Inland Revenue's Accounts Qualified Again Over Tax Credit Farrago

by Robin Pilgrim, LawAndTax-News.com, London

13 October 2005

Further criticism by the UK's National Audit Office this week has increased the pressure on HM Revenue & Customs to sue EDS over the introduction of its tax credit system.

HMRC says the two sides are still in negotiation, but a senior Treasury official says that if EDS doesn't make a substantial offer, then the government will go to law. EDS claims that the problems arose because Treasury ministers denied them the time to test the system properly. The NAO report says that negotiations with EDS have broken down.

Flaws in HMRC's systems, whether caused by EDS or not, led to billions of pounds worth of over-payments, some of which cannot be reclaimed because misunderstanding of the system led to the destruction of more than a million tax records.

Public Accounts Committee chairman Edward Leigh last month described the introduction of the tax credit system as ‘a nightmare’. He said there was still no reliable evidence from HMRC ‘that the flood of public money being wasted under the previous tax credits scheme through fraud and error has been stemmed to any degree'. Leigh added that HMRC chiefs should have warned ministers of the risks before rushing ahead with the tax credit system.

In his report on the Inland Revenue’s accounts for the year 2004-2005, issued on Monday, Sir John Bourn, head of the NAO, qualified his opinion in respect of Tax Credits for the third year running because of the likely level of claimant error and fraud. Says the NAO:

'The Inland Revenue distributed some £15.8 billion in 2004-05 on Tax Credits. The high level of overpayment under earlier Tax Credit schemes led Sir John to qualify his audit opinion on the Trust Statement for 2002-03 and 2003-04. The Inland Revenue told the Committee of Public Accounts in January 2005 that they were undertaking work to provide more information on the level of claimant fraud and error under the new Tax Credits. This exercise is not due to be completed until Spring 2006. In July 2005, however, the Department produced interim results which indicated that it had overpaid 3.4 per cent because of claimant fraud and error in 2003-04 (some £460 million).

'The Department believes these interim results are subject to a wide margin of error because they are based on work that had been completed by May 2005 and it is likely that these cases were more compliant. The final results are likely to show an increase in the proportion of cases involving claimant fraud and error.

'Sir John concluded that, while the interim work suggests that the level of claimant fraud and error is lower than with the previous Tax Credits, it remained unacceptably high in both the amount and percentage terms. Sir John has therefore qualified his audit opinion on the 2004-05 Trust Statement account.

'The value of awards is recalculated annually and the Department identified that one third of recipients of 2003-04 awards had been overpaid a total of some £1.9 billion in 2003-04. Subsequent backdated payments in respect of 2003-04 awards brought the total overpayments for that year to £2.2 billion. Overpayments are recovered where possible from future payments of Tax Credits. The Trust Statement account has however provided for £961 million of doubtful debts in respect of tax credit overpayments for 2003-04 and 2004-05.

'The annual basis of tax credit awards means that recipients need to be able to anticipate and plan for the consequences of changes in their income. This is clearly a problem for many families until they become used to the implications of the annual calculation of their entitlement.'

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