Examination of Witnesses (Questions 1-19)
HM REVENUE &
CUSTOMS
10 OCTOBER 2007
Q1 Mr Williams: Before we start, may
I welcome our guests from overseas, from various parts of the
Commonwealth who are members of the Trust in Government Study
Group. I had been going to say I hope you will be comfortable
here, even if you will not be interested, but looking around I
see most of you are not even going to be comfortable, so I hope
we can compensate on the interest. The hearing today is with Her
Majesty's Revenue & Customs on Tax Credits and PAYE. Our principal
witness has been with us on various occasions, Paul Gray. Would
you introduce your colleagues, please?
Mr Gray: Thank you, Mr Williams.
On my right is Sarah Walker, who is the Director in charge of
the Benefits and Credits Directorate in the Department, and therefore
has particular accountabilities on Tax Credits. On my left is
Mike Shipp who is the Director in charge of our PAYE, Self Assessment
and National Insurance Directorate, and therefore has particular
accountabilities around PAYE, the other aspect of the hearing.
Q2 Mr Williams: Thank you. First
of all if we turn attention to you, Mr Gray, and the issue of
overpayments, I see from the Report that since the system was
set up in 2003 there have been overpayments of £6.6 billion,
but £3.9 billion of this still has to be collected and that
you are calculating that probably £1.6 billion never will
be recovered. These are staggeringly high figures, are they not?
Mr Gray: They are large figures,
Mr Williams. The only figure I would comment on if I may is the
last of them where you said £1.6 billion we are expecting
not to collect. The £1.6 billion is actually the provisions
that we have made in our accounts; we certainly aim and hope to
collect a further proportion of those overpayments, but in accordance
with proper accounting practice as audited by the NAO we have
made provisions for that in our accounts. The level of over-payments
over the first three years of the operation of the new Tax Credits
has come down somewhat; it was £2.2 billion in the first
year, 2003-04, it has come down to £1.7 billion—
Q3 Mr Williams: That is only a 25%
drop.
Mr Gray: Yes, and it is still
a large figure. As a result of both the actions we are taking
to seek to improve the administration of Tax Credits and as a
result of the range of policy adjustments that were made in the
pre-Budget Report two years ago, the 2005 Report, we are anticipating
that those on their own will bring down the level of overpayments
on an annual basis by about a third, which will bring it much
closer to the level of continuing overpayment that was always
anticipated and was debated in Parliament at the time that the
policy was introduced.
Q4 Mr Williams: As a department you
do not seem to have discovered millions; when you do things you
do them in billions, like your fraud and error record: you are
losing £1 billion each year on fraud and error and you actually
do not believe anyone when they say that you fail to give proper
protection. When you look at the Treasury minutes, minute 15 on
page 11 says: "The Department notes [that is your department]
the Committee's conclusion but disagree that it failed to design
a scheme to give proper protection against error and fraud."
Can you seriously sit there and say that with error and fraud
running in the billion range you have an effective or a worthwhile
system?
Mr Gray: I am not satisfied yet
that we have—
Q5 Mr Williams: I am glad of that.
Mr Gray: Brought down the level
of error and fraud to anything like the levels that we need to,
so I am not sitting here feeling remotely complacent about the
position that we are in, far from it. The point of that comment
in the Treasury Minute was that we do feel we put in place appropriate
systems at the start of the introduction of the policy; we are
now progressively seeking to put in place ever more effective
methods. On your point about billions rather than millions, I
would certainly often sooner sit here talking to you in millions
rather than billions, but the scale of our operations is extremely
high here. We are now paying out of the order of £20 billion
a year in Tax Credits, we operate a very large business, but as
I have just said I am extremely keen that we get in a position
in which we can very significantly reduce those levels of fraud
and error from the figures collated in the first two years.
Q6 Mr Williams: But if you find a
billion evidence of proper protection in relation to fraud and
error, what would you regard as failure?
Mr Gray: Can I just refer to them
perhaps as error and fraud. What we are talking about here, and
we have only had measurements for the first two years of the system,
03/04 and 04/05 up to this point, the great majority of that figure
as measured in the first two years is error rather than fraud.
