House of Commons - Treasury

Select Committee on Treasury Sixth Report

4 Fraud, error and organised crime

83. The National Audit Office told us that HMRC's work to identify the level of error and fraud in 2003-04 awards is not due to be completed until Spring 2006, but that:

In July 2005, [HMRC] announced interim findings which indicated that [in 2003-04] it overpaid 3.4% by value (£460 million) because of claimant error and fraud. These results are subject to a wide margin of error as they based on an initial sample and are likely to involve the more compliant cases. The final results are likely to show an increase in the proportion of cases involving claimant error and fraud.[127]

84. Sir David told us that HMRC's work to identify the final levels of loss for 2003-04 due to claimant error and fraud was not yet complete.[128] He explained that, in order to "satisfy the NAO because this will go into our accounts", the Department was looking in detail at a sample of 4,700 cases.[129] He confirmed that he expected the final level of claimant fraud and error to be "significantly more" than 3.4%:[130]

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.[131]

85. Analysis undertaken recently by the Institute for Fiscal Studies suggests there may be significant levels of fraud or error amongst people claiming tax credits as lone parents.[132] According to the IFS, HMRC and the Department of Work and Pensions (DWP) together estimate that they are paying income-related support for children, in the form of tax credits or out-of-work benefits, to 2.1 million lone parents, but the Office for National Statistics estimates there are only 1.9 million lone parents living in the United Kingdom. The IFS suggests this indicates that:

a portion of the tax credits or out-of-work benefits which HMRC or DWP think they are paying to lone parents are probably being received by cohabiting couples with children, whether through deliberate fraud or errors made by claimants or the government. If one disregards the threat of fines or penalties, it is often financially worthwhile to pretend to be a lone parent, rather than a couple, when claiming tax credits or out-of-work benefits.[133]

OUR CONCLUSIONS

86. We are concerned that it is now over two years since the end of the 2003-04 tax year, and yet HMRC is still to establish final levels of claimant error and fraud in the tax credits regime for that year. Given that the final figure is likely to be significantly higher than the interim figure of 3.4%, we question why the Department has not moved more quickly to establish a complete picture of patterns of claimant error and fraud in 2003-04, to put it in a stronger position to address the problem in more recent tax years. We recommend that the Government put appropriate procedures in place to ensure that similar work for tax years 2004-05 onwards is completed more promptly.

Recent incidences of organised fraud

a) Background

87. Commenting on the former Inland Revenue's accounts for 2004-05 on 7 October 2005, the Comptroller and Auditor General noted that HMRC had evidence that tax credits had been targeted by organised criminals, particularly where they were able to make claims over the internet without proving their identity, but that the Department's Internal Audit Office had concluded that "there was a lack of comprehensive information to allow a robust analysis of the problem".[134] Shortly thereafter, on 2 December 2005, HMRC announced the closure of the tax credits e-portal, following identification of attempts to defraud the tax credit regime by making claims through the tax credits e-portal.[135] These claims falsely used internal information held by DWP about its staff. HMRC stated that it had closed the e-portal whilst it developed new checks to ensure that the system remained secure, and that a criminal investigation was underway.

88. Subsequently, on 18 January 2006, the Paymaster General gave further details of this fraud. She stated that:

some 8,800 DWP staff identities "may have been stolen" in 2003-04;
of these, 6,800 had been used in an attempt to defraud the tax credits regime in autumn 2005;
of the 6,800 fraudulent claims, around 4,100 were fully intercepted by HMRC before any payment, so that no payment was made;
of the remaining 2,700 claims, where tax credit payments were made into multiple bank accounts using the stolen identities, payments were suspended immediately they were discovered, and all payments were suspended by 16 December 2005.[136]

The Paymaster General estimated the loss from this fraud as £2.7 million.[137] She also gave details of another fraud, involving the use of identities stolen from Network Rail employees, stating that HMRC's investigations had so far resulted in at least 16,000 claims being stopped and that details had been passed on to what is now the Serious Organised Crime Agency.[138]

89. The Paymaster General has also given figures for the numbers of cases of organised fraud detected by HMRC since April 2004:

in 2004-05, HMRC intervened on 17,164 incorrect claims before the tax credit payments were made where fraud or error was suspected;
from April 2005 to the end of November 2005, HMRC made 38,924 such interventions, of which HMRC estimate over half arose as a result of organised attacks;
from October 2004 to the end of November 2005, HMRC identified and stopped 22,284 tax credit claims in payment, where organised fraud was suspected.[139]

SCALE OF FRAUDS

90. According to the NAO, recent HMRC estimates show losses to the Exchequer of some £15 million due to organised fraud:

This figure relates to the losses to date in some 25 cases of significant organised fraud, defined as those involving more than £25,000. As a result of the further work on tackling organised fraud, the Department believes that the £15 million figure will increase, but it is too early to give a firm estimate at the moment.[140]

91. Sir David told us that the scale of the frauds perpetrated on the tax credits regime was "pretty unprecedented".[141] The identities used fraudulently were not only those of DWP and Network Rail employees, but also those of other individuals.[142] The Paymaster General told us that HMRC decided to close the e-portal because "what was particular" about this fraud was the use of stolen identities to open "vast numbers" of individual bank accounts: "whether those bank accounts were funnelled somewhere else eventually is a matter for the investigation now".[143] Officials were able to give us an idea of the scale and complexity of the frauds:

… production orders … 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 … 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.[144]

92. The criminal investigation into the frauds remains ongoing; as at 19 April, two arrests had been made in connection with these frauds; the individuals concerned were charged with money-laundering offences and remanded in custody.[145] HMRC hopes "to be able to say something, whether it is a definitive figure about organised crime", when it publishes its report into the results of its work to identify the final levels of loss for 2003-04 due to claimant error and fraud.[146]

