Examination of Witnesses(Questions 100-119)
SIR NICHOLAS
MONTAGU KCB, MR
DAVID HARTNETT
AND MR
STEPHEN BANYARD
MONDAY 20 MAY 2002
100. In the scale of the benefits you are administering
and the scale of the £1 billion you are spending on setting
up this system, I would have thought was absolutely imperative
to have some sort of survey so you have some idea of how many
people are eligible for the credits which you are administering.
(Sir Nicholas Montagu) You are a very impatient man.
I am being examined today on the accounts for the first full year
of operation. You have heard from Dave that we now have the Family
Resources Survey in and that towards the end of the year we should
have some sort of comparison. Given the customary pace of the
wheels of Government, I think we are doing pretty well.
101. May I ask you something on the general
accounts? Table 1 on page R3 says that total tax receipts—very
good political information for me, but I am not going to deploy
it here—have gone up massively in the last five years. It
specifically says that total tax receipts have gone up between
1999 and 2000 from £139 billion to £148 billion. Then
if we turn to page R7, paragraph 2.5, we find that the non-compliance
work of your Department has identified fewer tax liabilities,
in fact the tax liabilities identified have dropped from £5.4
billion to £4.5 billion. So even thought tax receipts have
increased, the amount of money you have uncovered as being additional
tax liability, has fallen. Why is that?
(Sir Nicholas Montagu) Who knows?
102. I hope you know, you are in charge.
(Sir Nicholas Montagu) Let me put it this way. If
I asked all of you in your glory how many of you had been convicted
of mugging old ladies, I guess that probably no more than one
hand would go up in this room. That could be for a variety of
reasons. It could be because only one of you has done so, or because
the police have not got round to the rest of you. There is a very
serious point there. With compliance yield, I have often said
here that in the ideal world compliance yield would be zero. We
do not know whether it is because we are getting more effective
at encouraging voluntary compliance, whether we are getting less
good at finding it or whether it is external factors. There are
external factors. Undoubtedly, the fall in yield from international
activity, which is subject to huge fluctuations each year, the
yield from oil taxation, which was affected by the low oil prices
and also things like the numbers of insolvencies can affect the
amount of yield. It is a complex issue.
Jon Trickett
103. I have been listening with some curiosity
to the exchanges between the Chairman's predecessor and Dawn Primarolo.
I just want to ask Sir John one or two questions on this matter.
Am I correct in saying that effectively what must be regarded
as Government expenditure has been transferred from DWP, or DSS
as it was, through to Inland Revenue?
(Sir John Bourn) This is so. If the money which goes
out as a tax credit had gone out as public expenditure from DWP,
that is exactly what it would have been. What would have counted
as public expenditure, no longer counts as public expenditure,
but it is public expenditure.
104. Nevertheless, from the individual's point
of view, it is income.
(Sir John Bourn) Exactly.
105. Whether or not the taxonomy of all this
is that it is taxation or whether it is benefits, it is income
for the individual. Am I right, secondly, in saying that it is
the same core group of people who were previously targeted by
benefits as they were described previously and now by tax credits?
Is it broadly the same group of people we are targeting?
(Sir John Bourn) Broadly; yes.
106. One could argue that we are talking really
to some extent about a semantic difference. I could argue, but
you probably would not care to make that comparison between benefits
on the one hand and tax credits on the other and that previously
you would have had a close interest in that matter and now you
are excluded from that. Am I right in my understanding?
(Sir John Bourn) Yes, that is right. If it had gone
out as benefits, I would have been the external auditor with access.
107. From my point of view, it seems the same
bundle of money, perhaps more effectively targeted, but nevertheless
broadly the same bundle of money. One of the points which has
been made by the Inland Revenue is that they do not want to disturb
these poor employers any more than they need to. I notice that
we do not disturb them a lot, so I am going to ask some questions
about that in a moment. That seems to suggest that you wear size
15 boots when you undertake this kind of monitoring. But I understood
you to be saying that you monitored the Department rather than
the employers themselves. I am just wondering whether you would
reflect briefly on how, if you were to be invited, you would undertake
such a task and minimise the impact on the employer, which it
seems to me is really what Sir Nicholas's argument is based on.
