Select Committee on Public Accounts Twenty-Second Report

Conclusions and recommendations

1.  £5.8 billion was overpaid to claimants in the first three years of the current tax credits scheme. The Government has made changes to the scheme which it estimates will eventually reduce overpayments by one third. The Department does not have complete information on the causes of overpayments and is uncertain about how far each measure will reduce overpayments. The Department should include the actual cost and effect of these changes in its annual report to allow Parliament to evaluate their success.

2.  In response to repeated questioning, the Department eventually told the Committee that increasing the income disregard to £25,000 would cost the Exchequer an additional £500 million each year. The Committee requested information on the cost of the increased disregard shortly after the decision was first announced in the 2005 Pre-Budget Report. But the Department disclosed its estimate only during the Committee's most recent hearing and after the National Audit Office produced its own estimates of the potential cost. The Department said that greater confidence in its estimates had allowed it to release this information. But if it was confident enough to increase the disregard it should have been able to give an estimate of the cost when the decision was first announced.

3.  Tax credits suffer from the highest rates of error and fraud in central government, undermining HMRC's reputation for accuracy, fairness and proper handling of taxpayers' affairs. In 2005, the Committee concluded that the Department's effectiveness in managing the tax system depended on maintaining public confidence in its administrative competence. Yet the Department neither produces routine estimates for error and fraud nor sets targets for reducing levels. It needs to demonstrate to taxpayers that it maintains its capacity for the proper handling of their tax affairs by setting targets for reducing the level of error and fraud and producing routine estimates to validate its performance against the targets.

4.  The Department does not have up to date information on levels of claimant error and fraud in tax credits. In the absence of up to date information the Department cannot assess the effectiveness of its efforts to combat tax credit error and fraud. From 2007-08 most tax credits awards will now be finalised in the July following the year to which they relate. The Department should make earlier estimates of the overall levels of error and fraud and assess these as a basis for more timely and targeted action to bring the trend down.

5.  The design of the internet system for tax credits was deficient from the outset and left it vulnerable to attack by organised criminals. The system, which was opened in August 2002, did not conform to mandatory requirements on security set down by the Government's e-envoy. Only after sustained fraudulent attacks did the Department acknowledge that it could no longer manage the risks arising from the inadequate design, and it was forced to close the system in December 2005. The internet channel has been closed for well over a year and is unlikely to re-open before the summer of 2008.

6.  The Department failed to design the tax credits scheme to give proper protection against error and fraud. In its efforts to make the scheme accessible to claimants, it relied too much on detecting false claims after payment had been made. This approach of 'pay now, check later' left the scheme vulnerable to fraud. The Department is now increasing its testing of claims before they are paid, focussing on claims considered to present the highest risk. The effectiveness of this approach demands appropriate risk criteria, and the ability to identify emerging trends in the claimant population. It should supplement this work by testing a sample of claims below its risk threshold to confirm that its risk assessment criteria are soundly based.

7.  The Department has increased the number of tax credits compliance staff from 1,200 to 1,400 in 2006/07, allowing it to examine a further 20,000 claims. The increase in the number and the change in focus of compliance tests by HMRC in 2005-06 resulted in significantly increased yields. The Department should regularly reassess the resourcing of compliance work on tax credits against its effectiveness in helping to reduce the unacceptably high levels of incorrect claims.

8.  The Department applies the same risk assessment process to all tax credit claimants, without distinct procedures for migrant workers. Migrant workers do however present an additional risk of failing to notify the Department when they leave the United Kingdom and cease to be eligible for tax credits. The Department needs to manage the risk of making incorrect payments to claimants who have left the country permanently without telling it.

9.  The Department does not have a gateway to request information held by the Home Office on migrant workers who are claiming tax credits. This information would assist the Department in verifying information provided on income and circumstances. It should explore with the Home Office the scope for receiving information held on migrant workers.

10.  The administration of tax credits has not been effective and Members of Parliament continue to receive too many complaints about the quality of service provided. Administrative errors made by the Department continue to generate incorrect payments but it does not know how much is involved. This type of information is routinely prepared by the Department for Work and Pensions in connection with its administration of benefits. HM Revenue and Customs should calculate and publish information on the value of incorrect payments caused by administrative error.

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Prepared 9 May 2007