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NAO Reports On HMRC Accounts

by Robert Lee,, London

16 July 2007

HM Revenue and Customs delivered GBP437 billion to the UK Treasury last year, an increase of GBP31.7 billion (or 7.8%) compared with the previous year, a new report by the National Audit Office has shown.

According to HMRC, the NAO report says that the department "is getting it right in many ways" having reduced value-added tax fraud, exceeded its target of 35% for the number of self assessment tax returns filed on line, and processed record numbers of employers' returns faster than ever before.

However, Sir John Bourne, head of the NAO, was critical of HMRC in many areas, especially in relation to tax credit errors and fraud, and the department's income tax computer system, which he said is no longer up to the job.

HMRC said that tax credit compliance teams carried out checks on 137,930 claims and potentially incorrect payments of GBP138 million were prevented. In 2006-07, HMRC compliance work prevented tax credit claims with a value of GBP212 million from being paid out incorrectly on suspicion of organised fraud. However, some GBP3.9 billion in overpaid tax credits was owed to HMRC by the end of March 2007.

Bourn said that the levels of claimant error and fraud in the tax credit schemes remain "unacceptably high".

"This has led me to qualify my audit opinion on regularity of these payments," he stated. "It is important that the Department now targets reductions in levels of error and fraud and considers how its compliance teams can engage more widely with tax credit claimants.”

HMRC said it will recover GBP1.5 billion of this direct from tax credit claimants, and will recover a further GBP1.7 billion from future awards.

Bourn also said that HMRC's computer systems "are no longer well suited to the efficient administration of income tax", especially where people have more than one job or change jobs frequently. This has led to employees paying too much or too little tax. HMRC has put in place a number of measures to improve the quality and timeliness of PAYE processing, in advance of its implementation of a new computer solution in 2008. Bourne urged the department to quantify the success of its measures in reducing levels of error within PAYE.

While the NAO praised HMRC for making good progress in engaging with taxpayers over the internet, it said there was still much to be done in this area, especially in reducing the one million taxpayers who regularly miss the January 31 self-assessment deadline.

Bourn also welcomed measures to tackle VAT missing trader fraud, but warned that criminals may simply switch to fraudulently trading goods not covered by the new reverse charge mechanism, which was approved by the European Commission to help combat missing trader fraud.

"Missing trader fraud is a major challenge right across the EU. It will need concerted action by all Member States to find a long term solution to this problem," Bourn stated.

Missing trader-related trading activity has fallen by around 90% since the summer of 2006, HMRC claimed.

Responding to the NAO report, HMRC Chairman Paul Gray commented: "I'm pleased that the NAO has recognised the improvements HMRC has made to the quality of PAYE processing and the good progress we've made in engaging with taxpayers on-line."

He continued:

"Six million families and ten million children benefit from tax credits. We have reduced the amount of error and fraud in the tax credit system and I have put in place a fundamental review to accelerate the testing of levels of errors and fraud. This will enable us to set clear targets to reduce this further."

"HMRC's work affects everyone, man, woman and child in the UK. Much of our work is technically complex relying on sophisticated computer systems or professional financial and legal skills. Our intelligence led, risk-based approach efficiently focuses our resources, for example, on those who deliberately avoid paying their fair share of tax or to counter attempts to smuggle dangerous drugs."

"But there is still more to be done to ensure that we provide a high quality service to all our customers."

"We will take on board the NAO's recommendations and work closely with interested parties and stakeholders to help us to improve. We are committed to delivering a top class service to the public."

The full text of the NAO report on HMRC's accounts can be found in the Tax News Resources section.

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