Business

Challenge to cut tax credit fraud

Baby and parent's hand
Image caption Tax credits can be difficult to understand for new parents

Tax authorities are facing a challenge to meet a target to cut the level of fraud and error in the tax credits system, figures show.

The latest statistics reveal that £2.1bn was lost by the authority in 2008-9, from 1.2 million cases of fraud or error.

That made up 8.9% of the tax credit bill, according to HM Revenue and Customs (HMRC).

The government has told the authority to cut this to 5% by March 2011.

When the challenge was set in October's Spending Review, accountants cast doubt on whether this could be done - especially with a "demoralised" HMRC staff who already faced a backlog of cases.

But tackling fraud is a significant part of the government's austerity measures.

Issue

The tax credit system was aimed to provide financial support for parents returning to work and reduce child poverty.

It was designed to be flexible as parents' financial circumstances changed. As a result, entitlement takes into account age, income, hours worked, number and age of children, childcare costs and disabilities.

The guidance for tax credits staff runs to 1,447 pages and it is this complexity that has led to fraud and error in the system, according to experts.

A review of nearly 5,000 cases revealed that this cost the authorities more than £2bn in 2008-9. This was on top of £260m owed to 350,000 claimants that year after errors by HMRC, which administers the benefit.

Incorrect income

Overpayments were the result of a number of factors.

The HMRC report shows that the most common reasons for the error and fraud were incorrect details of income and childcare costs.

In the projected 365,000 cases where error and fraud could be found, the value of the tax credits awarded was more than £7,000 in the year.

The HMRC said that the vast majority of losses related to mistakes by the claimant - either simple errors arising from misunderstanding or failure to take reasonable care when making a claim.

"The target set in October is challenging, but we are determined to clamp down across the whole spectrum of fraud and error," said a HMRC spokeswoman.

"A joint error and fraud strategy, published by HMRC and the Department for Work and Pensions in October, sets out a wide range of radical options to combat fraud.

"These include setting up a new investigation service to catch benefit and tax credit cheats and radically increasing the range of third-party data to identify incorrect and fraudulent claims. It also gives a strong signal that criminal gangs will no longer find the UK an easy target."

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