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


1   HMRC's performance in reducing error and fraud

1.  Working tax credits and child tax credits (tax credits) are payments to support workers on low incomes and those with responsibility for children and young people. HMRC paid £30 billion in tax credits in 2011-12, providing support to just under six million individuals and families. The system of tax credits is extremely complex. HMRC calculates the value of claims based on a range of factors, including hours worked, the number of dependent children, childcare costs, disability and household income.[2] Claimants need to keep HMRC up to date with their circumstances, but can find it difficult to understand the system and what they are required to report. This leads to HMRC making incorrect payments based on incomplete, outdated, or wrong information.

2.  Although the tax credits system was launched in April 2003, HMRC has made very little progress in reducing levels of error and fraud which are very high in comparison to other benefits and payments made by other government departments.[3] In response to our previous recommendations on tax credits HMRC committed to reduce total error and fraud to no more than 5% of the amount claimants are entitled to receive by 2010-11.[4] However, HMRC has missed its target with error and fraud standing at 8.1% in 2010-11. This equates to an estimated loss of some £2.3 billion to error and fraud by 31 March 2011, some £850 million higher than it had expected.[5] In 2010-11, HMRC estimated that one in five awards contained error or fraud.[6]

3.  HMRC agreed with the Treasury in the 2010 Spending Review to stop £8 billion in tax credits error and fraud by 2015. HMRC has now confirmed that they will be unable to achieve this amount and estimates that it will now only prevent around £3 billion in error and fraud.[7] The agreement with the Treasury does not commit HMRC to delivering cash savings and HMRC does not have to report separately on its progress. At a time when departments are making cuts this is surprising and HMRC was unclear as to what the consequences of missing this commitment to deliver £8 billion in savings would be.[8]

4.  HMRC believed it was on track to meet its targets until summer 2012. It initially estimated it had reduced error and fraud by £1.4 billion during 2010-11. Following the publication of the error and fraud estimates, HMRC revised the estimated impact of its work down to £480 million.[9] HMRC did not test the assumptions it made in measuring the impact of its interventions to tackle error and fraud. These included assumptions as to how long a claim would remain correct following an intervention and the deterrent effect of its work. HMRC found that claimants made the same mistakes again and awards become incorrect quicker than was previously believed. It also found it difficult to evidence the deterrent effect expected from claimants telling friends and family about changes HMRC made to their award and helping them to avoid similar errors.[10] HMRC has identified the need to engage with customers' claims more frequently to ensure they are receiving the right amount of money.[11]

5.  HMRC has taken action to improve its understanding of the impact of its interventions, with the aim of providing better information on its progress in tackling error and fraud. HMRC has commissioned an independent company to undertake social and economic research to establish why some claimants repeatedly make the same mistakes in providing information to HMRC.[12] It has also selected 500 tax credits claims to track in real time, which will allow it to identify when an error reoccurs. HMRC recognised that 500 claims is not enough and has agreed to track a greater number of claims in the future.[13]


2   C&AG Report, paras 1-2. Back

3   Qq 29-30, 67-68 Back

4   HC Committee of Public Accounts, Tax Credits, Twenty-second Report of Session 2006-07, HC 487, April 2007 Back

5   Q 32; C&AG Report, para 1.7 Back

6   C&AG Report, para 2 Back

7   Qq 114-117 Back

8   Qq 158-161 Back

9   Q 107 Back

10   Qq107-109; C&AG Report, paras 3.3 - 3.10 Back

11   Q 109 Back

12   Q 109 Back

13   Q 108 Back


 
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Prepared 22 May 2013