MANAGING
RISK
IN
APPLICATIONS
FOR
TAX
CREDITS
27. In the 1998 budget, the Chancellor announced
the introduction of two tax credits for working families and disabled
people, as part of the Government's strategy to make work pay.
They replaced two social security benefits, family credit and
disability working allowance, administered by the Benefits Agency
and were introduced in October 1999. In the first six months the
Inland Revenue paid out just over £1 billion, and expected
this to rise to over £4.5 billion in 2000-01, the first full
year of operation.[19]
28. In the first six months of the scheme, the Inland
Revenue made payments direct to applicants each week, using the
Benefits Agency's payment systems, but from April 2000 payments
had also been made through the PAYE system by employers and were
included in people's pay packets. Employers offset the cost of
tax credit payments against the combined total of PAYE tax and
national insurance deductions due to the Department each month
or quarter. Where tax credit payments were likely to exceed deductions,
the Inland Revenue funded employers in advance.[20]
29. The Comptroller and Auditor General noted that
implementation had gone smoothly and the Inland Revenue were continuing
to strengthen the controls necessary for the effective operation
of the scheme. He recommended that they should continue both to
refine their approach to managing the risk of erroneous or fraudulent
applications and improve the assurance obtained about the reliability
and accuracy of the substantial amounts paid out of tax revenue.[21]
30. Our predecessor Committee asked about the level
of fraud and evasion, particularly as a result of accidental or
deliberate mis-statement of information by applicants. First indications
were that this was not very widespread. The Inland Revenue had
developed a risk scorecard to target resources more accurately
on those claims most worth investigating. This would pick up,
and indeed had identified, issues such as the non-declaration
of a partner's earnings and concerns about employer/employee collusion.
To help focus their risk approach they were carrying out a full
check of a sample of several thousand cases between August 2000
and August 2001, which would give them a benchmark of the proportion
of cases where for some reason applicants had not provided the
correct information. The risk score card was not their only tool,
however. Third party information was important, as was data matching
with data on their other systems as well as those of the Department
of Social Security (now the Department for Work and Pensions).[22]
31. During consideration of the Tax Credits Bill
in 1999, questions were raised about whether the Comptroller and
Auditor General should have access to employers to obtain direct
assurance about tax credit payments made on the Department's behalf.
In correspondence with the Chairman of the Committee of Public
Accounts, the Paymaster General took the view that access would
be inappropriate in view of sensitivities about burdens on business.
She suggested that the Comptroller and Auditor General should
instead take assurance from the Inland Revenue's employer compliance
visits, but agreed to reconsider if this caused difficulties in
practice.
32. Our predecessor Committee asked whether the Inland
Revenue would be able to give the Comptroller and Auditor General
sufficient assurance about employers' operation of the tax credit
scheme during 2000-01. The Inland Revenue thought that they would
be able to do so. They had done a lot both on employer compliance
and in bringing together the overall management of the tax credit
scheme. Local districts and Tax Credit Offices reported to the
same Board member, compliance work on tax credits at employers
was risk based and employer compliance staff were familiar with
tax credit rules. In addition, employers' annual returns would
bring together all their responsibilities to the Inland Revenue,
including tax credit payments, which could then be checked against
authorisations.[23]
33. Our predecessors also asked whether administration
of the tax credit system placed undue burdens on small businesses.
The Inland Revenue accepted that there had been quite a few complaints,
because it was a new scheme. But the number of complaints had
fallen, for example from 10 per cent of calls to the Employer's
Helpline to 5 per cent. Inevitably, small businesses tended to
find the resource implications of a new scheme more difficult,
and the Inland Revenue had heard more from them. For that reason,
they had concentrated on helping small businesses through their
Business Support Teams, and through targeted Helplines and workshops.[24]
Conclusions
34. Tax credits represent a major change in the Inland
Revenue's business, involving significant payments to taxpayers
and employers alongside collection of tax. The risks are very
much those faced by the Department for Work and Pensions in paying
benefits where they have led to significant error and fraud. So
far there is limited evidence of fraud and error in tax credits
but that could change as they develop. The Inland Revenue need
to continue to refine their risk assessment methodology, drawing
on their review of several thousand cases, data matching and third
party information.
35. Tax credits also shift some of the burden of
administration from government bodies to employers. We are encouraged
by the Inland Revenue's efforts to help small businesses through
their Business Support Teams, and through targeted Helplines and
workshops, and by advance funding where payments of tax credits
by employers to employees will exceed the tax and national insurance
contributions due. However, they need to keep the impact of these
regulatory burdens under review.
36. The Comptroller and Auditor General still does
not have access to employers' records to assure himself of the
accuracy and regularity of tax credit payments to their employees.
Substantial sums of public money are involved, more than an estimated
£4.5 billion from 2000-01. It remains to be seen whether
the Comptroller and Auditor General will in practice be able to
rely on the outcome of the Inland Revenue's own compliance activity
to give Parliament the assurances it needs.
