Tax Credits Bill

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Mr. Clappison: We now come to a slightly wider debate on fraud. Fraud within the tax credits system is an important issue, and many others share that concern. We must consider how much fraud there is within tax credits because some hon. Members feel that tax credits are particularly susceptible to fraud. It is unclear whether they are susceptible to fraud, but they are clearly not immune to it. Even if the incidence of fraud in working families tax credits and other tax credits is no greater than that in the rest of the benefits system, it will still amount to a considerable amount of fraud and a substantial loss of public money.

Estimates of fraud vary. In evidence to the Public Accounts Committee in July 2000, the former Department of Social Security gave its best estimate of the level of fraud throughout the social security system as around 3 per cent. of total benefit expenditure, which is equivalent to around 3 billion annually. The Government have provided various estimates of the level of fraud within the social security system, the lowest of which was 2 billion. A Government Minister estimated that it could be as much as 7 billion, but that figure was calculated on different levels of suspicion of fraud. Applying that proportionally to the figure likely to be involved in the new tax credits system, and bearing in mind that 1.3 million families will claim working tax credit, fraud is an important subject.

Fraud tends to be highest with means-tested benefits because they are more complicated, and the working tax credit is not a straightforward form of social security. There are also additional risks of fraud with means-tested benefits, which contrasts with universal benefits with simple age-related entitlements such as retirement pension and child benefit where fraud is relatively rare. Tax credits fall into the same category as means tested benefits. It has been suggested that tax credits are especially susceptible to fraud because there are too many ways in which people can work the system. That may or may not be the case, but we have heard it from Government and Opposition Members who cite authoritative sources with close connections to the decision-taking process on tax credits. The Minister looks puzzled, and I refer him to the speech on Second Reading by the right hon.

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Member for Birkenhead (Mr. Field), which contains an interesting analysis. We must have a proper effort on the part of Government to measure the extent of fraud in tax credits, and not to sweep it under the carpet, or to give the impression of sweeping it under the carpet, in order to avoid embarrassment.

10.15 am

The Government have been neither timely nor transparent in assessing the level of fraud in tax credits in general and in the working families tax credit, which has been up and running for more than two years. I give as an example the debate that we held last year on the uprating order for working families tax credit in which I asked the Paymaster General about the extent of fraud in working families tax credit. She wrote to me on 11 April last year telling me:

    ''The Inland Revenue are carrying out a benchmarking exercise to establish the level of fraud in tax credit claims. This began in September 2000 and will run for twelve months. The results will be used to ensure tax credits compliance work is carried out in the most effective way''.

That naturally led me to expect that the results of this important benchmarking exercise would be available in September 2001.

In October, I again asked the Treasury for its assessment of the extent of fraud in the working families tax credit. On 18 December I was told that the results of the benchmarking exercise would be known ''early next year''. That raises the question of what has been happening since September 2001. It would have been timely for the results of that exercise to be made public in time for the debates on the Bill because we are, among other things, debating ways in which we can tackle fraud within the tax credits system. The Government have had the results on that exercise sitting on Minister's desks since September 2001, and we need to hear their assessment of how much fraud there is in respect of working families tax credit and other tax credits.

I remind the Minister that the Government postulated a link between knowing how much fraud is occurring and doing something about it. Shortly after they came to power, they told us in a 1998 Green Paper that

    ''our systems are not sufficiently secure to prevent fraud from occurring in the first place because of patchy information on what fraud is occurring where and how''.

We are now two years into the working families tax credit, and no nearer knowing how much fraud there is.

Moving on from the question of how much fraud exists in tax credit claims, we also need to hear from the Government what measures they propose to take to tackle fraud. What is their strategy? The 1998 Green Paper complained that the previous Government lacked a comprehensive strategy against fraud, and that the approach to fraud was too parochial, with insufficient co-ordination. That would be a good critique of the current Government's efforts to tackle fraud within the tax credits system because too often the effect of their reforms has been to bring about further fragmentation in fraud investigation. A large part of the work of existing agencies has been taken away from them by the advent of tax credits and

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transferred to the Inland Revenue, which is now charged with investigating fraud in areas in which it has not previously ventured.

