2 Departmental management of debt
8. With the exception of HMRC, the amount of debt
owed to government has been increasing in the past six years across
departments, including an increase of £0.8 billion in DWP.
The majority of debt owed to government is old, with 61% of HMRC's
debt and 88% of DWP's debt over 180 days old at 31 March 2013,
and over £8 billion (46%) of government debt more than one
year old. HMRC is the only department to have reduced its debt
balance. However, whilst there has been some improvement, a significant
proportion of the fall comes from writing off or remitting £3.5
billion of tax credits debt and other debt it considers "uncollectable".
HMRC told us that in 2013-14 these actions had reduced the debt
that was over 18 months old by 31%.[12]
9. Overall, the management of debt owed to central
government has been characterised by neglect, followed by periodic
large write-offs or remissions. This has meant that government's
debt balances and losses are higher than necessary, and government
has to borrow more as a consequence. Tight public finances now
mean that it is more important than ever that this is addressed.
The Cabinet Office and Treasury acknowledged that historically
debt has been a "Cinderella" issue; an operational issue
not seen as "exciting" by civil servants. Accordingly,
it has not been given enough priority compared to high-profile
spending reform issues. Departments have different definitions
of debt, it is not always reported to their boards, and it is
not transparently set out in their accounts.[13]
The Treasury noted that some key debt balances had been regarded
as "terribly difficult" to pursue, and sat outside departments
in arm's length bodies, such as the Legal Aid Agency, Child Maintenance
Enforcement Commission or the Student Loans Company.[14]
10. The neglect of debt undermines policy objectives,
for example by leaving fines unenforced, and creates injustice
in the treatment of citizens when debts are left for a number
of years. It can also allow growing balances owed to government
to go unnoticed. For example, payments due from other countries
for health treatment provided to their citizens in the UK, or
student loans which should have been identified as eligible for
repayment. [15]
11. Departments are now recognising the need for
a tighter financial focus on debt. DWP reported that it was taking
debt recoveries more seriously. Debt management had previously
been carried out in a shared service organisation, but it was
now seen as core business within the DWP finance group. DWP has
established a debt management board that reports to the departmental
board, and there is increasing scrutiny by Non-Executive Directors.
The Department also told us that its total debt was likely to
show a small decline in 2013-14—the first for at least 10-15
years. The Department committed to reporting debt more transparently
in its annual report and accounts. [16]
12. The Treasury noted that it would develop a consistent
measure of debt across departments and mandate the set of standard
key performance indicators on debt management outlined in the
National Audit Office report. The Treasury agreed with the need
for more transparent reporting on debt, including debt forecasts
and disclosure of material credit risks. Treasury said it would
be an important part of the role of the new Director General for
Spending and Finance to lead on cross-government debt management.
[17]
13. The quality of data on debtors is generally poor
across government, partly due to legacy IT not designed to collect
the key information fields needed for debt management, and poor
quality input data. This limits departments' ability to tailor
collection activities to individual debtors. The National Audit
Office noted that a pilot study had found that 97% of HM Courts
and Tribunal Service debtor records were missing one or more key
fields. Data problems can also be the consequence of process design.
HMRC noted that tax credits are retrospectively assessed, with
families telling HMRC what they think they are going to earn and
what they think their outgoings will be. HMRC assesses tax credits
on that basis, but is often unsighted on people's changing circumstances.
[18]
14. HMRC and DWP highlighted the improvements offered
by the new "Real Time Information" system introduced
this year which will provide the departments with accurate monthly
information on people's incomes, combined with greater use of
telephone and digital interactions with citizens about changes
in their circumstances. Using these approaches to amend payments
at an earlier stage would, they believe, prevent £800 million
of tax credits debt from being created in the first place. HMRC
told us it was able to be proactive in challenging behaviours
of people who regularly try to run behind on their tax liabilities,
though it would never try to take more than it thought people
could properly manage and would accept long return periods when
appropriate. As
a consequence of this more proactive approach debt crystallises
earlier and HMRC expects its debt balance to rise again in the
next year. However, the Department considered that Real Time Information
had allowed it to collect an extra £5 billion of cash in
2013-14. DWP reported that it was also beginning to use HMRC's
information to make earlier contact with debtors and where necessary
pursue them through their employer and recover money through their
earnings. [19]
15. Departments are unable to extract a 'single view'
of what individual debtors owe them, let alone a view across government.
DWP highlighted the importance of developing a single-customer
view of the amounts owed to the Department to enable it to deal
with individual debtors on a case-by-case basis, and assess how
much the person is able to afford to pay back.[20]
16. Departments use debt collection agencies to provide
additional capacity to chase debts they had not pursued because
of low rates of return, or for a quicker follow up "to catch
the debt while it is fresh" with claimants known to have
previous problems. Some £1.2 billion of debt was handed over
to debt collection agencies in 2012-13. This represents about
1.5% of the UK's market for managed debt, so there is capacity
for government to make more use of this approach. On average,
in pilots, debt collection agencies had collected approximately
22% of the amount of debt allotted to them, though with considerable
variation. Debt collection agencies are on payment-by-results
contracts and typically charge about 7p for every £1 collected.
Government is set to expand significantly the use of debt collection
agencies with the new "debt market integrator", a framework
contract arrangement intended to provide all government departments
with a single route to access private sector debt services. Additionally,
the Chancellor's Autumn Statement 2013 announced an increase in
the use of debt collection agencies by HMRC, which plans to use
them to collect an additional £500 million of mainly tax
credits debt, which the Department considers to be a challenging
target. [21]
17. The Cabinet Office and HMRC acknowledged that
they were still learning how and where to make best use of debt
collection agencies' skills and expertise. Departmental pilots
were currently "in an exploratory period", testing the
effectiveness of using debt collection agencies at different points
in collections, and understanding which type of organisation is
best placed to collect which type of debt.[22]
The development of the "debt market integrator", should
allow for more market intelligence, and enable government to be
more scientific and have greater predictability in collection.[23]
18. While the use of debt collection agencies presents
an opportunity to draw on resources, skills and experience from
the private sector, it requires careful selection and monitoring
of the providers' standards and performance. We probed departments
on their due diligence processes. HMRC and DWP stated that debt
collection agencies must comply with the same criteria, hardship
standards and principles as their own debt management activities.
They assured us that they would take action against debt collection
agencies not meeting their obligations. HMRC later provided additional
details, stating that it picked debt collection agencies with
care and monitored and evaluated them, particularly around data
security, and that it carried out checks on providers' compliance
with tax and social security obligations, although EU law did
not allow it to exclude non-UK domiciled companies. [24]
12 Qq37, 57 C&AG's report figures 4 and 13 Back
13
Qq19-21 Back
14
Q48 Back
15
Qq47, 112-115, C&AG's report figure 6 Back
16
Qq22, 107, 118 Back
17
Qq1, 109-111, C&AG's report figure 9, HM Treasury supplementary evidence to Committee,
letter from Sharon White to Chair, 15 May 2014 Back
18
Q60, C&AG's report figure 14 Back
19
Qq23, 27, 31, 37, 60-63 Back
20
Qq38, 47 Back
21
Qq3, 4-11, 12, 33, 35, 60, HMRC supplementary evidence to Committee,
letter from Lin Homer to Chair, 19 May 2014, C&AG's report paragraph 2.26 Back
22
Qq12, 31 Back
23
Qq35, 53 Back
24
Qq25, 49-52, HMRC supplementary evidence to Committee, letter
from Lin Homer to Chair, 19 May 2014 Back
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