HMRC Tax Collection: Annual Report & Accounts 2012-13 - Public Accounts Committee Contents

2  Personal tax and tax credits

13.  Real Time Information (RTI) is a major change to the PAYE system which requires employers to provide HMRC with PAYE information when payments are made, rather than after the end of the tax year.[26] The introduction of RTI has gone well so far. During 2012-13 HMRC piloted the system successfully with over 60,000 employers, of which 73% had fewer than nine employees. It then used this pilot to learn lessons which assisted the full roll-out.[27] HMRC required all employers to adopt RTI during 2013-14, and it told us that 90% of employers were now using the system.[28]

14.  HMRC recognised that the small and medium-sized enterprise (SME) sector is very varied and that some businesses—including pubs and those in the farming industry—continue to experience difficulties implementing RTI, such as with reporting on time or dealing with casual employees. HMRC told us it had sought to understand the issues that businesses faced and to provide support. During the summer of 2013 it had surveyed businesses to find out what burdens and difficulties they faced, and it was analysing the 24,000 responses it had received. HMRC said it supported SMEs through helplines and websites, and it had relaxed SMEs' reporting requirements, allowing them an additional six months to April 2014 to implement RTI fully. However, from April 2014 this relaxation will end, and at the same time HMRC plans to introduce fines for non-compliance with RTI.[29]

15.  Effective working between HMRC and the Department for Work & Pensions (DWP) is critical for the successful roll-out of Universal Credit, both because Universal Credit uses information transferred to it from RTI to calculate payments and because it will eventually replace tax credits. HMRC is working closely with DWP to prepare for a gradual transition of tax credit recipients to Universal Credit. It recognises the need for both cultural and organisational change to minimise disruption to individual claimants.[30]

16.  HMRC has linked its RTI system with DWP to provide it with the information needed to calculate payments to claimants, and data on the 2,197 people who already receive Universal Credit has been transferred.[31] However, HMRC chose to implement RTI with neither comprehensive disaster recovery arrangements (i.e. technical resilience) nor full financial accreditation in place.[32] Regarding technical resilience, HMRC told us that its discussions with other departments had not identified a need for the system to be available at all times. It considers that its current business continuity arrangements, which allow up to a week for major technical faults to be rectified, are sufficient to meet the needs of the PAYE system and other departments currently, and that further technical resilience to support Universal Credit can be added later if required. On financial accreditation, HMRC regards this to be the 'gold standard' for its financial systems, with no impact on what the customer sees or its ability to collect taxes.[33]

17.  HMRC has committed to add financial accreditation to RTI and to keep the level of technical resilience under review. HMRC said it had not experienced long-term or on-going problems with RTI; however there had been specific problems which it has addressed through its continuity arrangements such as returning temporarily to the old PAYE system. HMRC told us that it has used the first year of RTI to test and develop its systems and, while it accepts that errors still impact on individuals, it can identify overpayments and underpayments sooner than under the old PAYE system.[34]

18.  At the end of March 2013, HMRC recorded personal tax credits debt of £4.8 billion, £800 million higher than at the end of the previous tax year. It estimates this could increase to £5.5 billion by 2014-15. Work to track historic debt has led HMRC to increase its provision for irrecoverable debt by £985 million to £3.3 billion, some 69% of the current personal tax credits debt balance. It also reduced its estimate of recoverable tax debt from 43% to 31%. Although HMRC considers that it may recover more than this, the provision was based on HMRC's past performance and actual recovery rates.[35]

19.  HMRC's latest central estimate is that in 2011, 12 7.3% of personal tax credits payments were incorrect due to error and fraud, down from 8.1% in 2010-11.[36] HMRC told us that it carried out over 100,000 interventions to target the risk of fraud through undeclared partners and prevented over £200 million of losses in 2012-13, and that it expects 2012-13 data to show an improvement in its performance in this area.[37]

20.  HMRC told us it is in discussion with private sector organisations about how they can help increase HMRC's capacity to reduce fraud and error. It ran a six-week trial between May and July 2013, costing £50,000, to test whether a private sector company specialising in data analytics could check child tax credits successfully. The company dealt with 5,000 cases and identified £20 million of fraud and error, a return on investment of £400 to £1. HMRC challenged the suggestion that it does not have the capacity to do the same work in-house, but reported it was considering whether a mixed economy, in which it does not have to do all such work, could be useful in allowing it to use its resources more flexibly in future.[38]

21.  HMRC could not show us that it was making most effective use of other sources of information, such as from banks and statutory child maintenance services, to identify possible tax credits fraud. HMRC claimed that confidentiality issues restricted how transparent it could be when responding to reports of suspected fraud involving reports from the statutory child maintenance services, but it committed to liaise with them to establish whether there were widespread or systemic problems.[39] HMRC told us that it had started to liaise more closely with banks and that the flow of information had improved, so it was now more likely to pick up, for example, instances of child tax credits payments being paid into a UK account but withdrawn outside the EU. However, there is no current requirement for banks to identify all such activity by making a Suspicious Activity Report to the National Crime Agency. Such a requirement could highlight routinely to HMRC a population of claimants which it should investigate.[40]

22.  HMRC said that it was committed to prosecuting more cases of tax credits fraud and that the number of cases that it had referred for prosecution was growing fast compared to a relatively low base—it expects to refer between 600 and 700 cases for prosecution in 2013-14. However, HMRC confirmed that it does not prosecute all those who knowingly provide fraudulent information and told us that, with 4.8 million families in receipt of tax credits, it was not possible to do so due to the numbers involved. HMRC explained that it also uses a mixture of civil penalties, refusal of tax credits awards and other influencing techniques to deter fraud, and it pointed to evidence that telling claimants when it was suspicious that an over-claim had been made had been effective in changing people's behaviour.[41]

26   C&AG's Report, paragraph 2.15 Back

27   Qq 3-4, 71; C&AG's Report, paragraph 14 Back

28   Q 62 Back

29   Qq 4-7, 65-66, 85 Back

30   Qq 43, 56-57 Back

31   Q 32 Back

32   Financial accreditation provides HMRC with assurance that any systems introduced are acceptable for accounting and financial control purposes - C&AG's Report, paragraph 2.24  Back

33   Qq 17-18 Back

34   Qq 13-15, 20, 28 Back

35   Qq 88-89, 99-100, 103-104; C&AG's Report, paragraphs 4.26 to 4.27. Back

36   Q113 Back

37   Q 125 Back

38   Qq 116, 118, 160-167 Back

39   Qq 113, 126-129 Back

40   Qq 133, 142-144 Back

41   Qq 116, 119, 121 Back

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Prepared 19 December 2013