HM Revenue and Customs (HMRC) paid £30 billion in tax credits in 2011-12, providing support to nearly six million individuals and families. The scheme is complex as the eligibility of claimants and their awards are based on a range of criteria and the scheme is designed to react to changes in claimants' circumstances. Tax credits are difficult for claimants to understand and equally challenging for HMRC to administer. In 2010-11, HMRC estimated that one in five awards contained error or fraud which resulted in claimants receiving more money than they were entitled to.
HMRC acknowledges that its performance in reducing tax credits error and fraud is disappointing. It lost £2.3 billion to error and fraud in 2010-11, £850 million higher than it had expected. HMRC's target in the 2010 Spending Review was to save £8 billion from reducing tax credits error and fraud by 2015. It now estimates that it will miss this target by £5 billion. HMRC needs a more realistic target for the amount of savings it should achieve from reducing error and fraud.
The support provided by HMRC to claimants, in writing and through its helpline, needs to be improved. This will help ensure claimants receive the correct amount and avoid overpayments, which they often struggle to repay. In 2011-12, HMRC wrote off £1.7 billion of tax credits debt. HMRC must work more closely with organisations that represent claimants to get a better understanding of where claimants need help so it can make improvements to the support it provides to claimants.
HMRC has increased the number of awards it checks, resulting in more people contacting Citizens Advice for help with their claims and a greater number of appeals against decisions to reduce or terminate the amount of tax credit paid. HMRC did not put in place sufficient resources to deal with the increase in appeals resulting in delays and causing unnecessary distress and hardship to claimants.
Using data to identify patterns and trends in claimant behaviour, as well as checking claimant information against other data sources to identify discrepancies, is crucial to tackling error and fraud. HMRC has made some progress in its analysis of data, but it has not always checked tax credits against child benefit data that it holds and it should also explore how it can use a wider range of data sources. HMRC also needs to improve its understanding of why claimants do not always report changes to their circumstances as this is when the majority of error happens.
On the basis of a Report by the Comptroller and Auditor General, we took evidence from HM Revenue & Customs and Citizens Advice on tax credits error and fraud.