PROGRESS
IN
EMPLOYER
COMPLIANCE
37. Since the Committee of Public Accounts reported
on employer compliance in November 1997,[25]
the Inland Revenue has made a number of improvements to the way
it checks employers' compliance with PAYE regulations. The Contributions
Agency has transferred to the Inland Revenue, providing the opportunity
to merge the previously separate PAYE and national insurance compliance
teams. Employer compliance work now includes policing the national
minimum wage, the payment of tax credits and the collection of
student loan repayments by employers. But this, and other organisational
changes, had affected the level and quality of work, and the tax
yield from compliance work had fallen. The Comptroller and Auditor
General saw further scope to target resources on higher-risk employers.[26]
38. In addition, the Comptroller and Auditor General
drew attention to significant variations in performance between
Inland Revenue offices in terms of identifying non-compliance.
There was still limited sharing of best practice between offices
and between the respective teams which carry out work on larger
and smaller employers. Staff also lacked access to and confidence
in using the computer system to identify higher risk cases for
analysis. In addition, the Inland Revenue had announced a further
restructuring of their local office network,[27]
which created a risk of diverting their attention from addressing
these issues.[28]
39. The Inland Revenue assured our predecessor Committee
that they policed all the schemes effectively. There had been
a number of purposes behind the merger with the Contributions
Agency. One had been to reduce the burdens on businessto
avoid two sets of people going over the books. Another was to
achieve genuine efficiencies. As a result the number of compliance
staff had been reduced. Ideally, the compliance yield would be
zero, because everybody got it right and paid up without enforcement
activity. There was, however, a balance to be drawn between helping
employers get it right and compliance activity. As a result, the
Inland Revenue had expanded enormously the business support function.
They were working closely with the Small Business Support Service,
and had a New Employers Support initiative, Business Support Teams
and a range of helplines.[29]
40. The Inland Revenue saw the fall in compliance
yield as a direct result of the management time and resources
they had devoted to delivering major changes, such as the merger
with the Contributions Agency and the implementation of new IT
infrastructure. Variations in yield across local offices reflected
in part different tax districts dealing with different populations.
However, risk and research would help them develop a better understanding
of what they might reasonably expect. A rigorous examination of
any failure to meet those expectations could then be conducted.[30]
41. Variations in quality across local offices continued
to be a matter for concern. The Inland Revenue were doing a number
of things to counter this. Employer compliance effort was now
well integrated and working together. Each office had as part
of its compliance unit specialists looking at risk, including
risk research to improve targeting. They had introduced other
risk specialists who were able to look at compliance across the
board. More good practice was shared between offices, and as a
result the variation was narrowing, although more could be achieved.[31]
Conclusions
42. The merger of the Inland Revenue and the Contributions
Agency gave them the opportunity to sharpen their compliance activity,
whilst delivering efficiency savings and easing the burdens on
business. This was a challenging agenda, and although managing
this change led to a fall in the quality of compliance work the
tax yield is now recovering.
43. There are significant variations between local
offices in the yield from compliance activity, though in part
these will reflect differences in local tax-payer populations.
The Inland Revenue are taking a range of initiatives to address
this variation, such as sharing good practice and undertaking
risk research across offices. But there is still much to be done,
and they should set targets against which management and Parliament
can assess progress.
1 C&AG's Report, Appropriation Accounts 1999-2000,
Volume 16: Class XVI, Departments of the Chancellor of the Exchequer
(HC 25 XVI) Back
2
C&AG's Report, paras 3.2-3.3 Back
3
ibid, paras 3.5-3.7 Back
4
ibid, paras 3.8-3.10 Back
5
ibid, para 3.11 Back
6
ibid, para 5 Back
7
Qs 2, 53-60, 92-106, 143-145 Back
8
Qs 35-40, 43-46, 50-52, 80-91 Back
9
Qs 41-42, 47-49 Back
10
C&AG's Report, paras 3.12-3.14 Back
11
Qs 4-5 Back
12
C&AG's Report, paras 5.2-5.6 Back
13
ibid, paras 5.2-5.6, 5.17 Back
14
ibid, paras 5.14-5.23, 5.26, 5.30 Back
15
Q8 Back
16
Qs 107-113 Back
17
Qs 114-125 Back
18
C&AG's Report, para 5.9; Qs 126-142 Back
19
C&AG's Report, paras 4.2-4.3 Back
20
ibid, paras 4.2, 4.6; Qs 65-66 Back
21
ibid, para 5 Back
22
Qs 16, 67-79 Back
23
Qs 14-15 Back
24
Qs 61-64 Back
25
31st Report from the Committee of Public Accounts,
Inland Revenue: Employer Compliance Reviews (HC 357, Session
1997-98) Back
26
C&AG's Report, paras 5, 6.2-6.5, and Figure 15 Back
27
Inland Revenue: The Government's Expenditure Plans 2001-2004
(Cm 5118), pp 8-9 Back
28
C&AG's Report, paras 6.11-6.30 and Figure 14 Back
29
Qs 12-13 Back
30
Qs 10-11 Back
31
Qs 9-11 Back