UK's Inland Revenue Deleted 1m Records 'By Mistake'

by Amanda Banks, Tax-News.com, London

20 September 2005

A report released last week by the UK's Public Accounts Committee contains severe criticism of the Inland Revenue's administration of its tax credit system, and reveals that housekeeping software installed by the Inland Revenue to delete old cases also deleted almost one million live tax records between 1997 and 2000.

Says the report:

The operation of Tax Credits has proved unsatisfactory for a significant minority of claimants who were disadvantaged and who cannot understand how much they are due or why in so many cases such large overpayments have been made. The Department does not have sufficient information about the claimant population to enable it to provide good service to the public and avoid disruption to its own main business of tax administration. The Department should review the information provided to claimants to enable them to understand their Tax Credit awards, and should develop as a matter of urgency the operational information needed to manage the Department’s relationship with claimants and the effects upon them.

Members of Parliament have been inundated with distressing complaints from constituents whose lives have been affected by the Department’s management of Tax Credits. The Department has also received a large volume of complaints about Tax Credits, as have the Citizens Advice Bureaux. The current appeals and complaints procedures do not include any independent process, however, and the Department remains the final arbiter.

The scale of overpayments being recovered from claimants is much higher than envisaged when the Tax Credit scheme was designed. Tax Credit initial awards are provisional and the final award for the year in question is often significantly reduced because the claimant’s pay has increased by more than £2,500, which is disregarded. This leads to recovery of the overpayment. The Department published figures in June 2005 showing that some 1.8 million (33%) of claimants had been overpaid in respect of 2003–04. The Department should review and report each year on the effect on claimants of the inbuilt overpayment and recovery of substantial sums of money so that Parliament can judge whether the consequences for claimants are compatible with its intentions in passing the legislation.

The Department cannot show whether error rates attributable to claimant error and fraud have halved as it predicted in December 2003. The Department undertook to report on this issue by July 2005, by which time over £30 billion would
have been spent on New Tax Credits. That report should quantify and analyse in detail the estimated overpayments due to fraud and error; set out targets for reducing overpayments and plans for achieving them; and show the performance indicators used by the Department to manage Tax Credits.

Schemes that are intrinsically complex carry the risk of being too difficult for the intended beneficiaries to understand and for departments to handle. The Accounting Officer’s ability to guard against fraud and error, and to secure economy, efficiency and effectiveness, may also be impaired by undue complexity. Accounting Officers should see that Ministers are made aware of the risks presented by unduly complex schemes, and if necessary be ready to seek a Ministerial direction where such schemes would be hard to implement to an acceptable standard.

The Department estimates that routine housekeeping software incorrectly deleted almost one million taxpayer records in the period 1997 to 2000, resulting in over 360,000 unidentifiable taxpayers not receiving repayments due and 22,000
others not paying tax that was due. The software had been in place for at least 10 years, and had been deleting live files since its installation, but not to such a massive extent. The Department needs to maintain reliable and comprehensive management information to monitor the operation of IT systems, including data that would enable unintentional record deletion or loss to be detected promptly.

The problems in administering Tax Credits have entailed some impairment of the Inland Revenue’s reputation for accuracy, fairness and proper handling of taxpayer affairs. The Department’s effectiveness in managing the tax system
depends on maintaining public confidence in its administrative competence. It needs to demonstrate and convince taxpayers that it has resolved the problems caused by Tax Credits; caught up on the backlog of other work; and maintained its capacity for timely, fair and accurate processing of taxpayers’ affairs.

“We are talking here about your core data on taxpayers,” said Conservative MP and Committee Member Richard Bacon at a Committee hearing. “How could a programme have existed for such a long time that allowed that to happen?” he queried.

In response, David Varney, Executive Chairman of HMRC, explained: “I think it existed because the connection was not made between the build-up of open cases and the length of time and this routine, so this routine was seen separately from the build-up of the open cases.”

According to the report, HMRC has now changed its systems, and stores data deleted from the database on a backup file, so it can access it if necessary.

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