Examination of Witnesses (Questions 460
- 479)
WEDNESDAY 19 APRIL 2006
SIR DAVID
VARNEY, MR
PAUL GRAY,
MR STUART
HARTLIB, MR
STEVE LAMEY
AND MR
RICHARD SUMMERSGILL
Q460 Mr McFall: I understand that,
but would you see merit in a fixed award scheme, or do you think
there is merit just in trying to tinker with the present scheme
rather than a full-scale change? That is really what it is.
Sir David Varney: Well, "tinker"—we
have done quite a lot on this system. This system aims to be -
Q461 Mr McFall: Modified?
Sir David Varney: Modified, thank
you. I am sorry, that just slipped out. I think there has been
quite a welcome from a lot of the pressure groups about a more
responsive system. They welcome that. The issue, political issue
essentially, of the fixed system is how quickly does it respond
to changes in circumstances? That is why I think Frank was advancing
the proposition that your mailbox would get rather more hostile
and you would get people who were disaffected.
Q462 Mr McFall: On fraud and organised
crime, the department's work to identify the level of claimant
error and fraud in the 2003-04 awards is due to be completed now,
and I think you suggested Spring 2006. What are the final levels
of losses for 2003-04 due to claimant error and fraud?
Sir David Varney: We have not
finished the work yet. Can I explain what we are doing? We have
taken out a sample which we have gone through in quite some detail
and we have to satisfy the NAO because this will go into our accounts.
What I said at the time we published the initial findings was
that I expected those to increase because they were the easiest
cases. So when we do the more complicated cases the characteristic
is that error is much more important in financial terms in fraud.
We have got to tackle both. I am not saying we should be complacent,
but error is a much more important feature. I think when we come
to publicising it in the Spring we will be able to give an account
of a set of numbers which have been agreed and tested by the NAO.
Q463 Mr McFall: In your initial findings
you overpaid 3.4% of the value, which is around £460 million,
but it will probably be significantly more than that?
Sir David Varney: Yes.
Q464 Mr McFall: What progress have
you made in investigating the frauds perpetrated using the identities
of the 18,000 DWP and National Rail employees?
Sir David Varney: I will pass
that on to Stuart. It is still an ongoing criminal investigation
and we are still trying to in a sense distil away the fog of war
as we follow up these investigations by putting what are called
production orders on banks asking them to reveal details of bank
accounts. We are getting quite a lot of information back about
the extent and scale of it. This was pretty unprecedented.
Q465 Mr McFall: It is not just limited,
though, to DWP and Network Rail, is it? There are other companies,
I have been told, which are involved.
Mr Hartlib: There are also individuals
not associated with companies and, as Sir David said, this is
a complex and ongoing criminal investigation. To give the Committee
a flavour of the sort of scale we are talking about here, the
production orders which have been served so far have been on 19
banks and building societies, around 2,200 bank accounts, which
have spawned, we believe, around 6,000 further sub-accounts within
the financial institutions. The sub-accounts range from one link
to a main account to up to 105, and again to give you an idea
of the scale, from one financial institution alone our investigators
came away with 30 boxes of material which had to be analysed and
the links made. We are also about to apply to the courts for further
production orders covering 6,000 more bank accounts and we expect
there to be the same web of sub-accounts coming from this. So
that is going to need a long time for our analysts to get to the
bottom of. I can tell the Committee that there have been two arrests
in connection with these frauds and the individuals have been
charged with money-laundering offences linked to this and currently
they are remanded in custody, and for obvious reasons I cannot
go any further on that. So this is a complicated criminal investigation
which is going to take some time to get to the bottom of.
Q466 Mr McFall: What estimates have
you made of the losses to the Exchequer as a result of organised
crime perpetrated in the tax credit system?
Mr Hartlib: The work is still
ongoing on carrying out this analysis, so I am not able to say
this afternoon.
Q467 Mr McFall: When will you be
able to say?
Mr Hartlib: We hope to be able
to say something, whether it is a definitive figure about organised
crime, alongside the time we publish the random enquiry report
for 2003-04.
Sir David Varney: I think it is
very important that we do that, because I think it is important
that the public understands that this is not a struggle between
a group of Robin Hood characters and an evil Sheriff of Nottingham
tax collector. This is organised criminality of the vilest kind
and we want to put it forward so that people understand that this
is an attack on a system which we have tried to defend, and this
is very clever. It is not straightforward at all.
Q468 Mr McFall: I do not think Elliott
Ness could have put it better, if you remember Elliott Ness?
Sir David Varney: I am maybe a
bit old!
Q469 Mr McFall: On the e-portal,
do you intend to re-open the tax credits e-portal?
Sir David Varney: Yes, but there
are some real practical difficulties. What we were thinking about
the balance between security and taking the e-portal down was
that we knew that if we took it down we would have to take it
down for a long time; it would not come back easily. There is
some limited functionality which we can put back which is very
safe, but it will take quite some time before we bring this back.
Q470 Mr McFall: There is still a
vulnerability to organised crime if you open the e-portal completely?
Sir David Varney: Until we really
understand the scale of this attack. As Stuart Hartlib has said,
what was new in this was not that we were funnelling money into
single accounts or it met the existing risk criteria, but this
was quite complicated, the opening of a number of accounts, and
I am personally convinced that when we understand all this we,
together with the financial community, will have to think long
and hard about what the implications are for security going forward.
Q471 Mr McFall: Okay. Lastly, the
Paymaster General told us that "there will not be reductions
in the compliance within the Tax Credits Office, in fact quite
the reverse," but later in the same session she said, "We
are currently considering across the whole of the Department,
including tax credits, what the appropriate level of compliance
activity should be." Where does the reality lie?
