Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses(Questions 100-119)


MONDAY 20 MAY 2002

  100. In the scale of the benefits you are administering and the scale of the £1 billion you are spending on setting up this system, I would have thought was absolutely imperative to have some sort of survey so you have some idea of how many people are eligible for the credits which you are administering.
  (Sir Nicholas Montagu) You are a very impatient man. I am being examined today on the accounts for the first full year of operation. You have heard from Dave that we now have the Family Resources Survey in and that towards the end of the year we should have some sort of comparison. Given the customary pace of the wheels of Government, I think we are doing pretty well.

  101. May I ask you something on the general accounts? Table 1 on page R3 says that total tax receipts—very good political information for me, but I am not going to deploy it here—have gone up massively in the last five years. It specifically says that total tax receipts have gone up between 1999 and 2000 from £139 billion to £148 billion. Then if we turn to page R7, paragraph 2.5, we find that the non-compliance work of your Department has identified fewer tax liabilities, in fact the tax liabilities identified have dropped from £5.4 billion to £4.5 billion. So even thought tax receipts have increased, the amount of money you have uncovered as being additional tax liability, has fallen. Why is that?
  (Sir Nicholas Montagu) Who knows?

  102. I hope you know, you are in charge.
  (Sir Nicholas Montagu) Let me put it this way. If I asked all of you in your glory how many of you had been convicted of mugging old ladies, I guess that probably no more than one hand would go up in this room. That could be for a variety of reasons. It could be because only one of you has done so, or because the police have not got round to the rest of you. There is a very serious point there. With compliance yield, I have often said here that in the ideal world compliance yield would be zero. We do not know whether it is because we are getting more effective at encouraging voluntary compliance, whether we are getting less good at finding it or whether it is external factors. There are external factors. Undoubtedly, the fall in yield from international activity, which is subject to huge fluctuations each year, the yield from oil taxation, which was affected by the low oil prices and also things like the numbers of insolvencies can affect the amount of yield. It is a complex issue.

Jon Trickett

  103. I have been listening with some curiosity to the exchanges between the Chairman's predecessor and Dawn Primarolo. I just want to ask Sir John one or two questions on this matter. Am I correct in saying that effectively what must be regarded as Government expenditure has been transferred from DWP, or DSS as it was, through to Inland Revenue?
  (Sir John Bourn) This is so. If the money which goes out as a tax credit had gone out as public expenditure from DWP, that is exactly what it would have been. What would have counted as public expenditure, no longer counts as public expenditure, but it is public expenditure.

  104. Nevertheless, from the individual's point of view, it is income.
  (Sir John Bourn) Exactly.

  105. Whether or not the taxonomy of all this is that it is taxation or whether it is benefits, it is income for the individual. Am I right, secondly, in saying that it is the same core group of people who were previously targeted by benefits as they were described previously and now by tax credits? Is it broadly the same group of people we are targeting?
  (Sir John Bourn) Broadly; yes.

  106. One could argue that we are talking really to some extent about a semantic difference. I could argue, but you probably would not care to make that comparison between benefits on the one hand and tax credits on the other and that previously you would have had a close interest in that matter and now you are excluded from that. Am I right in my understanding?
  (Sir John Bourn) Yes, that is right. If it had gone out as benefits, I would have been the external auditor with access.

  107. From my point of view, it seems the same bundle of money, perhaps more effectively targeted, but nevertheless broadly the same bundle of money. One of the points which has been made by the Inland Revenue is that they do not want to disturb these poor employers any more than they need to. I notice that we do not disturb them a lot, so I am going to ask some questions about that in a moment. That seems to suggest that you wear size 15 boots when you undertake this kind of monitoring. But I understood you to be saying that you monitored the Department rather than the employers themselves. I am just wondering whether you would reflect briefly on how, if you were to be invited, you would undertake such a task and minimise the impact on the employer, which it seems to me is really what Sir Nicholas's argument is based on.
  (Sir John Bourn) You are quite right to say that my concern is with the system of administration of the Inland Revenue. The way in which the money reaches the beneficiary is through the agency of the employer, therefore, as the external auditor, to get a full understanding of the way the system works, I would need access to employers, not of course because I would seek to go to every employer every year or anything like that. The importance is to be able to go in circumstances when I or my colleagues see advantage in going. That is what the giving of the power of access to the Comptroller and Auditor General would constitute. I think that describing the kind of work that I would do as the external auditor as an attempt to lay a heavy hand on the great range of industry and commerce, is an attempt to push me to one side on a false argument.

