PAC Says Tax Credit Errors Costing GBP1bn Per Year

by Jason Gorringe, Tax-News.com, London

05 February 2008

The House of Commons Public Accounts Committee has this week published a report criticising HM Revenue & Customs for its handling of the UK's tax credit system.

Edward Leigh MP, Chairman of the Committee of Public Accounts observed that:

"The tax credits situation is as serious as ever. HMRC's attempts to bring the system under any measure of control have so far not been crowned with conspicuous success."

"The amount of tax credit being lost to fraud and error is still running at some GBP1bn each year. The Department has accepted our Committee's recommendations on the need to set targets to reduce fraud and error. It has still not put any targets in place."

He continued: "Another great cause for concern is the scale of overpayment to claimants. The tax credits system was, of course, designed to incorporate a degree of overpayment since the initial awards are provisional. It was not meant to generate overpayments of GBP6bn in three years. This money is supposed to be recovered from claimants but GBP2.3bn worth has been written off or is unlikely to be returned."

"About two million families a year have been placed in debt to the government in this way since the scheme was launched. Some regret ever having become involved. Certainly, the vulnerable ones face a future of trying to repay the money they owe, with all the hardship that involves."

"It was always a very bad idea for the Government to have to commission new work from the contractor EDS in order to recover compensation for the poorly performing tax credits computer system. In the event, EDS has stumped up very little of the GBP26.5mn of the settlement to be paid under this arrangement. If the full amount of the settlement, GBP71.25mn, is not paid over by the end of 2008, then HMRC must be prepared to return to the courts."

Mr Leigh was speaking as the Committee published its 8th Report of this Session.

According to recent estimates, HMRC has paid GBP65bn to tax credit claimants since the scheme was introduced in 2003.

Awards are made on an annual basis and payments are initially made on provisional data; a final assessment is made once the claimant's actual circumstances are known after the end of the year, which can change the final value of the award.

The Department overpaid GBP6bn in the first three years of the scheme. By the end of March 2007 it had collected GBP2bn of this debt, and had written off GBP0.7bn. GBP3.3bn of these overpayments remain to be collected. It is unlikely to recover GBP1.6bn of the debts.

This is the Committee's fifth report on the current tax credits system. Although the administrative cost has increased from GBP406mn in 2003-04 to GBP587mn in 2006-07, there is little evidence the Department has the scheme under control, the PAC has argued.

Many claimants continue to struggle to understand tax credits and why they are overpaid. There have been many complaints about the process for recovering overpayments, and the Ombudsman continues to receive and to uphold a large number of complaints.

Tax credits continue to suffer from the highest rates of error and fraud in central government. HMRC estimates that claimant error and fraud led to incorrect payments of between GBP1.04bn and GBP1.30bn in 2004-05.

In November 2005, the Department concluded a settlement of GBP71.25mn with EDS in respect of the computer problems during the introduction of Tax Credits.

Of that sum, GBP26.5mn depends on EDS winning future work from the Government, but the flow of payments from EDS has been extremely small, and it is highly unlikely that new business to EDS will generate the full payment.

Progress in addressing many of the Committee's previous recommendations on tax credits has been disappointing, and the Committee has stated that it wishes to return to this subject in the future to establish the extent to which these difficulties have been addressed.

On a separate issue, the Department has not been collecting income tax on certain small pensions since the early 1980s, with a potential tax loss of some GBP135 million per annum. It will not recover tax due from previous years, but will start to collect tax on these pensions from 2008-09.

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