Q7 Mr Williams: Can you tell us the
proportion?
Mr Gray: In the first year it
was something like 90% error, in 04/05 it was rather higher than
90%—Sarah Walker may be able to supplement the figure—but
we are talking about well over 90% in those first two years. We
recognise that in the first two years of the operation of the
system we had not done enough to support claimants for Tax Credits
being in a position where we were supporting them to make their
applications and their renewals with us, in a way which reduced
the amount of claimant error. That has been the focus of a large
number of the administrative changes that we brought in.
Q8 Mr Williams: We have three times
recommended in three Reports that you should set yourselves targets,
and three times you have ignored that recommendation. Was that
not a bit presumptuous in the circumstances?
Mr Gray: I certainly would not
wish to be presumptuous, and I do not think we have ignored it,
if I might say so. What I said when I appeared before the Committee
last on this subject—and it was repeated in that Treasury
Minute to which you referred—was that we firmly intend to
set targets for the reduction of error and fraud. What we said
in that last Treasury minute was we felt it was important to have
two good years of data from the early operation of the system
before we could meaningfully set targets for the reduction. What
I have put in place since the Committee's last hearing on this
subject is measures to speed up very much the collection of the
fraud and error statistics by the random enquiry process; I am
hoping that by the end of this year we will be able to publish
the results for 2005-06; by the middle of next year to have published
the figures for 2006-07, so we will have speeded up by 12 months
the timetable where we are able to publish the estimates. As part
of the spending review settlement which was announced yesterday
by the Chancellor, which included provisions for the targets that
departments will operate to over the next three years, that includes
a provision for us to set explicit targets for the reduction of
error and fraud in Tax Credits. In line with what we have said
before I do not think it would be sensible to seek to do that
until we have got the figures for 2005-06, which as I say I hope
we will have by the end of this calendar year; I then envisage
that, alongside the setting of all our other three year departmental
targets, early in 2008 we will be bringing forward and setting
explicit targets for the rate of reduction in tax credit error
and fraud.
Q9 Mr Williams: I must say I am surprised
the Treasury has not been applying pressure on you to set targets
earlier than that, but that is for the Treasury—
Mr Gray: This is a process I was
extremely keen to enter into myself, Mr Williams, I have not been
pressured to do this, I think it is entirely appropriate as the
head of the department that we should do this but only when we
have a reasonably firm basis on which to do so.
Q10 Mr Williams: Switching to the
overpayments, there have been two rather damning reports, there
is Ann Abraham, the Ombudsman, who has said that 91% of all complaints
handled by her office in relation to your department result from
what she described as: "the unfair and inconsistent application
of rules to claim the money back" and she is quoted as saying
that: "this is often with a distressing, devastating even,
effect on families". Does that not worry you?
Mr Gray: It does concern me that
we have not improved as much as I would like our handling of overpayments
and complaints. I frequently discuss these matters with Ann Abraham,
the Ombudsman, and indeed was doing so earlier this week. Actually,
in the latest year of her findings the percentage you quoted,
91%, has come down to just over 60%[1];
that is still too high and I am very keen to see it come down
further. In her latest report on Tax Credits which was published
yesterday she has made a number of further recommendations for
the way in which we do handle overpayment disputes. I am very
happy to take on board those recommendations and, as I say, earlier
this week I was having a constructive discussion with her about
how we implement them. The only other thing I would say is that
by definition the number of cases that come the Ombudsman's way
is an extremely small proportion of the total; she gets perhaps
100 or 200 cases a year. I say that not to minimise the importance
of the points she makes nor to minimise the need for us to get
better at the way we handle our complaints, but the vast majority,
over 95% of the overpayment disputes which we handle, do actually
involve no official error and do not give rise to the sort of
issues that she has highlighted in here.
Q11 Mr Williams: The example quoted in
The Guardian the other day was of a man dying of cancer
who had correctly provided information; you then told him he had
received £5,700 in overpayment, and when the Ombudsman took
it up with you, you eventually relented even to the extent of
saying that you would also provide £170 in compensation,
which unfortunately went to his estate and not to him because
he had already died; it took you that long to sort the problem
out. The Citizens' Advice Bureau in their report this week say
that more than half of claimants would be less likely to claim
the means-tested benefit in future as it as a result of their
experience. That is very, very worrying.