(Sir John Bourn) You are quite right to say that my
concern is with the system of administration of the Inland Revenue.
The way in which the money reaches the beneficiary is through
the agency of the employer, therefore, as the external auditor,
to get a full understanding of the way the system works, I would
need access to employers, not of course because I would seek to
go to every employer every year or anything like that. The importance
is to be able to go in circumstances when I or my colleagues see
advantage in going. That is what the giving of the power of access
to the Comptroller and Auditor General would constitute. I think
that describing the kind of work that I would do as the external
auditor as an attempt to lay a heavy hand on the great range of
industry and commerce, is an attempt to push me to one side on
a false argument.
108. I am inclined to that point of view as
well. In your role previously in monitoring the benefit system,
is it not true that at that time you would have from time to time
been approaching employers?
(Sir John Bourn) Certainly we would have approached
employers from time to time. I do not have at my fingertips the
exact legal details, but yes, certainly we would have had to.
109. So it is not something with which you are
unfamiliar.
(Sir John Bourn) No.
110. Did that provoke large numbers of complaints
about the C&AG and the NAO?
(Sir John Bourn) No.
111. I am happy that we have now heard both
sides more fully perhaps than we had previously. No doubt the
members will draw their own conclusions. I now want to ask about
compliance and non-compliance. This non-compliance unit seems
to me to have been heavily biased in one particular direction.
(Sir Nicholas Montagu) I am sorry, which unit are
we talking about.
112. The Compliance Coordination Unit.
(Sir Nicholas Montagu) So we are on tax credits.
113. Yes; sorry. It does seem to have spent
a large amount of its time looking at individual cases and hardly
any time at all looking at employers, yet I should have thought
it was fairly obvious that the large-scale fraud would take place
with employers. I wonder whether I have misunderstood exactly
what was happening.
(Sir Nicholas Montagu) No. If you want detail, I shall
get Dave to help you. The point is this. If you think you are
entitled to the working families' tax credit, you put in an application
to the Inland Revenue. This is assessed at the tax credits office
and after the identity check, if there is no reason to suppose
that it is anything other than bona fide, then it will
be paid out, arrangements will be made with the employer and so
on. Essentially what we are talking about here is a unit at the
tax credit office which deals with individual claims. Employer
compliance comes in with the sort of things we have been talking
about, with visits to employers by our employer compliance teams,
by end of year checks on the P35. You also talked about large-scale
fraud, and I have to say that in none of the work we have done
is there any evidence of large-scale fraud or collusion by employers.
114. But there again, you have hardly done any
visits to employers. I see 49,000 cases which I presume are individuals
and disputed cases of 230 visits to employers which actually turned
out to be 199, did it not?
(Mr Banyard) We did 29,000 visits to employers last
year. In those 29,000 visits we found 6,800 who were paying credits
and of those 6,800 only 18 required action. The view of our employer
compliance teams at the moment is that this is not a difficult
area.
115. Is it not obvious that an individual can
only defraud the tax credit system by a relatively small amount,
whereas the one or two individuals who claim to be employers perhaps
when maybe they are not, could be defrauding you of large amounts
of money.
(Sir Nicholas Montagu) One or two individuals who
are what?
116. One or two individuals who are perhaps
entrepreneurs but they have taken the wrong track in life might
well set themselves up as employers and defraud you of very large
amounts of money.
(Mr Hartnett) Maybe I can help with some numbers.
We have already prosecuted two employers for collusive activities
with their employees which led to loss of tax credit which we
intend to recover. Out of the 131 cases working towards prosecution
in our special compliance office, 13 involve apparent collusive
activities on the part of employers. Stephen's point is a really
important one, as is the work which Nick described to the Chairman
in relation to the reconciliation of authorisations and what are
now P35s. In all that work we have not found any substantial numbers
of large-scale frauds by employers.
117. I am confused, perhaps justifiably. If
we look at paragraph 3.26, I was speaking about the compliance
unit and the figure I quoted is nothing like 29,000 employers
visited in their own place of business. There is a disputed figure.
Here it says 230 employers but in your letter to us it says 199.
