House of Commons - Public Accounts - Twenty-Second Report

Select Committee on Public Accounts Twenty-Second Report

2 Error and Fraud in Tax Credits

15. Tax credits are vulnerable to fraud through applicants providing false information, for example understated or undeclared income, or by misrepresenting their circumstances, for example not declaring the existence of a partner. Claimants may also make genuine errors in their applications which result in incorrect awards.

16. The Department's effectiveness in managing the tax system depends on maintaining public confidence in its administrative competence, which is undermined by high levels of error and fraud. The Department has estimated that in 2003-04 claimant error and fraud led to incorrect payments to claimants of between £1.06 billion and £1.28 billion, some 8.8 to 10.6% of payments by value. The Comptroller and Auditor General qualified his audit opinion on HM Revenue and Customs' Trust Statement because of these losses.[20] The percentage levels are the highest for any government scheme providing means tested support, and the Department acknowledged that they were far too high.[21]

17. The Department explained that it was committed to reduce these levels substantially. But it did not know if error and fraud had in fact been reduced, because it only had information for 2003-04 awards.[22] The Department measures error and fraud by investigating a random sample of awards, but it cannot start an enquiry until the award has been finalised. Some 2004-05 awards were not finalised until January 2006, which meant the Department only started its investigations in February 2006. Given the time the Department takes to complete this work, it will only produce estimates of levels of error and fraud for 2004-05 awards in the spring of 2007.[23]

18. Despite the fact that the scheme has been in operation for four years, the Department still does not have a target for reducing error and fraud. It felt it needed data for 2004-05 to provide a reasonable baseline on which to set such targets.[24] The Committee expected the Department to have established a clear benchmark for managing the risk of error and fraud when the scheme was designed. The Department is only now starting to consider potential benchmarks, four years after the scheme was introduced.

Organised crime and the tax credits internet facility

19. Tax Credits have been targeted by organised criminals, and the Department identified incorrect payments by suspected organised fraudsters of £131 million in 2005-06.[25] These attacks forced the Department to close the tax credit internet channel (the e-portal) on 2 December 2005. The ability to claim tax credits through the e-portal was particularly appealing to organised criminals as it allowed them to submit multiple claims quickly with impunity.[26]

20. The facility to allow tax credits claimants to submit claims via the internet was introduced in August 2002. In September 2002 the e-envoy issued requirements on controls that should be built into systems where government services were provided electronically.[27] Central government departments and agencies were required to comply with these requirements. But the Department did not apply these to the tax credit system, despite the fact that they were mandatory.

21. In introducing the tax credits internet channel, the Department sought to strike a balance between accessibility for those who wished to use it and appropriate security.[28] But it failed to reassess the security of the internet channel at any point in the three years after the e-envoy's guidance was issued. It was only in December 2005, following a concerted attack by organised criminals, that the Department concluded the internet channel was not robust enough to withstand fraudulent attacks. It does not intend to re-introduce the internet channel until it is satisfied it fully meets current security requirements.[29] But this is unlikely to happen before the summer of 2008, some two and a half years after it was originally closed.[30]

Compliance

22. Although aware of the risk of fraudulent tax credit claims, the Department initially placed the main emphasis of its compliance work on checking claims after they were in payment. It now gives much greater emphasis to checking claims before payment.[31] Table 2 shows that the number of pre-payment checks increased in 2005-06, to almost half of all its checks. The value of incorrect payments identified by the Department's compliance work also increased in 2005-06. But in the absence of an overall measure of error and fraud, it is not clear if this increase is due to more effective compliance work or more attacks on the system.

Table 2: HMRC's direct compliance checks

2004-05 2005-06

Checks on awards before payment 17,000 16% 67,000 45%

Checks on awards after payment 91,000 84% 80,000 55%

Value of incorrect payments identified by compliance checks £130 million £528 million*

* This comprises incorrect payments prevented of £307 million and incorrect payments identified of £221 million. There is no corresponding breakdown of the figure for 2004-05.

23. In 2006-07 the Department has increased the number of tax credits compliance staff from 1,200 to 1,400.[32] HMRC made this decision on the basis that the additional staff will allow it to undertake an additional 20,000 investigations.[33]

24. HMRC's design of the tax credits scheme has failed to establish proper controls to prevent error and fraud from entering in to the system. In particular, the Departments approach of 'paying claims now, and checking later' failed to safeguard against fraudulent claims going directly into payment. As the Department's experience of the fraud committed through the e-portal shows, this failure in the design of controls is compounded where there are inadequate checks in place to establish the true identity of the claimant.

Migrant workers

25. In May 2004 ten new countries joined the European Union, and many people from those countries have entered the UK to work. Subject to meeting certain conditions, migrant workers have the right to claim tax credits.

26. The Department applies the same risk assessment process to migrant workers as to other claimants.[34] It looked at the specific risks in this area, and concluded from the initial results of its work that the risk associated with migrant workers is no greater than that for other claimants.[35]

27. To be eligible for tax credits, claimants need to be present and ordinarily resident in the UK.[36] The Department therefore needs to know if migrant workers leave the country and continue to receive tax credits. Individuals are responsible for notifying the Department if they leave the UK and are no longer eligible for tax credits. But the Department did not consider there was a particular risk of non-compliance in this area.[37] It can charge penalties where claimants do not notify it that they have left the United Kingdom for more than eight weeks, although it does not know how many penalties have been charged.

28. The Department also faces a risk in dealing with claimants who have previously lived abroad,[38] because it needs to verify incomes and circumstances before they came to the United Kingdom. Again, it does not have any distinct procedures to manage this risk.[39]

29. The Department provides tax credits information to assist the Home Office's work on Immigration and Terrorism. But it does not have any arrangements to request information held by the Home Office that could be used in its compliance work on tax credits.

20 C&AG's Report, para 2.38 Back

21 Q 14 Back

22 Q 84 Back

23 Q 83 Back

24 Q 11 Back

25 C&AG's Report, para 2.33 Back

26 C&AG's Report, para 2.30 Back

27 Office of the e-envoy: Registration and Authentication: e-Government Strategy Framework Policy and Guidelines, September 2002. Back

28 Q 40 Back

29 Q 41 Back

30 Oral evidence taken before the Treasury Sub-Committee on 14 March 2007, The Administration of Tax Credits: Follow Up, HC (2006-07) 382-I, Q 88 Back

31 Q 17 Back