HM Revenue & Customs: Tax credits error and fraud

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• Public Accounts Committee

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

“HMRC’s performance in cutting the level of fraud and error in the tax credits system has been hugely disappointing and extremely poor. Over 8% of taxpayers’ money spent on tax credits is lost as a result of fraud and error, with people getting more money than they were entitled to. An estimated 1 in 5 awards is subject to fraud and error. This is too high.

“The department’s failure to cut the fraud and error rate to 5% has cost the taxpayer dear. HMRC committed to saving £8bn by 2014-15. They now say they will only save £3bn and in 2011-12 wrote off £1.7 billion of tax credit debt as uncollectable. In these strained times, the Government cannot afford these failures.

“The department does not properly understand which actions are effective in dealing with these issues. It increased the number of interventions on individual cases tenfold, but this only resulted in a doubling of the money saved by the taxpayer.
“If the department is to improve on this, it must understand its own performance better and that will require a more accurate way of measuring the impact of its work.

“At the same time, it is clear that claimants are not being well supported by HMRC. HMRC is not responding effectively to the crucial problem of claimants not reporting their circumstances accurately, especially when their circumstances have changed.

“The advice and guidance it provides for claimants need to improve. HMRC thinks that it is responsible for only 2.5% of tax error credit. This looks far-fetched in the light of evidence from Citizens Advice on the inaccuracy of HMRC advice to claimants over the phone. And appeals by claimants are growing, with a high rate of success for claimants.

“HMRC has made some progress in analysing risks but nowhere near enough. Error and fraud in two categories - working hours and undeclared partner - together accounted for losses of over £1 billion in 2010-11. The department needs to make more effective use of available data to identify higher risk claims.”

Margaret Hodge was speaking as the Committee published its 4th Report of this Session which, on the basis of evidence from HM Revenue & Customs and Citizens Advice, examined tax credits error and fraud.

Complexity

HM Revenue and Customs (HMRC) paid £30 billion in tax credits in 2011-12, providing support to nearly six million individuals and families. The scheme is complex as the eligibility of claimants and their awards are based on a range of criteria and the scheme is designed to react to changes in claimants’ circumstances.

Tax credits are difficult for claimants to understand and equally challenging for HMRC to administer. In 2010-11, HMRC estimated that one in five awards contained error or fraud which resulted in claimants receiving more money than they were entitled to.

Performance

HMRC acknowledges that its performance in reducing tax credits error and fraud is disappointing. It lost £2.3 billion to error and fraud in 2010-11, £850 million higher than it had expected. HMRC’s target in the 2010 Spending Review was to save £8 billion from reducing tax credits error and fraud by 2015.

It now estimates that it will miss this target by £5 billion. HMRC needs a more realistic target for the amount of savings it should achieve from reducing error and fraud.

Support

The support provided by HMRC to claimants, in writing and through its helpline, needs to be improved. This will help ensure claimants receive the correct amount and avoid overpayments, which they often struggle to repay. In 2011-12, HMRC wrote off £1.7 billion of tax credits debt.

HMRC must work more closely with organisations that represent claimants to get a better understanding of where claimants need help so it can make improvements to the support it provides to claimants.

HMRC has increased the number of awards it checks, resulting in more people contacting Citizens Advice for help with their claims and a greater number of appeals against decisions to reduce or terminate the amount of tax credit paid.

HMRC did not put in place sufficient resources to deal with the increase in appeals resulting in delays and causing unnecessary distress and hardship to claimants.

Using data to identify patterns and trends in claimant behaviour, as well as checking claimant information against other data sources to identify discrepancies, is crucial to tackling error and fraud. HMRC has made some progress in its analysis of data, but it has not always checked tax credits against child benefit data that it holds and it should also explore how it can use a wider range of data sources.

HMRC also needs to improve its understanding of why claimants do not always report changes to their circumstances as this is when the majority of error happens.

Further information

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