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.
| 