  108. I am inclined to that point of view as well. In your role previously in monitoring the benefit system, is it not true that at that time you would have from time to time been approaching employers?
  (Sir John Bourn) Certainly we would have approached employers from time to time. I do not have at my fingertips the exact legal details, but yes, certainly we would have had to.

  109. So it is not something with which you are unfamiliar.
  (Sir John Bourn) No.

  110. Did that provoke large numbers of complaints about the C&AG and the NAO?
  (Sir John Bourn) No.

  111. I am happy that we have now heard both sides more fully perhaps than we had previously. No doubt the members will draw their own conclusions. I now want to ask about compliance and non-compliance. This non-compliance unit seems to me to have been heavily biased in one particular direction.
  (Sir Nicholas Montagu) I am sorry, which unit are we talking about.

  112. The Compliance Coordination Unit.
  (Sir Nicholas Montagu) So we are on tax credits.

  113. Yes; sorry. It does seem to have spent a large amount of its time looking at individual cases and hardly any time at all looking at employers, yet I should have thought it was fairly obvious that the large-scale fraud would take place with employers. I wonder whether I have misunderstood exactly what was happening.
  (Sir Nicholas Montagu) No. If you want detail, I shall get Dave to help you. The point is this. If you think you are entitled to the working families' tax credit, you put in an application to the Inland Revenue. This is assessed at the tax credits office and after the identity check, if there is no reason to suppose that it is anything other than bona fide, then it will be paid out, arrangements will be made with the employer and so on. Essentially what we are talking about here is a unit at the tax credit office which deals with individual claims. Employer compliance comes in with the sort of things we have been talking about, with visits to employers by our employer compliance teams, by end of year checks on the P35. You also talked about large-scale fraud, and I have to say that in none of the work we have done is there any evidence of large-scale fraud or collusion by employers.

  114. But there again, you have hardly done any visits to employers. I see 49,000 cases which I presume are individuals and disputed cases of 230 visits to employers which actually turned out to be 199, did it not?
  (Mr Banyard) We did 29,000 visits to employers last year. In those 29,000 visits we found 6,800 who were paying credits and of those 6,800 only 18 required action. The view of our employer compliance teams at the moment is that this is not a difficult area.

  115. Is it not obvious that an individual can only defraud the tax credit system by a relatively small amount, whereas the one or two individuals who claim to be employers perhaps when maybe they are not, could be defrauding you of large amounts of money.
  (Sir Nicholas Montagu) One or two individuals who are what?

  116. One or two individuals who are perhaps entrepreneurs but they have taken the wrong track in life might well set themselves up as employers and defraud you of very large amounts of money.
  (Mr Hartnett) Maybe I can help with some numbers. We have already prosecuted two employers for collusive activities with their employees which led to loss of tax credit which we intend to recover. Out of the 131 cases working towards prosecution in our special compliance office, 13 involve apparent collusive activities on the part of employers. Stephen's point is a really important one, as is the work which Nick described to the Chairman in relation to the reconciliation of authorisations and what are now P35s. In all that work we have not found any substantial numbers of large-scale frauds by employers.

