HM Revenue and Customs: Improving the Processing and Collection of Tax: Income Tax, Corporation Tax, Stamp Duty Land Tax and Tax Credits - Public Accounts Committee Contents

Examination of Witnesses (Questions 20-39)


14 OCTOBER 2009

  Q20  Mr Bacon: I know that organised fraud is categorised separately according to this paragraph; could you tell us what are the figures for fraud and error and organised fraud? You see, £1.58 billion and £1.84 billion in total—forgetting organised fraud for the minute—is fraud and error.

  Ms Strathie: Yes.

  Q21  Mr Bacon: How much of the £1.58 billion and £1.84 billion is fraud and how much of it is error?

  Ms Strathie: Roughly 10% is fraud and the remainder is error and, as you say, that does not include the serious and organised criminal attacks on the system which are a bit more difficult to quantify. Our approach to fraud and error—and indeed this is something that the Chancellor has given us in his remit this year—has been to break down what is fraud and what is error, and indeed we have an aspiration to break that down further between our customers and our own people in the organisation. Basically you are looking at 90% customer error and if you want to look at that on another level, many of these errors are around child care costs and child care provision, so we are pretty clear on where things go wrong but the vast amount of customer error is because people fail to tell us that things change, that they have changed their circumstances. We have actually introduced quite a number of approaches, including a very proactive health check of contacting customers, just to check before renewals if anything has changed in their circumstances.

  Q22  Mr Bacon: You mentioned that it was difficult to quantify the value in relation to organised criminal attack, but you presumably make some attempt to do that.

  Ms Strathie: Yes.

  Q23  Mr Bacon: What is the rough value that you have estimated?

  Ms Strathie: I do not have the figure for that, do you?

  Mr Summersgill: No. The last figure that was published was for 2007-08 and was in the order of £66 million. That was organised fraud prevented by our activities.

  Q24  Mr Bacon: But you do not have the figure for organised fraud that was not prevented. Do you have no estimate of it? I am interested in this for two reasons; one generally because I do not like fraud against the taxes paid by my constituents and the second reason is that an HMRC civil servant leaked to me a dossier containing evidence of organised criminal attack. Fortunately I was not taken away by the police and arrested, but until recently until the arrest of my colleague I did actually have his mobile phone number on my BlackBerry—I can tell you it is not there now. He disclosed an organised criminal attack that was possibly involving tens maybe hundreds of million pounds where people came to this country from Eastern Europe, set up low paid jobs with British bank accounts so that they got tax credit payments, then went back home where, in Slovakia, they took the money out with a cash card, did not tell you about their change in circumstances and it was sometimes 12 months before you caught up with them, and £5,000 or £6,000 later they had enough money to buy a house. That was being done on a widespread scale, and after I publicised the fact of it and handed on the dossier I had received to the predecessor of the predecessor of the present C&AG it was closed down quite quickly; there was a lot of effort that was put into it. You must in that process have had some estimate, and in other similar attacks, of what the value was.

  Ms Strathie: What we are saying is the last published figure is the one that Mr Summersgill told you about. It is really important when we look at our very serious and organised measures to understand that threats do not generally come under one single head of duty and one single line, nor does our intelligence come from any single source in HMRC. We are constantly reviewing the threat assessment; some of it is against tax credits and we were successful in shutting that down. More recent attacks have focused on the self assessment system and on carbon credits. Basically, the reason why things do not come necessarily in neat packages and it could only ever be an estimate of value is because generally these are interwoven into total loss. When people are serious and organised they are generally attacking or attempting to attack on several fronts.

  Q25  Mr Bacon: The Report says you are increasingly prioritising debts by risk rather than by value, which one can see might make sense in some ways, especially if you assume that even a high value debt is likely to be repaid, but that must have some consequence for the recovery of large numbers of small debts, does it, and what do you do about it?

  Ms Strathie: You are talking about debt generally, Mr Bacon, not just tax credit debt, yes?

  Q26  Mr Bacon: Yes.

