NAO critical of HMRC’s failure to reduce tax credit fraud

The National Audit Office (NAO) has criticised HMRC’s failure to reduce ‘material’ levels of error and fraud in tax credit payments, and has qualified its opinion of the department’s accounts on that basis, as it has done every year since tax credits were introduced in 2003/04

The NAO points out that in 2016-17, HMRC fell behind its planned profile for achieving sustainable efficiencies from transformation, reporting £78m of savings against £189m originally expected. HMRC made other operational savings and one-off cost reductions which helped to compensate, reporting efficiency savings of £254m against a target of £203m. Only £181m of these efficiencies were sustainable, hence HMRC will need to make additional savings in future years.

The report states: ‘This scale of transformation will be challenging to manage, and the UK’s exit from the EU presents an additional challenge.

‘HMRC recognised that it needed to slow, stop or de-scope activity to live within its budget. It reduced the difference between planned activity and budget to around £60m for 2017-18.

‘However, many of the programmes are interdependent and some are implementing necessary changes, such as the new customs system. HMRC must ensure that any changes to scope or timing of programmes do not jeopardise the delivery of benefits.’

Amyas Morse, NAO head, said: ‘HMRC is part-way through an ambitious programme to bring in digital services and reduce its costs. In doing so HMRC must ensure it maintains adequate services if it is to protect revenue and tackle error and fraud.’

Customer service

HMRC significantly improved its performance against its customer service targets in 2016-17 by hiring over 800 staff and using its workforce more flexibly. In 2016-17 telephone advisers had to handle 34m calls (29m in 2015-16) which was eight million more than forecast.

HMRC reported its best performance for five years against both its key telephony measures: the percentage of calls to its helplines that it handled (92% in 2016-17 compared to 72% in 2015-16); and the average speed to answer calls from when a caller enters a queue to speak to an adviser which fell from 12 minutes in 2015-16 to under four minutes in 2016-17.

However, the NAO stated: ‘HMRC’s set of performance measures could be improved to better reflect customer experience. Its current approach to measurement could overstate calls handled, and understate the time to answer as experienced by the customer.

‘There is also opportunity for HMRC to improve some of its other performance measures to better reflect customer experience, including whether it resolves customers’ queries first time, and the quality of its advice.’

HMRC’s central estimate of error and fraud in 2015-16 (the most recent available) is £1.57bn of overpayments (5.5% of total spending on personal tax credits) and £0.21bn of underpayments (0.7%).

The audit watchdog points out that HMRC’s estimated increase in error and fraud within tax credits is contrary to the significant reductions achieved in previous years, and the rate is expected to increase further.

HMRC analysis shows that during 2015-16 the increase in estimated error and fraud was associated with the income, work and hours, childcare and undeclared partner risk categories. HMRC also expects the level of error and fraud to increase when reported for 2016-17, due to the impact of introducing the new ‘commercial with a view to a profit’ self-employed test as well as the impact of the ending of the outsourced Concentrix contract.

NAO warns that HMRC will face further challenges in administering tax credits as claimants transfer to universal credit.

It also flags up ongoing concerns about progress on HMRC’s major transformation programme which seeks to move to a fully digital tax system by 2020. The NAO report states: ‘Transformation as originally scoped, and its intended benefits, will be challenging to deliver within the timescale.’

Amyas Morse, NAO head, said: ‘HMRC collected more tax revenue in 2016-17 and improved its service levels for taxpayers. However error and fraud is rising within tax credits and HMRC needs to make it easier for claimants to get help.

The NAO’s report on HM Revenue & Customs 2016-17 Accounts is here.

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