HMRC to Miss Tax Credit Fraud Target

23 May 2013

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.

Low-income families must apply for tax credits through a complex system which has proved 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 committee called on HMRC 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 already 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.

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 are 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."