The fragmentation of the Government's fraud strategy has been made worse by their insistence on drawing a distinction between working families tax credit and benefits within the social security system. The result has been that their policies on fraud have been moving in different directions. A principal provision in the Social Security Fraud Act 2001 took away benefits from someone who was convicted of benefit offences twice in three years. I hasten to add that the measure had Opposition support and was one that the Government were proud to trumpet at the time. However, tax credits are not included in the regulations relating to the Social Security Fraud Act 2001, so what is considered to be a major element in the Government's strategy for tackling benefit fraud is not part of its strategy for dealing with tax credit fraud. There is no provision for repeated convictions for tax credit fraud to be dealt with in the same way as benefit fraud.

In relation to the investigation of fraud and not simply its punishment, how do the Government intend to bring together the different agencies involved in the investigation, detection and prosecution of fraud? What procedures are in place, for example, to give the Inland Revenue access to the National Intelligence Unit, which was brought into being by the Scampion report? That report also recommended that there should be a common prosecution policy between the Inland Revenue and the former Department of Social Security following the introduction of the working families tax credit. We can see differences between the prosecution policies. What is the Government's response to the recommendation in the Scampion report?

The Paymaster General was good enough to send me a document setting out the Inland Revenue board's prosecution policy. Indeed, the Financial Secretary adverted to it today in the previous debate. The document states the general principles on which the board operates. It begins by saying:

    ''The board operates a policy of selective prosecution intended to bolster their overall enforcement strategy. The focus is on cases where prosecution will do most to promote compliance with the law.''

The document then sets out the features that in its view made fraud more serious, some of which the Financial Secretary has adverted to today. The problem in practice has been that the board's prosecution policy has been so selective, with just the 22 prosecutions to which it refers, that it does not do justice to the problem of fraud in working families tax credit. Indeed, the prosecution policy that the Financial Secretary mentioned is meaningless, given the low number of prosecutions.

We also want to hear from the Minister about the Government's policy for investigating claims for tax credits. To take one example, what is their policy for investigating claims for child care costs for working families tax credit? In March last year, to give him credit, the hon. Member for Northavon (Mr. Webb), asked the Government what assessment they had

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made of the level of fraud in the child care tax credit element of the working families tax credit. In a written answer, he was told by the Paymaster General:

    ''There is as yet no statistically valid data available from which a meaningful estimate of the level of fraud in the recently introduced Child Care Tax Credit element of the Working Families Tax Credit can be made.

    Applicants are required to supply evidence of child care costs from their provider in order to receive Child Care Tax Credit. The Inland Revenue carry out risk assessments of applications based on their experience of fraudulent claims, and can impose financial penalties where fraud is found to have taken place. These checks and sanctions apply to the child care tax credit in the same way as other elements of the Working Families Tax Credit.''[Official Report, 19 March 2001; Vol. 365, c. 32W.]

That was a very ministerial answer, mightily impressive in the absence of other facts.

However, that needs to be set against what the Paymaster General told me about investigations, penalties and prosecutions involving child care tax credit in a written answer on 19 December last year. I was told that in the two-year period from 1 October 1999 to 30 November 2001 there were 418 investigations into the child care tax credit, out of which two penalties were imposed and there were no prosecutions. We wonder, therefore, whether, perhaps uniquely, child care tax credit is immune to fraud or whether it needs a more thorough-going investigation than it has thus far received?

Perhaps the Minister can tell us today whether the Government are any nearer having an answer to the question posed by the hon. Member for Northavon in his written question: how much fraud is there in the child care elements of working families tax credit? The child care element will continue to be paid to recipients of the new working tax credit.

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