REPORT BY THE COMPTROLLER AND AUDITOR
GENERAL: APPROPRIATION ACCOUNTS 2000-01 Volume 16: Class XVI Department
of the Chancellor of the Exchequer (HC 3355-XVI) Audit of the
Inland Revenue under section 2 of the Exchequer and Audit Departments
Act 1921, Part 3 Tax credits
Correspondence to the Chairman of the
Committee and a memorandum submitted by Sir Nicholas Montagu KCB,
Chairman, Inland Revenue
When I appeared before the Public Accounts Committee
last year for a Hearing on the departmental accounts for 1999-2000,
we spoke briefly about our plans for administering the payment
of tax credits via employers—which only came into force
in April 2000.
Since I am due to appear before you again on
20 May to answer questions on our accounts for 2000-01, I thought
you and the Committee might find it helpful to have a note from
me on developments in this area , since that earlier hearing and
also since the Comptroller and Auditor General's report on the
2000-01 accounts was published on 13 February 2002. I attach this,
and should of course be happy to supply any further information
which you or your Members would like to have in advance of the
20 May Hearing. I look forward (if that is the mot juste)
to seeing you then.I am copying this letter and the note to the
Comptroller and Auditor General.
National Audit Office (NAO) Report on
Inland Revenue Accounts—tax credits
1. This note explains why we have made less
progress than we had hoped in providing the Comptroller and Auditor-General
(C&AG) with the level of assurance he expected on the value
of tax credit payments made by employers (PVE) during 2000-01.
One way for us to gain assurance that employers have only paid
out to their employees the level of tax credit that we authorised
is to reconcile the payments they declare they paid with our internal
records of payments authorised. We hoped to be able to make this
comparison for 2000-01, but it has turned out to be less straightforward
than we thought. We have nevertheless found no evidence to suggest
that the mismatches between records arise from anything other
than genuine error. We have discussed these issues with the NAO
and agreed to work together to improve the level of assurance
in this area for 2001-02. I will be happy to report back to the
Committee on progress.
2. I should also mention a factual error
in the C&AG's report which we should have picked up before
publication. The figure of 230 employers visited in paragraph
3.26 should be 199: we have already told the NAO about this.
BACKGROUND TO
PAYMENTS VIA
THE EMPLOYER
3. Employers get instructions to pay tax
credits to their employees at a daily rate; but they only have
to make the payments at the same frequency and to cover the same
period as their pay their wages. For example, if an employer who
paid monthly in arrears on the last day of the month were told
to pay £10 per day for 20[1]
weeks starting on 15 March 2001, the first actual payment would
be on 31 March; and the amount of tax credit included in the pay
packet would be £170 (£10 17 days). The next month
they would pay £300 on 30 April, in May they would pay £310
on 31st and so on every month thereafter. Employers tell us how
much they pay out in tax credits to all their staff once a year
when they submit their annual return of PAYE and NICs (the "P35").
In the example, the employer's P35 for the tax year 2000-01 would
show that they had paid over £170 in tax credits in that
tax year.
4. We received about 1.2 million P35s from
employers for the tax year 2000-01 (of whom some 226,000 employers
had been authorised to pay tax credits to their employees), and
approximately 54 million associated individual returns (P14s)
for their employees[2].
We process the majority of the returns by around the October/November
following the end of the tax, so, we cannot include the actual
figures from P35 returns in our accounts. The C&AG accept
in the report both our consequent need to estimate the figures
in our accounts and the method used to do so.
MONITORING EMPLOYER
PERFORMANCE
5. Although employers have to report the
amounts paid out only once a year, we have other ways of monitoring
their performance during the tax year. Every individual whose
tax credit will be paid through their wage packet is told when
their credit is awarded the daily rate their employer is required
to pay and when the payments will start. So they can see at once
if they get less than they should. Our staff in the Tax Credit
Office always act promptly to deal with anyone reporting difficulty/delay
in getting their payments, and we will step in to take over payment
if an employer cannot or will not meet their responsibilities.
6. We also monitor employer performance
in-year through the visits our employer compliance officers make
to employers. The Tax Credit Office ask the compliance teams to
visit a small number of employers, but we select many more for
visits by using our national and local risk analysis—and
responsibility for paying tax credits is one of the elements pointing
towards the need for a visit. Where they visit an employer who
pays tax credits, our employer compliance officers will check
at least one employee's tax credit payments, and we keep a record
of employers who made mistakes. We checked tax credit payments
by an estimated 6,800 of the employers we visited in 2000-01,
and found only 18 (0.26 per cent) where wrong payment resulted
in our recovering any money.
7. After the end of the tax year, P35s can
provide a cross-check against our records although this will always
be fairly rough-and-ready. The example used at paragraph 3 may
help again to explain this problem. The employer had to pay £10
per day from 15 March 2001, so that we would expect the tax credit
paid over in the first year to be £220 (£10 per day
until the end of the tax year on 5 April 2001). But the employer
(because of paying monthly in arrears) only paid over the tax
credits up to and including 31st March in that tax year and so
only recorded £170 of payments on the P35. Because the £50
of tax credit to cover 1 to 5 April was included in the wage packet
on 30 April, it would be recorded in the P35 for the following
tax year. So comparing the entry on the first year's P35 could
make it look as if the employer had underpaid in the first year.
The next year it would look as if they had overpaid £50 when
we made a similar comparison. This shows the difficulty of linking
payments authorised for payment by an employer in any given tax
year with the tax credits shown as paid on the P35.
