Select Committee on Treasury Written Evidence


Supplementary memorandum submitted by Rt Hon Dawn Primarolo MP, Paymaster General, HM Treasury

TAX CREDITS

(Q 180 and 186)   What information is given to the claimant when they are asked to repay an overpayment—specifically if they are given information about hardship and how to challenge recovery

  In my letter to David Laws MP on 30 June this year I stated the following:

    "HMRC recognises that such amendments may cause problems for some claimants. This is why HMRC explain at the time they start to automatically recover outstanding amounts:

    —  what the claimant needs to do where the recovery creates hardship,

    —  or, what the claimant should do where they believe that it is not appropriate that they should be liable to pay back the overpayment at all, for example, in the case of official error.

    The guidance sent out by HMRC confirms the availability of help and how to seek such help. It also provides details of how to obtain HMRC's Code of Practice 26 (COP 26), `What happens if we have paid you too much tax credit?' The Code sets out what happens where a family believes that recovering an overpayment will create hardship. The HMRC website also includes the same information and advice. HMRC also work closely with CPAG and CAB to publicise the availability of help in cases of hardship."

  I can confirm that HMRC provides the following information to claimants.

  When a claimant notifies HMRC of a change in circumstances, they will be sent an award notice which will include notification of any overpayment, and how this affects their payments. They will also receive a copy of Tax Credits Notes 602 which advises them to contact HMRC if their payments are reduced to a level that causes financial hardship. Once they have contacted HMRC, the claimant would then be sent a copy of Code of Practice 26 (COP 26), which covers overpayments and the processes in place of hardship cases. This booklet also advises claimants to contact HMRC as soon as possible if they object to a decision to recover an overpayment.

  For overpayments recovered directly from claimants, the Notice to Pay (TC610) gives information regarding the amount of the overpayment to be paid back, the date by which it is due (30 days hence) and that repayment can be spread over the next 12 months if they wish, detailing the Payment Helpline phone number for them to arrange this. It also gives information on payment methods on the reverse of the form. The Tax Credit Helpline numbers are provided. A Notice to Pay is issued to each claimant in a two claimant household.

(Q 206/208)   More details on how HMRC deters fraud, and what identity verification checks are in place

  As I stated during the hearing, because these are areas of compliance activity I am unable to provide too many details on HMRC's processes. I hope the following information will be helpful to the Committee.

  The most effective way to avoid financial loss in tax credits is to tackle any risk before the claim goes into award. HMRC's aim is therefore to try and do this wherever possible in the most effective and timely way.

  HMRC's strategy for combating fraud involves applying the following standard checks to all tax credits claims; to all changes of circumstances and renewals of claims before payment is made:

    —  Automatic verification of the data claimants provide to check they are consistent with information that HMRC already hold for them.

    —  Automatic risk assessment to identify high-risk cases. New Claims posing the greatest risk are examined in detail before the award is put into payment.

  Following these checks HMRC then utilise a graduated series of interventions applied throughout the life of a tax credit claim:

    —  A large number of cases are selected for investigation using sophisticated IT based risk profiling tools. HMRC identify risky non-compliant claims and undertake compliance intervention to correct them. Where a claimant error is identified, action is taken to help the claimant to ensure the error does not re-occur and put the award back on track quickly to minimise the level of overpayment.

    —  In the more serious cases, HMRC may also use their powers to charge a financial penalty.

    —  In some instances, the risks identified in a claim are so serious that a more robust response than imposing a financial penalty is considered appropriate. These cases are investigated with a view to securing a criminal prosecution. HMRC have undertaken 125 prosecutions so far this year and currently have approximately 150 cases in the court system.

    —  Where criminal proceedings are not being taken forward, HMRC intervene and terminate the payments to disrupt organised fraud. HMRC has handled over 14,000 cases in this way and have only received one appeal.

  The Department is constantly reviewing and updating its capture, verification, risk assessment and investigation processes to ensure they provide a robust defence against attacks. The Department has been working on identifying key risk areas since tax credits were introduced. I cannot provide too many details of what those risk areas are but they include identity fraud and bogus documentation. And HMRC has had, from the start, a series of measures in place to counter these and have successfully addressed this threat to date.

