15.In September 2015 we took evidence from the Department for Work & Pensions and HMRC on how they were tackling fraud and error in benefits and tax credits. We published our report in October 2015. The Comptroller and Auditor General has given qualified opinions on the Department for Work & Pensions’ accounts since 1988–89, and on HMRC’s accounts since 2003–04, because of the rates of fraud and error. In our October 2015 report we commented on the two departments’ apparent lack of ambition in tackling this significant and longstanding problem. The departments’ Treasury Minute response to our recommendations did nothing to counter this impression and we therefore recalled the departments to give further evidence in July 2016.
16.HMRC is responsible for administering tax credits. In 2015–16 it paid £28.2 billion supporting around 4.4 million families and 7.4 million children. The Department for Work & Pensions manages most other benefits, and the State Pension, payments of which amounted to a combined £173.4 billion to some 18 million people in 2015–16. While both departments continue to pursue initiatives to reduce fraud and error there has been no step change in the levels of over or underpayments. The latest figures available (2015–16 for the Department for Work & Pensions and 2014–15 for HMRC) show that the departments still overpaid claimants by a combined £4.5 billion and underpaid by £2 billion.
17.HMRC said it continued to strive to reduce fraud and error as much as possible. But its target for overpayments of tax credits due to fraud and error is now “no more than 5%” of expenditure for 2016–17—a level above the 4.8% (£1.37 billion) already achieved in 2014–15. The Department for Work & Pensions reported overpayments of 1.8% (£3.1 billion) of benefit expenditure for 2015–16. The Department for Work & Pensions has disaggregated its overall overpayments due to fraud and error figure to set separate projections in four major areas of benefit expenditure for what it expects to achieve in 2017–18, compared to 2013–14. The Department told us that, whilst it had set projections for four benefit groups (Universal Credit, working-age legacy benefits (those before Universal Credit), pensioner benefits and disability/carer benefits), it did not see the projections as targets given the difficulties of projecting fraud and error for benefits groups at the same level of precision as for aggregate fraud and error across all benefits.
18.We are concerned at the lack of stretch in setting targets without due regard to current achievement levels and the lack of confidence and commitment this implies in the departments’ own efforts. Agreeing meaningfully stretching targets and reviewing these annually would drive better performance in the administration of tax credits and benefit payments that HMRC and DWP are responsible for and reduce the high levels of over and underpayments.
19.Initial estimates show that the levels of fraud and error in the Universal Credit live service are higher than fraud and error in Jobseeker’s Allowance. Although not an exact like for like comparison, the 2015–16 estimates show 7.3% overpayments and 2.6% underpayments for Universal Credit, compared to 5.0% overpayments and 0.8% underpayments in Jobseeker’s Allowance. The Department for Work & Pensions explained that it faces a challenge to develop a suitable methodology to measure fraud and error in Universal Credit as it supports those in and out of work, compared to Jobseeker’s Allowance which is solely for those who are out of work. In particular the Department cited the impact of ‘loss of claimant contact’, where it had not been able to make contact with a number of Universal Credit claimants to verify payments.As it could not confirm entitlement to benefit was correct during its measurement process the Department told us that such ‘lost contact’ formed a key category of overpayments in the first fraud and error estimates for Universal Credit that the Department would need to undertake further work to fully understand. Loss of contact may not indicate fraud or error, individuals now in work may be harder to contact or consider their claim to have ceased.
20.The Department for Work & Pensions told us that it continues to expect that under Universal Credit fraud and error overpayments will come down by around £1 billion each year, once it is fully rolled out. The Department told us that it would increase the number of claims subject to fraud and error measurement in line with the growth in the volume of Universal Credit cases.
21.We were concerned that DWP’s understanding of the level and causes of fraud and error in Universal Credit and some other legacy benefits is incomplete, particularly where benefits have never been measured for fraud and error or have not been measured recently. As well as Universal Credit having higher than expected fraud and error the Department also does not regularly measure fraud and error across all its benefits, for example Carer’s Allowance has not been measured for 20 years and the population has changed over this long time period.
22.We recognise that the departments have improved their understanding of the major causes of losses due to fraud and error. Both departments have developed initiatives for underreported income and earnings—which is the Department for Work & Pensions’ largest cause of loss resulting in overpayments of £951 million in 2015–16–based on the use of RTI, where employers send details to HMRC every time they pay employees. The Department told us in its written submission before our evidence session that it had made significant strides in tackling overpayments related to earnings and employment through the use of RTI, though this is not yet reflected in a reduction in income and earnings related fraud and error.
23.We asked the Department for Work & Pensions why fraud and error rates had increased for Pension Credit, where overpayments are now 5.6%. The Department told us that it was now able to use RTI data for cleansing Pension Credit cases and it believed that RTI was making a difference. However, the Department admitted that during the year it had changed the way it prioritised working through the data from RTI, which had led to a reduction in the amount of fraud and error identified in Pension Credit claims using RTI data. The Department also said that it had not yet optimised the use of RTI data and that it had more work to do with this.
24.Both departments told us that they were also developing initiatives in other areas of loss, such as working with banks to identify undeclared capital. They also both noted that some areas of loss remained more difficult to tackle, including cohabitation, abroad fraud (where claimants pretend to live in the UK to claim benefits, but are actually living overseas) and earnings not covered by RTI, such as for the self-employed.
25.The departments did not accept two of the recommendations in our October 2015 report—to set targets for reducing underpayments and for HMRC to review claimants’ experiences of the tax credits process. We are pleased that the departments have finally revised their positions and will now set targets for reducing underpayments, a previously neglected issue, and review claimants’ experiences of tax credits. The Department for Work & Pensions in its written submission to us ahead of the evidence session agreed to set a global target for underpayments which it aims to have completed by the end of September 2016. HMRC committed to working collaboratively with the Department for Work & Pensions where possible over the summer months and to produce options to discuss and agree with Ministers. We look forward to sufficiently stretching targets being set for both departments to properly galvanise work that improves accuracy of payments and prevents underpayments in benefits and tax credits from occurring, so that households are properly supported with payments to which they are entitled.
26.HMRC told us that it was working with the Department for Work & Pensions to interview claimants to understand their experience of moving from tax credits to Universal Credit. The departments have an opportunity to gather meaningful feedback from this research and use it to ensure claimants continue to receive support during migration, whatever their circumstances. Both HMRC and the Department for Work & Pensions told us of actions they undertake to engage with claimants to make them more aware of their obligations to report changes that may affect their benefits so that fraud and error levels are reduced further. The Department for Work & Pensions told us in its written submission that claimants usually make mistakes because they do not understand what is being asked of them or the Department makes it too hard for claimants to access the Department’s services. The Department plans to undertake work to improve the quality of communications and ensure content is clear so that claimants understand the actions they have to take. HMRC also told us that it planned work so that tax credit claimants were clearer on when they needed to make a joint claim with another person as opposed to a single claim. Both departments cited the opaque definition of “living together” as an example of where claimants may struggle to interpret rules and reporting obligations.
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3 November 2016