Mr Gray: That is a worrying finding
on their part. Again, we regularly discuss these issues with the
Citizens Advice Bureau and I do not seek to minimise the significance
of the points that they are raising. In the particular case and
some other cases that you quoted it is quite clear we have not
handled as appropriately as we should, and I am not infrequently
in correspondence with various of you around the table and other
Parliamentary colleagues in relation to cases that we have not
handled well. I do not seek to defend that, we need to get better
on handling those cases, but again without trying to imply any
complacency on my part it is a very small proportion of the total
cases being handled; on average every Member of this House has
something like 10,000 families in their constituency who are in
receipt of Tax Credits. Even if you have 10 or 20 problem ones,
that is 10 or 20 too many but it is in proportionate terms the
tip of a very large iceberg, but we need to resolve all of them
I accept.
Q12 Mr Touhig: Mr Gray, in paragraph
2.4, page 2, we see that the Department's performance targets
are based on whether or not the information is correctly entered
into your tax credit system, not on whether the actual payment
is correct. Why is that?
Mr Gray: That has been the way
in which the targets have been set in the past; as we are moving
forward we are looking at ways in which we can improve the way
in which the targets are set. I do not know if Ms Walker wants
to add anything on this point, but in the first round of Tax Credits
we were operating on a particular set of targets, we are looking
to see whether there are ways in which we can improve that.
Q13 Mr Touhig: As I understand it,
Mr Gray, tens of thousands of people can be getting the wrong
amount of credit, but so long as you have correctly entered in
the information, you meet your targets.
Mr Gray: We are measuring the
accuracy of what we put into the system, but at the end of the
day we seek to ensure that people are actually getting the right
amount of money to which they are entitled.
Q14 Mr Touhig: But your target is
based not on whether they are the right amount but whether you
have correctly inputted the information. Do you get a bonus of
you meet your targets; you and your senior colleagues, do you
get bonuses?
Mr Gray: Not specifically in relation
to that individual target.
Q15 Mr Touhig: But you get bonuses.
Mr Gray: We are eligible for bonuses.
Q16 Mr Touhig: So here we have a
target which is in no way beneficial to the recipient but provided
you have correctly inputted the information, you have hit the
target.
Mr Gray: That particular target;
I am subject to a much wider range of targets in terms of the
overall performance.
Q17 Mr Touhig: In 2006-07 you wrote
off £61 million in respect of official error, so therefore
we could have thousands of people across the country not getting
their correct benefit, you have to write-off money in error and
you still meet your targets because your target is based upon
inputting information, whether it is correct or not, no matter
what the customer eventually gets at the end of the day.
Ms Walker: Perhaps I can help.
The target is expressed in terms of the actions taken by our staff
because that is what we are trying to measure at that point, but
it is true that we also look at the accuracy of the payment, and
the level of accuracy of payment is similar; there is no evidence
that there is anything wrong in between the inputting of the information
and the payment going out, but we are looking to change so that
we do actually measure the payment going out. The official errors
that result—
Q18 Mr Touhig: That might be some
more incentive to you then to actually get it right, if your target
is based upon making sure that people get the right amount of
money.
Ms Walker: Of course.
Q19 Mr Touhig: Yes. In response to
our earlier Report you rejected our view that you operated a:
"pay now check later approach" in processing claims.
You go on to say you designed the scheme to give proper protection
again fraud and error, and in support of that on page 11 of the
Treasury Minute you say that one of these measures actually means
that you carry out verification checks of claims before payment.
If that is the case, how have you overpaid £6.6 billion?
Mr Gray: At the point at which
we are verifying the payment we are verifying that in relation
to the information we have available at that point we are correctly
paying out the right amount of the claim.
1 Note by witness: 63% is the proportion upheld
in whole or in part for Parliamentary Ombudsman cases generally
in 2006-07. The corresponding figure for Tax Credits cases in
2006-07 is 74%. Back
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