  As part of the constant updating of its processes for preventing fraud and measuring the general level of compliance in tax credits, HMRC carries out annually a programme of random enquiries of a statistically representative sample of finalised claims across the tax credit population. Interim results have already been shared with the Public Accounts Committee in July this year, and finalised results for 2003-04 will be available in Spring 2006. Once the Department has established a baseline figure for the level of non-compliance in tax credits, the intention is to target year on year a reduction in this figure beginning 2006-07. Alongside these measures, HMRC has joint initiatives underway with colleagues from the Department for Work and Pensions, Local Authorities, Metropolitan and other police forces, and with CIFAS (Credit Industry Fraud Avoidance System—UK fraud prevention service).

STAFFING CUTS

(Q 232)   The basis on which any HMRC staff have been or are being offered early retirement in order to assist HMRC in achieving its target of reducing full-time equivalent posts by 16,000 (12,500 net of redeployment to front-line services) by April 2008

  Civil Service Departments are able to use three different early retirement schemes that are designed to address staff surpluses. The Approved Early Retirement (AER) scheme offers the lowest cost option of the three. Under this, staff aged 50 or over are able to retire early and receive a pension based on their accrued years of service, but without any enhancement to the retirement terms. (The other two schemes offer enhanced benefits.) HMRC has challenging efficiency targets in terms of both staff numbers and financial savings. We have concluded that we are best able to meet these commitments by the use of AER schemes.

  AER schemes are defined by strict rules on who may apply. Staff are only allowed access to the HMRC schemes if their Director certifies that they are surplus to the staffing needs of their business area. However, where we foresee the need for specialist staff to be retained to deliver wider business needs or the level of training investment is such that it would be inefficient to lose that resource, we have directed that surpluses will be dealt with by way of redeployment rather than through early retirement.

  In an AER exercise held earlier this year, some 748 staff were accepted for early retirement. A further 600 staff have been identified as being eligible under a second scheme currently under way. Further schemes will be run as businesses reorganise over the coming months.

  In each case the AER represents a reduction in costs as pension benefits will be 50% or less of the salary that would otherwise have been paid and the costs are significantly less than the cost of full redundancy.

CHILD TRUST FUNDS

  The Economic Secretary to the Treasury will be appearing before the Committee on 23 November and it has been agreed that he will respond to all the issues raised on Child Trust Funds at that hearing.

VALUATION OFFICE AGENCY

(Q 260)   Details of future plans for the Valuation Office Agency, in light of the recent decision to put on hold the council tax revaluation planned for English homes, including details of decisions that are still to be taken in this area

  Some 200 staff on various short-term contracts left the Valuation Office Agency (VOA) very soon after the announcement of the postponement of the revaluation. Since then, the VOA has also terminated the contracts of some 200 further staff who were on fixed-term appointments. This means that to date around 400 staff in total have been given notice to leave the Agency. In addition, it has advised its remaining staff that there will be an early departure scheme for permanent employees. Further announcements about the VOA will be made very shortly, and the Committee will be kept informed.

FUTURE UNDERTAKINGS

(Q 237)   Inform the Sub-Committee about whether there is a timeframe for achieving an integrated departmental IT system, given Inland Revenue's pre-existing relationship with Capgemini and HM Customs and Excise's pre-existing relationship with Fujitsu, and about the timeframe for assessing and proceeding with that integration

  HM Revenue and Customs has in excess of 100,000 users and over 250 major IT systems that underpin the full range of its businesses, covering direct tax, indirect tax, National Insurance, Tax Credits and frontiers work. These currently operate within two separate operating environments—ex Inland Revenue and ex HM Customs and Excise.

  Over the course of 2006 the infrastructure of HMRC will be modernised and see the introduction of a single operating environment. This will allow HMRC staff to communicate freely across a single network supporting all of HMRC's IT systems. In addition a single backoffice systems covering HR, Finance and Commerce will also be introduced in 2006-07.

  An integrated IT contract across HMRC is a critical enabler for providing a full range of facilities for sharing data, processes and systems. It will also ensure that any future improvements are spread across the Department, rather than being limited to the boundaries of former Revenue or former Customs—boundaries which in many cases no longer apply. Negotiations to bring the contracts together are underway. The integration of the contracts will be subject to a full business case and ministerial approval.