8. Some employers do not collect enough
tax and NICs from their employees to cover the tax credit payments
we ask them to make. Throughout the year we provide funding to
help them cover the credits due. When we process their returns
we check them against the amount of funding we know we provided,
so as to ensure that they took the funding payments fully into
account.
CHECKING 2000-01
P35S
9. We checked all P35s for employers to
whom we had provided funding to cover their tax credit payments
as they came in. This did not reveal any significant problems.
10. Between October and December 2001 we
also carried out a series of computer "runs" which compared
the tax credit payments we recorded as authorised for payment
by each employer with the value of tax credits they recorded on
their P35 return. These produced a list of employers whose tax
credit payments appeared to exceed their authorisations. We wanted
to identify employers whose records should be examined by a compliance
team to determine the cause of the discrepancy and to satisfy
us that there was no fraud involved. We initially set tolerances
to exclude the year end variances explained in paragraph 7, but
the final run in December excluded all tolerances to give us a
list of all those who appeared to have "overpaid" tax
credits in 2000-01.
11. The list was far longer than we had
expected, but we could not provide an explanation in time for
the C&AGs report on our 2000-01 accounts. Since then our internal
auditors and operational people have been working on the list,
and we now have a clearer view of what has caused the problems.
Of the 1.2 million P35s received around 27,000 showed an amount
of tax credits paid out by the employer higher than our records
led us to expect. The value of these discrepancies varied significantly,
but the top 90 cases (those with a discrepancy in excess of £100,000)
accounted for £38 million (over 50 per cent of the estimated
total value of the discrepancies).
12. We looked at 50 of the cases, the 25
with the biggest discrepancies and 25 taken from those where the
discrepancy ranged in value from 1p to £100,000, to try to
see why so many mismatches were occurring. The results of this
work show that in the majority of these cases the discrepancy
has risen because of error either within the Inland Revenue or
by the employer when completing the form. From our sample it seems
that the causes of the discrepancies include:
— A mismatch between the employer reference
held in our systems and the employer reference under which the
employer is making payments. We believe that (although there are
a small number of examples of changes during the year that rightly
change the reference since the award was made) much of this was
caused by our Tax Credit Office making mistakes in assigning the
employer reference to the case when they processed the application
for tax credits from the employee.
— Errors in the information on the
P35 resulting from mistakes made either when we processed them
or when employers completed them.
13. Many problems with the employer references
arise because the individual applying for tax credits does not
know their employer's reference. The staff at our Tax Credit Office
have clear targets to process claims quickly to ensure that people
get their credit paid as soon as possible. Where, for example,
an applicant describes their employer as Smiths, Newsagent, High
Street, Anytown, it can be difficult for us to differentiate between
a sole trader running their own business and a local branch of
a national concern. Similarly, many companies run several PAYE
schemes and they may allocate employees to a particular scheme
by location eg Midlands or NW England or by frequency of payment
eg Weekly/Monthly Paid—so deciding which scheme to assign
the payments to can be very difficult. Our performance in this
area is improving and we have taken action to raise staff awareness
of the importance of getting this right.
14. We have also found evidence of keying
errors made when processing the P35: given the scale of our operations,
it is inevitable that some of these will occur, but we aim to
keep them to a minimum. And employers make all kinds of mistakes.
We have seen several cases of their seeing the relevant "box
on the form" as some sort of balancing item they need to
complete even when they have no tax credits to pay. We have improved
our guidance for the 2001-02 P35s which went out early in 2002
and have asked our Business Support and Employer Compliance teams
to remind employers of the right way to complete the box when
making their normal visits. We have also issued guidance to our
people processing the forms to try and pick up some of the more
obvious errors before we input the information. In addition I
have asked my Head of Internal Audit to consider whether in the
light of these results we should take a look at the information
provided on P35s to see what risks are associated with the level
of errors we and employers make.
15. Although we are working to improve the
position, we know that there will still be problems with the forms
received for 2001-02; so we are also considering:
— taking a sample of individual tax
credit cases to track them from the original application to an
entry on the employers' returns and vice versa; and
— running a series of comparisons through
the year (as P35s come in) of tax credit entries with our records.
This should allow us to identify some problems as soon as the
P35s are processed and so make it easier to correct errors.
16. We believe both these steps will help
us both to identify genuine "process" errors and problems
which we can take steps to correct and to provide an assurance
about how well the system is running and the level of employer
compliance with their statutory obligations. We have already started
to discuss with the NAO how best to approach this work.
17. As part of our continuing employer compliance
work, we expect to carry out 32,500 visits during 2002-03. Although
not all will be on employers paying tax credits, we should at
least have an equivalent level of coverage to that in 2000-01.
18. We had to learn a great deal in a very
short time during and from the first year of operating PVE—a
major change by any standards—and there have been inevitable
teething problems. While we have made less progress with some
of our processes than we had originally hoped, my Internal Audit
and operational people have to date found no evidence of anything
other than genuine error. I am confident that the work we plan
to undertake over the next few months will help to reduce further
problems and will put us on a sounder footing, and I will report
back to the Committee on our progress later in the year.
Sir Nicholas Montagu KCB
Chairman
Inland Revenue
2 May 2002
1 An award normally lasts 26 weeks and where an employer
pays monthly we will pay direct for the first six weeks to ensure
that they have time to set up their systems to make the payments. Back
2
The number is so large because many employees have more than one
employment in a single year. Back
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