PAYMASTER GENERAL'S AWARENESS OF FRAUD

93. We specifically asked the Paymaster General when it was first reported to her, as Minister, that HMRC was concerned about organised fraud. She responded:

What became clear in late November [2005] was that there was substantial suspected identity fraud in the system. HMRC advised me accordingly. I took their advice and we closed what was then the e-portal as quickly as was possible in order to close off that particular attempt.[147]

She subsequently clarified that it was "towards the end of November" that she became aware of the attack by organised gangs on identity fraud.[148]

94. Following our session with the Paymaster General, Mr David Laws MP wrote to us, expressing concern that the Paymaster General's evidence appeared to contradict her answer to an earlier Parliamentary Question (PQ) put by Mr Laws.[149] The Paymaster General had responded to the PQ on 10 January 2006, in the following terms:

Over the last 12 months HMRC has detected an increase in the number of organised attacks on the tax credits system, predominately via the internet. HMRC continued to monitor the situation closely and updated me in June 2005. A decision was taken to suspend the internet service from 2 December … [150]

95. Mr Laws considered that this answer indicated that the Paymaster General "had been updated on the problem [of organised fraud] in June and had probably known about it for far longer".[151] He stated his belief that "the Paymaster General has therefore misled Parliament" and asked that we "investigate exactly what the Paymaster General knew about the level of fraud and when".[152]

96. The Paymaster General subsequently wrote to us, responding to Mr Laws' allegations, which he had also put to her directly.[153] She explained that her response to the PQ of 10 January referred to a specific report she had received in June 2005, which provided information about trends in suspected fraudulent activity and related matters. In June, HMRC advised her that the compliance procedures in place were effectively managing the risk. Subsequently, in November, "new information came to light about what appeared to be a specific and unprecedented attack on the system"—the fraud perpetrated using identities stolen from DWP staff.[154] The Paymaster General stated that, "in the light of the virulent and highly organised nature of this attack, HMRC judged the balance of risk had changed significantly, and recommended closing the e-portal".[155]

LEVELS OF STAFFING IN COMPLIANCE

97. PCS alleged that HMRC had plans "to shed almost 300 jobs from [tax credits] compliance and anti-fraud activity in this financial year [that is, 2005-06]".[156] In oral evidence, PCS reduced this estimate to "around 150 jobs", and commented:

We have major concerns based on our understanding of where job cuts are destined to fall. I say "our understanding" because here we are, some one year on, from the Chancellor's announcements about efficiency savings and job cuts across the Civil Service, still not knowing from David Varney and his colleagues exactly where these cuts are destined to fall … One area where we do have some information to suggest where staff cuts are imminent is in the area of tax credit compliance.[157]

PCS argued that additional resources should be put into tax credits compliance and anti-fraud activity, because "it is an established fact that organised criminals see the design of the [tax credits] system as the provider of 'low hanging fruit' for their activities".[158] The union told us that a "knock-on" effect of HMRC's initiative to supplant staff with an IT system was the Department's "pay out first and check later" policy, which had in turn enabled a substantial number of fraudulent claims to be made and National Insurance numbers to be 'hijacked'.[159]

98. We put PCS's evidence to the Paymaster General. She described herself as "stunned and surprised" by the alleged plans to cut jobs in tax credits compliance and anti-fraud activity, and told us that there would "not be reductions in the compliance within the Tax Credits Office, in fact quite the reverse".[160] Later in the same evidence session, she stated that HMRC was "currently considering across the whole of the Department, including tax credits, what the appropriate level of compliance activity should be."[161]

99. We subsequently asked HMRC officials which of the Paymaster General's statements was more accurate—that that there would be increases in compliance activity within the TCO, or that the matter was still under consideration. Sir David responded:

I think the Paymaster General did capture all elements of the argument, and I think this is where Sir Humphrey comes to the fore! … 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.[162]

100. Officials confirmed that there were currently "no plans to reduce the number of compliance staff allocated to this work".[163]

OUR CONCLUSIONS

101. The problem of organised fraudsters targeting the tax credits regime, using thousands of stolen identities to channel tax credits to individual bank accounts, is obviously a complex one, and investigations by HMRC, DWP, the Serious Organised Crime Agency and the banks involved will no doubt continue for some time. As an indication of the scale of the problem, between April and November 2005, HMRC made over twice as many interventions on incorrect claims where fraud or error was suspected as it did in between April 2004 and March 2005; HRMC estimates that over half the interventions between April and November 2005 arose as a result of organised attacks.

102. On the basis of the information available to us at the present time, and given that a criminal investigation is underway, it would be inappropriate for us to comment on whether HMRC could have done more to prevent fraudulent claims from entering the tax credits system. At this stage, we are also not in a position to establish whether HMRC ought to have identified the problem at an earlier stage, or to have realised the vulnerability of the e-portal sooner. We welcome the Paymaster General's clarification of the advice she received from HMRC on the issue of fraud, and at what date.

103. We note the Paymaster General's assurances that the Government has no current plans to reduce the numbers of staff working in tax credits compliance. In its response to this report, we recommend that the Government make a clear statement about its future plans for compliance, both in terms of levels of staffing and processes, to indicate how developed those plans are and to set out a timescale for any decisions it intends to take in this area.

127 Ev 161 Back

128 Q 462 Back

129 Qq 462, 563 Back

130 Q 463 Back

131 Q 462 Back

132 Institute for Fiscal Studies press release, 'Government paying tax credits and benefits to 200,000 more lone parents than live in the UK', 12 March 2006; see IFS briefing note 70, available at www.ifs.org.uk. Back

133 Ibid. Back