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HMRC to miss tax credit fraud target, says PAC

Baby and parent's hand
Image caption Tax credits are designed to assist young parents who go back to work

The UK tax authority's failure to hit a target of reducing tax credit fraud and error has "cost the taxpayer dear", according to a committee of MPs.

HM Revenue and Customs (HMRC) was challenged by the government in 2010 to cut fraud and error by £8bn by 2015.

HMRC has now predicted that it will only be reduced by £3bn, a report by the Public Accounts Committee said.

The tax credit system aims to provide financial support for parents returning to work.

Overpayments

Low-income families must apply for tax credits through a complex system.

This 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.

Families must tell HMRC of any changes to their circumstances. The latest set of renewal packs are being sent to claimants at present.

However, the committee said that the system was difficult for claimants to understand and equally challenging for HMRC to administer.

As a result, the latest figures showed that:

  • One in five awards featured an error or fraud which meant the claimants were overpaid
  • A total of £1.7bn of these overpayments was written off because claimants were never likely to pay it back
  • Some £2.3bn was lost to fraud and error in 2010-11, which was £850m more than HMRC expected
  • A target to reduce the proportion of fraud in relation to the total amount of money spent on tax credits to 5% in 2010-11 was missed. It stood at 8.1%
  • The 2015 target, set in the 2010 Spending Review, will now be missed by £5bn, according to HMRC estimates

"HMRC's performance in cutting the level of fraud and error in the tax credits system has been hugely disappointing and extremely poor," said Margaret Hodge, who chairs the Public Accounts Committee.

"The department's failure to cut the fraud and error rate to 5% has cost the taxpayer dear.

"In these strained times, the government cannot afford these failures."

'Improvements needed'

The committee suggested that HMRC be given a "more realistic target" for reducing fraud and error.

It called on the tax authority to improve the information it gives to claimants in letters and through its helpline, and get better at cross-checking the information it receives from claimants with other data that it holds on them.

The biggest problems were inaccurate records of claimants' working hours, or HMRC being unaware of the income of a claimant's partner.

More people have contacted Citizens Advice as a result of an increasing number of checks by HMRC. In turn this increased the number of appeals after payments were reduced or cancelled.

The committee said not enough resources were put in place to cover these appeals, causing delays and "unnecessary distress and hardship" to claimants.

Gillian Guy, chief executive of Citizens Advice, said that the charity's advisers had witnessed "appalling" cases of poor communication from HMRC.

Mistakes, and delays of six to eight months in appeals, had caused financial hardship for many, she added.

This had led to lone parents having to support themselves on just income support and child benefit. Some risked being pushed out of work, having to borrow money and getting into debt, she said.

'Clamping down'

A spokesman for HMRC said that extra checks - which had increased tenfold in the last four years - had saved £390m in three specific areas. In addition, links with the private sector had improved the data used to make sure claimants' information was accurate and to identify fraud.

Image caption Fraud and error have been a problem in the tax credits system for some time

"We are also getting tougher with claimants about the proof they need to support their claims; for example on childcare costs and on school leavers," he said.

New technology will mean that employers would provide up-to-date information for tax credit claims from 2014, significantly reducing fraud and error.

"We will continue to improve the service and quality of information we provide, while clamping down on the minority who seek to abuse the rules," he added.

The Low Income Tax Reform Group, which speaks on behalf of claimants, said that HMRC needed to look at its own inaccuracies, rather than solely targeting incorrect claims.

"A common failing of such investigations so far has been a one-size-fits-all approach which tends to ignore the subtleties of a highly complex system, leading to far too many claimants being deprived of entitlements which are rightfully theirs," said Anthony Thomas, the group's chairman.

"Of the total amount attributable to fraud and error in tax credits, about two-thirds is accountable for by error, one-third by fraud. Yet HMRC's strategy is almost exclusively reliant on anti-fraud measures.

"HMRC must also pay more attention to analysing where they themselves make mistakes in administering the system, a problem about which they remain in denial."

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