  Ms Strathie: Where we saw that increase in debt that took us to around the £20 million pre-recession and then the further increase, a lot of that was because we were focusing on very, very high value debt. All of this is about prioritising resource and we had considerable success there, but we did see an increase in small debt rising over that period. Basically the revised strategy on our approach is to cover all of those areas. Basically we have debtors who can pay, are willing and able and just need some help to do it, so we have introduced new methods—people can pay on-line et cetera and there are time to pay arrangements. We have people who just need a bit of help to do it and we have introduced various different ways that people can pay. Then we have people who do not really want to pay but could pay.

  Q27  Mr Bacon: Sure. Specifically on tax credit debt, low value tax credit debt, are there large numbers of small tax credit debts that have not been chased as vigorously as they might have been because you are placing emphasis on high value debt within the tax credit system?

  Mr Summersgill: In the past there has been the possibility of that; clearly a lot of our focus in the Department has to be on the higher value debts. One of the things we have learnt is that the sooner we collect a debt, while it is young—as early as possible after the debt has crystallised following the finalisation process—and the more we can offer claimants the opportunity to pay off the debt by a debit against an ongoing payment then we are much more successful.

  Q28  Mr Bacon: I noticed that from figure 30; does that mean you are going to be doing more of that recovery through ongoing awards?

  Mr Summersgill: Yes. We are reviewing our whole approach in this area and, as Lesley mentioned earlier, a couple of things we are looking at are piloting the recovery of tax credit debts through as the pay-as-you-earn system.

  Q29  Mr Bacon: I have run out of time so let me just ask you a question about PAYE and then you can answer it at as much length as you like. Very quickly, I was interested in that earlier answer from Ms Strathie; it is great that you are doing it through PAYE but what proportion of tax credit claimants are now having that recovery where it is required done through PAYE?

  Mr Summersgill: It is a pilot so this year we offered it to a number of people with a debt less than £2,000 and within the pilot 1700 households are having a debt coded out. We will review how it has gone at the end of the year and then if it is successful we will look at the scope for rolling it out further.

  Q30  Mr Bacon: Are you happy to take it over quite a few years in such a way that even a poor person might not notice £5 a month over three or four years—you could pay back a small debt that way.

  Mr Summersgill: That is effectively the approach we take now in our time to pay arrangements. If it is not a debt we can collect from the ongoing tax credit award we will typically immediately allow a 12 months time to pay and we are always prepared to consider longer periods depending on individual circumstances.

  Q31  Chairman: Thank you Mr Bacon. Ms Strathie talked about the limitations of the system, perhaps I could ask the Comptroller and Auditor General if he has any views on the systems of debt collection in HMRC?

  Mr Morse: Thank you, Chairman. We think that HMRC is wrestling with an enormous issue, particularly following the consequences of the recession and we understood that there was intention to invest further in systems and to improve the systems infrastructure. I notice Ms Strathie mentioned the limitations of the system; we really feel that every £1 spent on improving this is about £100 yield in terms of what you can collect on behalf of the rest of the Government and it really is urgent that there should be investment in this area. We briefed the Committee on that before the hearing so I am glad to have a chance to testify to it on the record.

  Q32  Chairman: Do you want to comment on that?

  Ms Strathie: Yes, indeed. It is important that we understand how far HMRC has come in modernising a vast and complex business, and you cannot change every system overnight. If we had greater investment in this particular area then understanding very, very quickly the age and value of our debts would help, but secondly there is an opportunity for us to use more modern methods including debt collection agencies in some of this work. What we are seized of at the moment is you either reduce the head count in HMRC to free up the resources to do that or we strike some sort of agreement with our Treasury colleagues that we pay for that to an extent through the revenues that we collect. I know from all my experience of debt collection in DWP that the older a debt is the less likely you are to collect it, and therefore we feel that we have made incredible productivity gains in this area but we still have system limitations.

  Chairman: Thank you. Don Touhig.

  Q33  Don Touhig: Sticking with the question of tax credits do you believe that HMRC must try to recover overpayments to which claimants are not entitled—you must do it?

