Suspended debt
24. While the extra resources put into VAT compliance
have uncovered fraud and therefore debt, the Department has not
always been able to collect this debt. Debt recorded on the Trader
Register may be suspended from recovery for a variety of reasons:
the trader may be missing, the debt is subject to ongoing criminal
investigations; or the Department's assessment may be under dispute
by the trader. As Figure 3 shows, between March 2002 and March
2005 suspended debt on the Trader Register increased from £822
million to £1,641 million. The increase is primarily due
to the increase in a type of fraud involving traders who go missing.[36]
Level of reported debt
25. The Department has encountered difficulties in
managing the IT systems used to support its VAT accounting and
collection. The Department's VAT Mainframe accounting system records
information on all VAT registered businesses and is updated daily.
The Departmental Trader Register is the case handling system for
VAT debt management and is updated from the VAT Mainframe three
times a month. Not all VAT debt has been transferred onto the
Trader Register (Figure 4).
Figure 4: Overview of VAT Debt Accounting System
26. The Department has placed 'inhibitors' on certain
debts on the VAT Mainframe to prevent them from being transferred
onto the Register. Most of this inhibited debt also relates to
missing traders and cases under appeal and would have been classified
as 'suspended' had it been transferred onto the Trader Register.[37]
The Department has been unable to give a detailed explanation
and breakdown for all debt falling within this category.
27. In July 2002 the National Audit Office identified
that approximately £300 million of the debt recorded on the
VAT Mainframe had not been transferred to the Trader Register.[38]
This discrepancy had not been resolved by March 2005, when the
VAT Mainframe recorded £1.3 billion that was not reflected
in the Trader Register. The Department identified that some £400
million of this was attributed to differences in the timing of
updates to the two systems. The balance of £900 million represented
debt that should have been transferred to the Trader Register.
It estimated that that some £865 million of this debt related
to missing traders and cases under appeal and was not immediately
recoverable.
28. Although the Department started a feasibility
study in January 2003, it did not address the problem until 2004/05.[39]
The final phase of the IT project is due to be completed by the
end of 2006.[40] The
Department accepted that the resolution of this problem took longer
than it expected and acknowledged that action could have been
taken sooner. But it decided to use limited IT resources elsewhere
in the department where it considered they would have the most
impact and effect.[41]
29. The Department has acted on the biggest debts
and progress is being made on the reconciliation.[42]
£458 million of 'inhibited debt' has now been released to
the Trader Register, of which £252 million has been suspended.
A further £63 million has been cleared through adjustment,
for example where a tax assessment has been replaced by a VAT
return of a lower value, and £46 million has been received.
The Department has written off or expects to write-off £52
million: £45 million, 87%, due to insolvency and £7
million, 13%, due to the age of the debt.[43]
30. As at 12 January 2006 the difference between
the VAT Mainframe and the Trader Register stood at £943 million.
Some £540 to £550 million of this difference related
to timing. The Department estimates that a further £ 400million
of debt will be transferred to the trader register when the final
inhibitors are removed. It expects full reconciliation between
the two systems to be completed in June 2006.
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