HMRC’s Performance in 2016–17 Contents

4Tax Credits

25.The Government’s strategic aim is to replace Tax Credits with Universal Credit, administered by the Department for Work and Pensions (DWP).54 HM Revenue and Customs (HMRC) told us that it had transferred 110,000 people from Tax Credits to Universal Credit, in line with the introduction of Universal Credit across different areas of the country. For each person transferring, HMRC stops their payments of Tax Credits, and the person has to apply for, and then await receipt of, Universal Credit.55

26.HMRC considered that Tax Credits were poorly designed and overly complicated. It explained that, given this high degree of complexity, error and fraud may often give rise to over or under payments. HMRC highlighted that the percentage of Tax Credit cases with error or fraud was over 20%.56 In 2015−16, HMRC estimated that 5.5% of Tax Credits expenditure was overpaid due to error or fraud (up from 4.8% in 2014−15). It also estimated that 0.7% of Tax Credits expenditure was underpaid due to error or fraud (the same as in 2014−15). For 2015−16, this equated to overpayments of £1.57 billion and underpayments of £210 million.57

27.HMRC considered that error and fraud in Tax Credits would increase, when measured for 2016−17. It forecast that the value of error and fraud would peak between 7% and 8% of expenditure, above its target of 5%. HMRC explained there were two particular reasons for this rise: cuts in the number of staff tackling fraud and error; and the introduction of the “Commercial with a view to a profit” test.58

28.The reduction in the number of staff tackling error and fraud is due to the end of HMRC’s contract with Concentrix. In 2014, HMRC entered into a contract with Synnex-Concentrix UK Ltd to expand its capacity for dealing with fraud and error in the benefits system. However, HMRC terminated the contract earlier than intended in November 2016 due to performance issues. The previous Committee reported on HMRC’s contract with Concentrix in April 2017.59 Concentrix had not undertaken the agreed volume of interventions as part of the 2016−17 compliance campaigns, which HMRC estimated had resulted in a nearly 1% increase in error and fraud.60 Following the ending of HMRC’s contract with Concentrix, the vast majority of staff at Concentrix had transferred to HMRC. However, HMRC told us that the money that was being paid to Concentrix was not replaced in its budget and so the total number of staff involved in tackling error and fraud on Tax Credits had fallen, and that it did not have the budget to recruit additional staff to replace the lost capacity. HMRC expected this reduction in staff numbers to lead to a further 1% increase in the total value of error and fraud on Tax Credits. HMRC told us that HM Treasury had made the decision to not fund additional staff to tackle error and fraud in Tax Credits. HMRC’s analysis had indicated that the cost of replacing lost staff capacity (£34 million) would have been less than the value of fraud and error they could have prevented through their work (£120 million).61

29.HMRC expected that another 1% increase in the total value of under and over payments on Tax Credits could result from the introduction in April 2015 of the “Commercial with a view to a profit” test.62 The test required self-employed claimants to meet the conditions of “carrying on a trade, profession or vocation on a commercial basis and with a view to the realisation of profits… and trade, profession or vocation is organised and regular”. HMRC told us that the test reduced the total amount of Tax Credits paid out by more than half a billion pounds a year, but that the decision was made in the full knowledge that it would also increase the fraud and error rate by approximately 1%.63

30.HMRC told us that in some of the initial waves of Universal Credit, people with more straightforward circumstances were transferred from Tax Credits. It told us that such people were the most likely to be receiving the correct amounts of Tax Credits. HMRC considered that people who were still receiving Tax Credits had more complicated circumstances, and were the most likely to have over- and underpayments, relating to errors and fraud. HMRC indicated that the total percentage of remaining recipients of Tax Credits with some error or fraud in the amounts they received could therefore increase. We highlighted that those people still receiving Tax Credits could be the most vulnerable, before and during their transition to Universal Credit, as HMRC focused on correcting over and under payments, affecting the money left for them to live on.64

31.HMRC told us that as people were transferred from Tax Credits to Universal Credit, they receive a guarantee that, for a period, their total payment levels would not fall. If a person was receiving an overpayment in the value of benefit received at the time of transfer, this could result in the overpayment of Universal Credit. HMRC told us that it was working closely with DWP to understand how to prioritise its resources on tackling errors and fraud in Tax Credit payments, before it transferred people to Universal Credit. Tax Credits overpayments will transfer to DWP to collect. DWP has greater powers to recover money due, including taking it directly from earnings. This can place vulnerable people at the “sharp end” of HMRC’s mistakes and could potentially “plunge people into greater poverty”.65

32.HMRC felt that there was limited further work it could do tackle error and fraud on Tax Credits, given the Government’s aim to switch claimants from Tax Credit to Universal Credit. However, it considered that applying more resources to the problem would improve the results. It had focused resources on six areas to reduce error and fraud, covering income, work and hours, childcare costs, undeclared partners, child care responsibilities, and children with a disability.66

54 Q 189 ; C&AG’s Report, para 4.6

55 Qq 191−192

56 Qq 189, 196

57 C&AG’s Report, para 4.9

58 Qq 187−188

59 Q 200; Committee of Public Accounts, Fifty-first Report of the Session 2016−17, HMRC’s contract with Concentrix, HC 998

60 C&AG’s report, paragraph 4.25

61 Qq 200−202 ; HM Revenue and Customs (HMR0004), Q 201

62 Q 187

63 Q 187; C&AG’s Report, paragraph 4.23

64 Qq 193−195

65 Qq 194−196

66 Qq 189−190

10 January 2017