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UK Tax Credit System Still Failing, Says Spending Watchdog

by Robert Lee,, London

10 May 2007

The UK government's much-maligned tax credits system suffers from the highest rates of error and fraud in the public sector, a Commons panel overseeing government spending has heard.

According to the Committee of Public Accounts, in 2003–4, between GBP1.06 billion and GBP1.28 billion (8.8 to 10.6% by value) was incorrectly paid to claimants, bringing overpayments in the first three years of the tax credit system to GBP5.8 billion. The government has been forced to write off about GBP500 million, and it is unlikely to recover a further GBP1.4 billion of debt.

“This is the fourth time that this Committee has had to examine the current tax credits system – and it will not be the last," stated Edward Leigh, Chairman of the Committee. He added: "Billions of pounds, far more than those who thought up the system ever envisaged, are still routinely overpaid to claimants. Very large amounts have to be written off. And the attempts to recover overpayments from genuine claimants have caused significant suffering to many vulnerable families."

The tax credit scheme, one of the Blair government's flagship policies to help families on low incomes, has been beset by technical problems since its introduction in 2003. Much of the blame was initially placed at the door of EDS, the American IT systems firm contracted to build the tax credits computer system. However, government attempts to improve the system have been woefully ineffective in the intervening fours years, Leigh said.

“Changes have been made to the system but who will be confident that they will make any difference? HMRC itself is uncertain how effective they will be. Nor does it have up to date information on the amount of public money lost through claimant error and fraud. It is quite extraordinary that the Department doesn’t routinely estimate this and or set targets for reducing levels," he remarked.

“What we do know is that tax credits suffer from the highest rates of error and fraud in government. And HMRC seems incapable of mounting a credible and effective response to the flood of money being wasted in this way," he concluded.

HMRC has paid GBP47 billion under the current tax credit system in the first three years since it was introduced. A tax credit award is based on the claimant’s circumstances for the full tax year, and payments are provisionally made on the basis of circumstances for the previous year. Final awards are based on actual circumstances and, because incomes tend to increase, many claimants have received overpayments.

The system has also been wide open to attack by fraudsters, and in December 2005, the tax credits internet site was closed completely after organised criminals used the system to steal money.

The government has made some recent changes to the scheme in an attempt to reduce overpayments. The most important change involved raising from GBP2,500 to GBP25,000 the threshold for increases in income in-year which are ignored when awards are finalised. While this should reduce the amount of overpayments, the committee heard that it will lead to an overall increase in the cost of the scheme by GBP500 million.

HMRC says that it does not plan to set targets for reducing overpayements until later in spring 2007, when it will have been able to calculate error rates for 2004–05.

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