HM Revenue & Customs: tax credits error and fraud - Public Accounts Committee Contents

Conclusions and recommendations

1.  HMRC has made little progress in reducing the amount of money it loses due to error and fraud in tax credits. HMRC missed its target to reduce tax credit error and fraud to 5% by 2010-11 by a wide margin. The actual level of error and fraud in 2010-11 was 8.1%, some £850 million higher than HMRC had expected. The Department estimated that 70% of this loss was due to error. In the 2010 Spending Review HMRC's target was to save £8 billion from reducing tax credits error and fraud by 2015. However, it now estimates it will miss this target by £5 billion. HMRC should agree with the Treasury a new target for savings from reducing tax credit error and fraud, up to the end of the scheme in 2017 and the Treasury should hold HMRC to account to ensure real savings are delivered.

2.  HMRC needs a better understanding of its performance as it hugely overestimated its progress in tackling error and fraud. HMRC believed it was on target to reduce tax credit error and fraud to 5% until June 2012, when 2010-11 data became available, and it became clear that this was not the case. It had increased interventions on individuals from 123,000 to nearly two million, but that produced only a two-fold increase in monies saved. HMRC had to revise its estimates for the amount of tax credits error and fraud prevented in 2010-11 from £1.4 billion to £480 million. HMRC had not tested how effective its activities would be. It needs to improve the time it takes to produce the data it needs to monitor progress and determine actions. HMRC also needs a more accurate measurement of the impact of its work and to increase the quality of its in-year tracking of claims. It should work with the Department for Work and Pensions to ensure a consistent approach to measuring error and fraud throughout the welfare system.

3.  HMRC has not done enough to reduce error and fraud resulting from claimants not reporting their circumstances accurately. Over 80% of tax credits error and fraud relates to changes in claimants' circumstances. HMRC needs a more effective response to this issue. There is no automatic check against the data it collects on Child Benefit. If a parent notifies HMRC that their child has left school at 16 for the purposes of Child Benefit this change is not registered for tax credit purposes. HMRC should produce a plan setting out the actions it will take to tackle losses occurring due to individuals' change of circumstances.

4.  HMRC's advice and guidance to claimants needs to improve. HMRC believes that it is responsible for only 2.5% of tax credit error, an estimate that sits uneasily with the evidence from Citizens Advice on the inaccuracy of HMRC's advice to claimants over the phone. HMRC does not have a good record on recovering tax credits overpayments and wrote off debts of £1.7 billion in 2011-12. HMRC should systematically review the guidance and support it provides for claimants and staff with stakeholder groups, including Citizens Advice, and front-line staff, to identify and address the areas where improvements are required.

5.  HMRC needs a faster and more effective appeals process. HMRC has increased the number of claimants it contacts almost ten-fold, but has not put in place adequate resources to deal with the consequential increase in the number of appeals. In 2011-12 there were some 8,000 appeals against tax credit decisions, around 40% of which were decided in favour of the claimants. The appeals process can take many months and cause hardship and distress to those waiting to have their awards re-instated. HMRC needs to review its appeals process to minimise delays and ensure that when changing its approach to checking claims, it has adequate resources to handle any increases in the volume of appeals.

6.  HMRC needs to make more effective use of available data to prevent and detect errors and fraud. HMRC intends to build on how it uses data analysis to identify patterns and trends in error and fraud. There are six risk categories for error and fraud loss, which relate to the main elements of tax credits awards. HMRC has made some progress in its analysis of these risks, but this has led to little improvement in reducing error and fraud in two categories—working hours and undeclared partner—which together accounted for losses of over £1 billion in 2010-11. HMRC is looking for new data sources to help identify error and fraud, but it has not always made best use of the information it holds, such as child benefit data. HMRC should systematically review what internal and external data sources are available, for each of its six risk categories, before Parliament's Summer Recess and develop a credible plan for reducing error and fraud losses in each category.

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© Parliamentary copyright 2013
Prepared 22 May 2013