ADDITIONAL MATERIAL

  In addition to the specific information requested by the Clerk following the evidence session of the HMRC Spring Departmental Report on 26 October 2005, during in the hearing some further matters were discussed on which I would like to provide the Committee with additional details.

TAX CREDITS

(Q 172)   Figures showing the costs of administering WFTC, Family Credit and Tax Credits

  The cost of managing and paying the tax credits appears in Table 1 of the annual Report and Accounts for year ending 31 March 2004.

Table 1

COST OF COLLECTION (PENCE PER £ COLLECTED)
1999-20001 2000-0122001-023 2002-032003-04
Income Tax1.591.36 1.381.411.42
Corporation Tax0.760.98 1.011.151.25
Petroleum Revenue Tax0.24 0.150.200.26 0.18
Capital Gains Tax1.49 1.331.442.73 2.13
Inheritance Tax1.461.23 1.211.381.25
Stamp Taxes0.110.09 0.110.170.434
National Insurance Contributions (NICs) 0.570.590.67 0.660.42
Overall cost (pence per £ collected) 1.08 1.021.061.11 1.04
Tax Credits (pence per £ paid)5 3.292.942.53 2.21 62.96
Child Benefit (pence per £ paid)0.55

1  In the 1999-2000 report, the published ratio for Income Tax also included NICs costs and receipts, in addition to Tax Credit costs and payments. Since NICs are now shown separately and the reporting of Tax Credits has also changed, the figures here for 1999-2000 have been adjusted and exclude NICs.

2  The one-off STEPS receipt in 2000-01 has been excluded.

3  From 2001-02, ratios are now based on Resource spend rather than Cash.

4  The 2003-04 ratio was affected by temporary manual processing prior to the introduction of automated processing of SDLT forms.

5  The ratio for 1999-2000 excludes payments of Family Credit and Disability Working Allowance also made between October 1999 and March 2000.

6  Excludes costs of preparing for child and working tax credits: if these are included the ratio is 4.58 pence per £ paid.

  Before 2002-03 the figures relate to Working Families' and Disabled Person's Tax Credits. Note that the comparison over time is affected by the absence of children's tax credit from the costs of managing and paying tax credits for 2001-02 and 2002-03 as this was included in the Inland Revenue's routine work and not separately identified in running costs.

  As a proportion of total payments made each year, administration costs of tax credits have remained stable since 1999 at around 2.5% to 3%.

  Department for Work and Pensions' figures show the cost of managing and paying Family Credit was £66 million in 1996-97, £59 million in 1997-98 and £72 million in 1998-99. In these three years total expenditure on Family Credit was: £2,084 million, £2,326 million and £2,429 million. These figures imply that the cost per £ paid of administering Family Credit was broadly in line with that for tax credits at about 3 pence.

GOVERNANCE

(Q 229)   David Varney is both Chairman and Chief Executive of HMRC, is this consistent with the good governance standards for public services?

  The Corporate Governance Code was drawn up following a review that was led by Sir Andrew Likierman. In the course of that review a number of different options were considered in relation to the Accounting Officer (AO) role. However, the balance of the argument pointed to retaining the practice of appointing the permanent head of the Department as the AO, and against any sharing of accountability with other board members.

  The primary argument for retaining the AO role is that it provides absolute clarity in terms of accountability to Parliament. It was also felt that the AO status provides additional influence to the Permanent Secretary in checking potential political pressures, evidenced in part by the relatively small number of AO directions that are issued.

  Private sector concerns about concentrating too much responsibility in one person were not seen as relevant, as checks and balances exist in central government. These include the monitoring arrangements for government departments, the public audit process, and the counter-balancing powers of Ministers.

NATIONAL INSURANCE CONTRIBUTIONS AVOIDANCE

(Q 269)   If the National Insurance Bill is enacted, do you have a benchmark you have set yourself to bring in?

  The tax and National Insurance yield scored for PBR 2004 statement and associated measures was in Table B4 of PBR 2004, which shows for remuneration based avoidance £200 million in 2004-05 and £500 million per annum thereafter until 2007-08.

  The Regulatory Impact Assessment accompanying the National Insurance Contributions Bill provides a breakdown in respect of National Insurance Contributions as £95 million for 2004-05 and £240 million per annum thereafter.

14 November 2005





 
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Prepared 15 December 2005