Conclusions and recommendations
1. HM Revenue and Customs (the Department)
overpaid £2.2 billion of Tax Credits in 2003-04 to some 1.9
million families, representing one third of those claiming Tax
Credits. The recovery
of these overpayments has caused hardship to some families, and
the Department has struggled to manage disputes about recovery.
The Department is unlikely to recover the full amount of overpayments
and by March 2005 had provided for almost £1 billion of doubtful
debts. The Department's annual report should provide an explanation
and quantification of these overpayments and the recovery action
it is taking.
2. There have been unforeseen overpayments
due to software errors and the Tax Credits computer system is
fragile. The Department has estimated
that software errors led to overpayments of £184 million
in 2003-04 and 2004-05. Software problems continue to result in
errors. The Department needs to analyse and rectify these software
errors to achieve a robust and stable computer system.
3. The Government announced important changes
to the Tax Credit scheme in the December 2005 Pre-Budget Report,
including raising the disregard for increases in income from £2,500
to £25,000. The Department considers
that the overall cost of the package is broadly neutral but, because
of the absence of good quality data, it does not know the specific
cost of the individual changes that have been announced. The existing
£2,500 disregard is estimated to cost £800 million,
so the cost of the package is likely to be significant. Before
the Pre-Budget Report the Department estimated the cost of this
element of the package. The Department should provide details
of the estimate it has made.
4. Some overpayments are inherent in the design
of Tax Credits, as initial awards are based on claimant circumstances
and income for previous years. Changes
announced in the Pre-Budget Report should reduce these overpayments,
which account for one third of the total. The Department does
not have comprehensive information on how other overpayments are
caused. It should undertake further work to analyse the cause
of overpayments to determine if they can be reduced further.
5. The experience of Tax Credits illustrates
the difficulties where information from claimants, necessary for
the efficient administration of the scheme, is not available or
takes time to obtain. In implementing
the Tax Credits scheme, the Department should have taken more
care in its design and testing of the administrative arrangements
and the requirements placed on claimants.
6. Changes announced in the Pre-Budget Report
place new responsibilities on claimants to tell HMRC promptly
about changes in their circumstances.
The Department has not provided adequate advice to applicants
in the past and it acknowledges that improved communications are
vital in helping claimants understand the recent changes. It should
consult on its plans for communicating these changes with bodies
in the voluntary sector that advise claimants. It is also incumbent
on the Department, having demanded prompt information from claimants,
to be ready to process it accurately and quickly enough to prevent
any accumulation of overpayments or underpayments.
7. The Department does not have reliable or
up to date information on levels of claimant error and fraud in
Tax Credits. The absence of this information
and its analysis seriously impairs the Department's management
of the schemes and its ability to safeguard taxpayer's money.
As we stated in our last report on Tax Credits,[6]
the Department should quantify and analyse in detail its final
estimate of overpayments due to error and fraud and should publish
the results along with its targets for reducing these types of
overpayments and its plans for achieving its targets.
8. The design of the Tax Credits scheme limits
the Department's ability to estimate the overall level of error
and fraud. Final estimates of error and
fraud for 2003-04 will not be available until Spring 2006.
In designing similar schemes in the future, Departments should
assess the risk of error and fraud and their ability to identify
and manage it.
9. There has been a serious assault on the
Tax Credits system by organised criminals and the Department closed
the Tax Credits internet site on 2 December 2005.
Given the severity of the attack, in which identities were stolen
to submit fraudulent claims, the Department needs to assess the
adequacy of its fraud risk assessment and the effectiveness of
its controls before deciding on whether to re-open the internet
facility. It also needs to consider the wider implications of
the fraud, including whether its defences for telephone access
are strong enough.
10. The Department agreed a sum of £71.25
million in settlement of its claim against EDS for the Tax Credits
computer problems. Of this sum, £26.5
million will depend on EDS winning future work from government,
but there is no guarantee that it will win sufficient business
to trigger full payment. Government should not be placed
in the invidious position of having to commission further work
from a contractor in order to recover compensation for underperformance.
11. The terms of the settlement are covered
by a confidentiality clause and have not been disclosed by HMRC
or EDS. Confidentiality arrangements should
not be accepted where they will impair accountability for public
money. Contractors need to accept that, if they do business in
the public sector, the terms of such settlements should be in
the public domain. The Treasury should require Departments to
abstain from confidentiality clauses in settlements with contractors,
as is the case of severance compensation packages.
6 5th Report from the Committee of Public
Accounts, Inland Revenue: Tax Credits and deleted tax cases
(HC 412, Session 2005-06) conclusion 4, page 4 Back
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