the scheme. Those are the groups that I think will be most affected.
Sure. You have told us at great length how complex this is, how the better-off benefit most and how there will be fewer beneficiaries in the long run. Can you tell us what needs to change in the Bill to correct what you see as the faults?
Julian Foster: I think it comes down to four things. The eligibility needs to be looked at again so that the process of joining the scheme and enrolling is not as complicated. On the need for quarterly recertification, people should be asked only to advise of changes to their status and circumstances, and not necessarily have to go and reconfirm that everything they have already said is still the case. I think the ring-fencing of the subsidy so that it operates on a per-child basis, particularly for families of three or more children, is complicated and perhaps unnecessary—[Interruption.]
Order. I am afraid that that brings us to the end of this session, but if you would like to write to the Committee to clarify any other points you wish to make as a result of the question from Mr Cunningham, I am sure that it would like to hear from you. Thank you very much.