  117. I am confused, perhaps justifiably. If we look at paragraph 3.26, I was speaking about the compliance unit and the figure I quoted is nothing like 29,000 employers visited in their own place of business. There is a disputed figure. Here it says 230 employers but in your letter to us it says 199. The point I am trying to address is that the compliance unit seems on the one hand to have dealt with tens of thousands of individuals who have been referred to it or whom they are looking at in some detail and on the other side only 230, or 199 as you corrected yourself, employers. Why should there be that apparent imbalance or do you not accept that it is an imbalance?
  (Sir Nicholas Montagu) I do not think there is any imbalance there at all. Individuals can lie about their circumstances in order to qualify for credits which they should not get or for more credits than they should. That is why we vet carefully the individual applications which come in to the tax credits office, subject to the proviso that I made in my answers to Mr Osborne. If the tax credits office, in the course of their work, have reason to suspect that an employer is involved in unacceptable behaviour of whatever sort, they will then alert the local employer compliance teams and what the paragraph you referred to is talking about is the 199 cases where employer compliance teams undertook a visit at the specific request of the tax credits office. The fact that an employer pays tax credits is in itself an indication for a visit, one of many. If an employer compliance team, not alerted by the tax credit office, visits an employer who pays tax credits, they will always check at least one tax credit record. Against that background, we have the evidence I mentioned, and which Stephen drew on, that employer collusion does not seem to be an issue. Put together the figures Dave gave you: two prosecutions, 13 under investigation for possible collusion by my special compliance office. Put that against 266,000 employers paying out credits. The point about the employer compliance team, and in a way it also goes back to your questioning of Sir John, is that they are the frontline professionals with our business support teams in our dealings with employers. They will cover a whole range of payroll and other employer related issues.

  118. I am of the view, just as with landlords fiddling housing benefit with their non-existent or collusive tenants, that there will be employers out there seeking to defraud the system. I am also of the view that you have decided to run the employer side of the business with the lightest possible touch, perhaps because you believe that Ministers or the Government generally wish that to be the case. It is quite clear in the paragraph we have just discussed that you failed to collate information on the electronic databases. I notice in the next sentence that Sir John says, ". . . there are weaknesses in the Department's management information" in relation to this matter. I think your answers are complacent in relation to the employers. I believe that is what the fraud will be and I believe you have not uncovered it not because it is not there, but because you decided to approach the employers with the lightest possible touch.
  (Sir Nicholas Montagu) I need to say quite a few things on that and I need to bring Stephen in. The first is that before we authorise a payment via the employer we run a check on them. The second is that, with the greatest of respect, I have evidence for my statement. Stephen has given it to you. When we looked at 6,800 employers who were paying tax credits, we found 18 cases where there had been overpayment. That is evidence. What you have is a hunch that there must be a lot of employers on the fiddle. We are always trying to improve our risk analysis and our management information. We are always trying to identify employers at risk, but we do not really have evidence of large«scale collusion. I know that you have just been given your yellow card, but perhaps I could get Stephen to comment and then very briefly Dave, because Dave led our recent review of links with large business.
  (Mr Banyard) Our employer compliance teams are highly skilled in looking at employers' books and they look at them in the round. If you are going to find non-compliance in one aspect, for example credits, you might expect to find it in national minimum wage or in some other aspects. They do not take a narrow view; they have a number of mandatory checks which they make across each of the payments and functions, but they also take a broad view of the employer as a whole and look at whether the payments are reasonable, whether the hours look reasonable, whether any people look odd. They do that. In addition, of the 29,000 visits they did last year, four per cent of them are mandatory random visits. Next year we shall have a better reporting system for them which will enable us to say when credits were looked at and whether there were problems. We will take a random look across the population which is statistically significant and we shall be able to provide some degree of assurance.

  119. If possible, could you give us a note about the structure of this compliance unit and how many people work on employer compliance and how many work on compliance by individuals? I have a feeling, and I am afraid your long answers—very thorough and detailed, so necessarily long answers - have not really convinced me and set my mind at rest.
  (Sir Nicholas Montagu) I do have figures, but in the interests of time, we shall let you have a note on that.<fu1>

<fo1> Ev 20-21.

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