Sir David Varney: I think the
Paymaster General did capture all elements of the argument, and
I think this is where Sir Humphrey comes to the fore! Let me explain
what we are trying to do, and maybe Stuart can add to it. We are
looking at how do we take a risk-based approach to compliance
and therefore how do we deploy our compliance resources to the
best effect? We have brought in and beefed up more knowledge analysis
and intelligence capability because when you do compliance work
it has two effects: it has the general effect that if people know
you are going to enforce the law they are more careful about taking
risks with it, and secondly it is the direct effect of what is
its yield in terms of the inquiry. We have had numerous examinations
with the NAO and the Public Accounts Committee about the yield
of some of our compliance activities, so we are looking to modernise
overall the efficiency of our compliance work. In this particular
case, Stuart?
Mr Hartlib: Yes, in common with
all of our compliance areas we are looking at ways to become more
effective in the way we do our compliance interventions and certainly
claimant compliance is going down that road and introducing changes
to get more `bangs for our bucks', as it were, but currently,
as the Paymaster General said, there are no plans to reduce the
number of compliance staff allocated to this work.
Q472 Mr Newmark: I want to turn to
the cost of the package of reforms. I am not sure if that is addressed
to you, Sir David, or Richard. My first question is, the Government's
response to our report on the 2005 Pre-Budget Report estimates
the impact of the package of reforms of tax credits between 2006-07
through to 2010-11 as being minus £100 million, plus £200
million, plus £50 million, minus £50 million, minus
£150 million, giving a net cost of £50 million for the
package over that period. Do these figures represent expenditure
and savings against a baseline forecast, and if so—I am
assuming they do—what is the total level of overpayments
that was assumed in the baseline forecast, and what assumptions
were made about the proportion of overpayments that would be recovered?
Mr Gray: Trying to take the points
in your question in turn, yes, these were estimates against an
earlier baseline. That earlier baseline was the best estimate
that was available of the implications of the set of policy parameters
which were in place before that announcement. So that run of figures
represents the net effect over those five years of the interactions
of the various elements in the Pre-Budget Report forecast. That,
I think, was your first question. Have I covered that one okay?
Q473 Mr Newmark: Yes, sort of. You
are just explaining the logic behind the maths, but the maths
is fairly self-explanatory. I am trying to get a better understanding
of what the baseline figure is underlying your forecast. Was there
a baseline? How did you come to it? Is there a real figure or
were there a lot of assumptions behind that?
Mr Gray: Our analysts and the
analysts in the Treasury together seek in this area of expenditure,
as in our areas of revenue collection, to make the best estimates
of what they think the flow of expenditure is going to be on the
basis of the policy in place, and that requires making all sorts
of assumptions about rates of take-up and so on and so forth.
Q474 Mr Newmark: I just need a better
handle on what some of those assumptions were. I am just trying
to understand what the assumptions were behind your forecast,
that is all.
Mr Gray: Assumptions on what sort
of parameters, sorry?
Q475 Mr Newmark: Clearly there is
a figure. There is an assumption as to the fact that there are
some losses and there are some gains along the road, leaving a
net figure at the end of that, and in order to come up with that
figure, number one, there must be a baseline figure, which I am
assuming you have somewhere?
Mr Gray: Yes.
Q476 Mr Newmark: Number two, there
must be some assumptions behind those forecasts, and I am trying
to get a bit of an understanding, drilling down a bit, as to what
those assumptions are and what that baseline figure is.
Mr Gray: What those baselines
are trying to do is to estimate the gross level of expenditure
on tax credits over the period reflecting the various policy parameters
in place. Your further question went on to talk about what assumptions
are made about losses and write-offs, and there I think the correct
answer, subject to checking, is no assumption because when it
comes to losses and write-offs we are not in that gross expenditure
figure seeking to include an assessment of that.[2]
Q477 Mr Newmark: No, but you have
come up with some pretty specific figures here. There is the figure
of a cost of £100 million followed by a gain of, I think,
£200 million, another gain of £50 million and a loss
of £50 million, followed by another loss of £150 million,
with a net figure at the end of £50 million by 2011. These
are big numbers and I am trying to understand what lies behind
all that.
Mr Gray: In the Pre-Budget Report
there are about five or six detailed policy adjustments which
were announced by the Chancellor and the Paymaster General. There
is the increase in the disregard, automatic limits being imposed
in future in-year adjustments and a number of other changes we
can go through if you want. What that run of figures was trying
to do was estimate what is the net effect on total expenditure
when you take all those together and allow for their interactions.
Q478 Mr Newmark: Are you talking
annually or cumulatively now when you are netting this off?
Mr Gray: Both, because what we
are trying to assess in each year going forward is what will the
net effect of those changes be, because some of them had the effect
of increasing expenditure, some of them had the effect of reducing
expenditure. The dates of implementation of the five or six measures
are all at rather different points over the next 18 to 24 months,
so that net calculation was trying to bring all that together
and produce the net run of figures for the overall effect, taking
also account of the fact that it is a little bit like the Chairman's
opening question in relation to the cause of overpayments. None
of those factors will operate uniquely in isolation. There are
quite a lot of inter-dependencies and we are trying to assess
what is the net impact.
Q479 Mr Newmark: Okay. My next question
is, what estimate have you made about the number of families claiming
tax credit who will have increases in income between £2,500
and £25,000 in each year?
Mr Gray: I cannot give you that
figure off the top of my head. If we could let you have a note
on that later?
2 Footnote by witness: We assume a recovery profile
in line with the provision for bad and doubtful debts included
in HMRC's Trust Statement. Back
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