  Ms Strathie: Yes, our starting position is that if the money is owed to the Exchequer, unless we believe there is no chance or it is so vastly expensive, then we should try to collect it.

  Q34  Don Touhig: Is this objective pursued with a passion regardless of the consequences on the individual claimant?

  Ms Strathie: I would like to think that in any service that I have delivered in government I start with the customer, and working with our customers generally speaking gives you the best dividend. We do need to understand that people who are in the tax credit regime are not always people who live organised lifestyles and quite often get themselves into debt with us and many other agencies that they owe money to. That is why we have tried to work on different ways to help people make those payments.

  Q35  Don Touhig: I share that view very much, although a former Chancellor, Dennis Healey, once said there are two statements to treat with caution, the first one is "The cheque is in the post" and the second one is, "Hello, I am from the government, I am here to help". You told us in answer to earlier questions that you work closely with DWP in order to help recover money from people who have been overpaid, and you also in answer to questions from the Chairman said that there are some large organisations you have been seeking to recover money from for 16 years. Have you not just taken the soft option, let us pursue the little man and get the money back that he was overpaid and this multimillion pound corporation we will treat a bit differently?

  Ms Strathie: In scale and context tax credit debts are relatively small if you compare them with many other tax debts; on the other hand they are pretty large compared to many of the other welfare benefit debts. I believe in a refreshed strategic approach; we need to work much more closely on tax credit debt within DWP's overall approach and use our resources equally to best effect rather than see the tax credit debt in the totality of everything else. I have been in HMRC 11 years and I have not come across one company yet or one chief finance officer who has told me we take a soft approach with them.

  Q36  Don Touhig: How many overpayments are due to HMRC errors and how many are due to claimant errors, or do you assume all are claimant errors?

  Ms Strathie: The way that error has been calculated and the business design process if you like, the customer journey to achieve tax credits and to renew tax credits, is one where there are lots of checks and balances in the system to help the customer get it right. One of the things that I feel quite strongly about looking forward is that we need to break that error figure down to address any potential error on the part of our staff. At the moment we have simply fraud and error combined of which we know broadly 10% is fraud and the rest is customer error. Like you I do not believe that every single person who works for me does everything perfectly every day.

  Q37  Don Touhig: What you have just said is that it is customer error.

  Ms Strathie: I am saying we are scoring customer error, we are not scoring our staff error. We have an accuracy measure in lots of our different regimes right across the Department and we collect together accuracy figures, but that is not then taken forward into one of our key measures and it is something that we are now looking at going forward as to how we work on that. I do not have a figure for staff error. Do you need to add to that?

  Mr Summersgill: Could I just add to that? It is probably worth making a distinction between official error within the error and fraud statistics—which is actually very small and difficult to measure—and official error that leads to an overpayment. If official error leads to an overpayment then under the revised Code of Practice 26 if it was entirely down to us and there was no fault on the customer's side we would write that overpayment off.

  Q38  Don Touhig: But is not the culture always to assume that it is the customer, the client, who is at fault?

  Mr Summersgill: No, and indeed when a customer writes to us or you write on behalf of your constituents it will be looked into. Something that occasionally happens is that a customer will have notified a change of circumstances and for various reasons we may not have processed that timeously. We will listen to the phone conversation, which we record, and if we are satisfied that it is our error then we write the overpayment off.

  Ms Strathie: I would have to say, Mr Touhig, that I deal with all these cases personally, the ones where you write to me on behalf of your constituents, and we are quite generous in accepting that we may have contributed to the error.

  Q39  Don Touhig: I will pursue that further. We see at paragraph 5.14 that Mr Bacon has referred to that 6% of overpayments are less than £250 and the C&AG has told us that every pound you spend brings you back £100. Is it really cost-effective to pursue such small sums?

  Ms Strathie: That goes back to what I said to Mr Bacon earlier; we are reviewing our approach on all of this. There are lots and lots of people who have paid back those sums and we have to reach a judgment as to whether the people we are pursuing can pay and will not pay or actually cannot pay and then take a view on the cost-effectiveness of collection.

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