The point I am trying to address is that the compliance unit seems
on the one hand to have dealt with tens of thousands of individuals
who have been referred to it or whom they are looking at in some
detail and on the other side only 230, or 199 as you corrected
yourself, employers. Why should there be that apparent imbalance
or do you not accept that it is an imbalance?
(Sir Nicholas Montagu) I do not think there is any
imbalance there at all. Individuals can lie about their circumstances
in order to qualify for credits which they should not get or for
more credits than they should. That is why we vet carefully the
individual applications which come in to the tax credits office,
subject to the proviso that I made in my answers to Mr Osborne.
If the tax credits office, in the course of their work, have reason
to suspect that an employer is involved in unacceptable behaviour
of whatever sort, they will then alert the local employer compliance
teams and what the paragraph you referred to is talking about
is the 199 cases where employer compliance teams undertook a visit
at the specific request of the tax credits office. The fact that
an employer pays tax credits is in itself an indication for a
visit, one of many. If an employer compliance team, not alerted
by the tax credit office, visits an employer who pays tax credits,
they will always check at least one tax credit record. Against
that background, we have the evidence I mentioned, and which Stephen
drew on, that employer collusion does not seem to be an issue.
Put together the figures Dave gave you: two prosecutions, 13 under
investigation for possible collusion by my special compliance
office. Put that against 266,000 employers paying out credits.
The point about the employer compliance team, and in a way it
also goes back to your questioning of Sir John, is that they are
the frontline professionals with our business support teams in
our dealings with employers. They will cover a whole range of
payroll and other employer related issues.
118. I am of the view, just as with landlords
fiddling housing benefit with their non-existent or collusive
tenants, that there will be employers out there seeking to defraud
the system. I am also of the view that you have decided to run
the employer side of the business with the lightest possible touch,
perhaps because you believe that Ministers or the Government generally
wish that to be the case. It is quite clear in the paragraph we
have just discussed that you failed to collate information on
the electronic databases. I notice in the next sentence that Sir
John says, ". . . there are weaknesses in the Department's
management information" in relation to this matter. I think
your answers are complacent in relation to the employers. I believe
that is what the fraud will be and I believe you have not uncovered
it not because it is not there, but because you decided to approach
the employers with the lightest possible touch.
(Sir Nicholas Montagu) I need to say quite a few things
on that and I need to bring Stephen in. The first is that before
we authorise a payment via the employer we run a check on them.
The second is that, with the greatest of respect, I have evidence
for my statement. Stephen has given it to you. When we looked
at 6,800 employers who were paying tax credits, we found 18 cases
where there had been overpayment. That is evidence. What you have
is a hunch that there must be a lot of employers on the fiddle.
We are always trying to improve our risk analysis and our management
information. We are always trying to identify employers at risk,
but we do not really have evidence of large«scale collusion.
I know that you have just been given your yellow card, but perhaps
I could get Stephen to comment and then very briefly Dave, because
Dave led our recent review of links with large business.
(Mr Banyard) Our employer compliance teams are highly
skilled in looking at employers' books and they look at them in
the round. If you are going to find non-compliance in one aspect,
for example credits, you might expect to find it in national minimum
wage or in some other aspects. They do not take a narrow view;
they have a number of mandatory checks which they make across
each of the payments and functions, but they also take a broad
view of the employer as a whole and look at whether the payments
are reasonable, whether the hours look reasonable, whether any
people look odd. They do that. In addition, of the 29,000 visits
they did last year, four per cent of them are mandatory random
visits. Next year we shall have a better reporting system for
them which will enable us to say when credits were looked at and
whether there were problems. We will take a random look across
the population which is statistically significant and we shall
be able to provide some degree of assurance.
119. If possible, could you give us a note about
the structure of this compliance unit and how many people work
on employer compliance and how many work on compliance by individuals?
I have a feeling, and I am afraid your long answers—very
thorough and detailed, so necessarily long answers - have not
really convinced me and set my mind at rest.
(Sir Nicholas Montagu) I do have figures, but in the
interests of time, we shall let you have a note on that.<fu1>
<fo1> Ev 20-21.
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