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

3  Improving the quality of interventions to tackle error and fraud

11.  To reduce error and fraud HMRC must identify where claimants have not reported their circumstances accurately or have done so fraudulently. The tax credits system is designed to be responsive to changes in claimants' lives and the amount people should be paid changes with their circumstances.[34] HMRC has developed how it uses data to identify patterns and trends in error and fraud to focus its interventions.[35] HMRC told us it has delivered a return on its investment in tackling error and fraud, but it recognises the need for improvement.[36]

12.  There are six risk categories for tax credits error and fraud loss, which relate to the main elements of tax credits awards. While HMRC has reduced error and fraud in three of these areas, it has made little progress in two key areas — 'undeclared partner' and 'work and hours'. We recognise these are difficult areas to deal with. Together they accounted for losses of over £1 billion in 2010-11.[37]

13.  Claimants applying as a single person and not including their partner on the claim account for the largest area of error and fraud.[38] Claimants must report household income, but identifying couples who have claimed for tax credits as if they were single is difficult as HMRC holds limited data on living arrangements and financial relationships.[39] It has developed its ability to tackle this area using its CONNECT system, which helps identify hidden relationships between people, and new sources of third-party data. The results to assess the performance of this intervention are not yet available.[40]

14.  There are a minimum number of hours claimants need to work and it is a significant area of error and fraud which HMRC has found challenging to address. This is partly due to wider changes in how people are employed. We heard from Citizens Advice of an increase in the use of zero-hero contracts and greater unpredictability in the hours many people work, which can make it hard for claimants to keep track of and report to HMRC.[41] HMRC is seeking ways to address this area of risk. It pointed to the requirement, from late 2013, for all employers to report real time information on how much they pay employees as a way to improve how it identifies error and fraud.[42]

15.  Losses due to error and fraud relating to 'children' have almost doubled in three years, from £325 million in 2008-09 to £640 million in 2010-11.[43] This was partly due to HMRC's decision to automatically renew around one million additional awards, so those claimants continued to receive tax credits without taking any further action. HMRC did not anticipate that this would lead to an increase in claimants not reporting children aged 16 to 19 who had left full time education or training. HMRC did not carry out enough checks in this area.[44] It intends to write to some claimants and require them to confirm the information relating to children continuing in further education or training on their claim.[45]

16.  We heard from HMRC that it has improved its understanding of which interventions designed to tackle error and fraud work and which do not.[46] It recognises that there is more that can be achieved to improve the quality of how it targets claims for review. It is looking to develop its analysis so that it looks at fewer claims but with greater success in correcting awards.[47] HMRC is also seeking to identify new sources of data that it can use to inform this analysis and identify potential error and fraud. HMRC's child benefit computer system does not automatically link to tax credits and it undertakes a regular comparison of the data in the two computer systems to identify discrepancies. HMRC recognises it should be better at using the data it holds to identify patterns and trends.[48]

17.  Over 80% of error and fraud relates to changes in the circumstances of claimants. This error and fraud can be due to a claimant providing HMRC unknowingly or knowingly with inaccurate information, or not proving any information at all. Claimants notify HMRC of around six million changes of circumstances each year and HMRC are unable to check the accuracy of each of these changes.[49] HMRC undertakes a risk assessment of claims, but it was unable to tell us how many of its interventions address changes of circumstance.[50]

18.  Claimants do not always understand what information they need to report to HMRC and this presents a significant challenge to HMRC in keeping claimants on the right award. Around two-thirds of error and fraud that occurs due to a change of circumstance relates to unreported information.[51] It has begun to use new analysis and data sources to improve how it identifies unreported information, but the success of this work is not yet known.[52] HMRC needs to understand why claimants do not report the information it requires to make an accurate payment, but it has not yet developed a detailed picture of how claimants behave.[53]

34   Q 76; C&AG Report, para 1.2 Back

35   Q 151 Back

36   Q 97 Back

37   Q 73 Back

38   C&AG Report, Figure 1 Back

39   C&AG Report, para 11 Back

40   Q 74; C&AG Report, para 11 Back

41   Qq 20,124. Zero hours contracts are where an individual is on call and is only paid for hours worked. Back

42   Qq 124-125 Back

43   C&AG Report, para 12 Back

44   Q 119; C&AG Report, para 3.19 Back

45   Q 119; C&AG's report 4.13 Back

46   Qq 96-97 Back

47   Q 97 Back

48   Qq 22, 64, 71-72, 106, 119 Back

49   Qq 81, 87 Back

50   Qq 87-97 Back

51   C&AG Report, para 3.24 Back

52   C&AG Report, paras 11, 4.7 Back

53   Q 139 Back

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Prepared 22 May 2013