Tax and duties

HM Revenue & Customs 2006-07 Accounts: The Comptroller and Auditor General’s Standard Report

On tax credits

“Once again, the levels of claimant error and fraud in the tax credit schemes are unacceptably high. This has led me to qualify my audit opinion on regularity of these payments. It is important that the Department now targets reductions in levels of error and fraud and considers how its compliance teams can engage more widely with tax credit claimants.”

On income tax (PAYE)

“HMRC’s computer systems are no longer well suited to the efficient administration of income tax especially where people have more than one job or change jobs frequently. This has led to employees paying too much or too little tax. HMRC has put in place a number of measures to improve the quality and timeliness of PAYE processing, in advance of its implementation of a new computer solution in 2008. The Department should quantify the success of its measures in reducing levels of error within PAYE.”

On income tax (self-assessment)

“The Department has made good progress in engaging with taxpayers through the internet. However, a million taxpayers still failed to submit their returns by the 31 January deadline. The Department must continue its work to target groups who are more prone to non-compliance, for example those new to self-employment and subcontractors in the construction industry.”

On VAT missing trader fraud

“The Department has strengthened the operational measures it uses to tackle missing trader fraud, and this is to be welcomed. The Council of the EU has approved legislation to allow the Department to apply a reverse charge, which it can apply to criminals trading in goods associated with the fraud, namely mobile phones and computer chips. There is still a significant risk however, that fraudsters will simply switch their trade to other goods not covered by the reverse charge. Missing trader fraud is a major challenge right across the EU. It will need concerted action by all Member States to find a long term solution to this problem.”

On tax credits “Once again, the levels of claimant error and fraud in the tax credit schemes are unacceptably high. This has led me to qualify my audit opinion on regularity of these payments. It is important that the Department now targets reductions in levels of error and fraud and considers how its compliance teams can engage more widely with tax credit claimants.” On income tax (PAYE) “HMRC’s computer systems are no longer well suited to the efficient administration of income tax especially where people have more than one job or change jobs frequently. This has led to employees paying too much or too little tax. HMRC has put in place a number of measures to improve the quality and timeliness of PAYE processing, in advance of its implementation of a new computer solution in 2008. The Department should quantify the success of its measures in reducing levels of error within PAYE.” On income tax (self-assessment) “The Department has made good progress in engaging with taxpayers through the internet. However, a million taxpayers still failed to submit their returns by the 31 January deadline. The Department must continue its work to target groups who are more prone to non-compliance, for example those new to self-employment and subcontractors in the construction industry.” On VAT missing trader fraud “The Department has strengthened the operational measures it uses to tackle missing trader fraud, and this is to be welcomed. The Council of the EU has approved legislation to allow the Department to apply a reverse charge, which it can apply to criminals trading in goods associated with the fraud, namely mobile phones and computer chips. There is still a significant risk however, that fraudsters will simply switch their trade to other goods not covered by the reverse charge. Missing trader fraud is a major challenge right across the EU. It will need concerted action by all Member States to find a long term solution to this problem.”

Sir John Bourn, head of the National Audit Office, 12 July 2007


Sir John Bourn, head of the NAO, today issued his audit certificate on HM Revenue & Customs 2006-07 Trust Statement of revenues. Sir John was able to issue an unqualified audit opinion on the truth and fairness of the Trust Statement, but in common with 2005-06, issued a qualified opinion on regularity due to levels of claimant error and fraud in the tax credits system.

Tax Credits overpayments

During 2006-07 HMRC paid a net £18.7 billion in tax credits and an average of 5.5 million families received 2006-07 awards. In the first three years since the scheme was introduced in 2003, overpayments arising from adjustments to awards, and other small changes to entitlement after the finalisation of awards, have led to a debt of £6 billion. The Department has also identified £600 million in year adjustments to 2006-07 awards. At the end of March 2007, the Department had collected £2 billion of this debt and written off £0.7 billion. At the end of March 2007, £3.9 billion of this remained to be collected by HMRC. It has also provided for £1.6 billion for those debts where recovery is doubtful.

Tax Credits claimant error and fraud

As a consequence of attacks by organised criminals, HMRC closed its tax credits internet site in December 2005. This has reduced levels of incorrect payments, but HMRC still found it made incorrect payments £40 million in cases of suspected organised fraud. It also prevented incorrect payments of £212 million where organised fraud was suspected during 2006-07.

HMRC measures overall levels of claimant error and fraud and found that between £1 billion to £1.3 billion was paid to claimants to which they were not entitled in 2004-05. These levels are unacceptably high and, whilst the Department has made changes to its compliance procedures since 2004-05, there is no evidence to demonstrate a lower estimate for 2006-07. As a result, Sir John qualified his opinion on the regularity of Trust Statement.

Whilst all claims are subject to a series of checks before they are put into payment, the Department’s main compliance work currently focuses on around 2.5 per cent of awards. The Department is now considering whether, in addition to these detailed compliance examinations, more frequent engagement with other groups of tax credit claimants would assist in the prevention and deterrence of error and fraud across the wider claimant population.

Collection of income tax through PAYE

In 2006-07, HMRC collected £125 billion income tax and £85 billion National Insurance Contributions through Pay As You Earn (PAYE). PAYE aims to collect the right amount of tax during the year without the need for end of year adjustments, but HMRC’s PAYE computer systems are no longer well suited to the efficient administration of income tax especially where people have more than one job or change jobs on a regular basis. The systems structure records around jobs rather than individual taxpayers and HMRC can have difficulty identifying all sources of income when calculating tax payable. Based on its most recent estimates, each year the Department may not be pursuing some £880 million of tax due, and taxpayers are likely to have overpaid around £340 million, resulting in potentially 5 million taxpayers not paying the right amount of tax.

HMRC has taken steps to improve processing and ensure it takes into account all the information it holds on a taxpayer. But the Department recognises that real improvement in the operation of PAYE can only be achieved through fundamental changes in its computer systems. It therefore plans to move to its National Insurance computer system as the basis for administering the PAYE process. From 2008-09 this will mean all relevant information on individuals will be held together and provide a complete view of a taxpayer’s income.

Since the early 1980s some pension providers have not deducted tax under PAYE from all pensions in payment. This is due to a combination of incorrect central guidance, inappropriate local agreements and failures by local offices to implement agreed procedures. HMRC estimates it has potentially not collected income tax on 420,000 pensions with a tax loss of around £135 million per annum. The Department has now begun a systematic programme of work to put these pensions on a proper footing but it does not intend to recover tax which has not been deducted in years earlier than 2007-08.

Collection of income tax through self assessment

HMRC has changed the self assessment process to ease the burden on certain taxpayers. And its online services have been at the forefront of HMRC’s drive to engage taxpayers. The percentage of returns filed online has increased and it has already exceeded its target of 35 per cent of self assessments to be filed online by January 2008.

In 2006-07 around one million taxpayers did not submit their returns by the 31 January deadline. The Department’s early analysis suggests that this was primarily because of reduced media advertising in 2006-07 and problems with its campaign to contact taxpayers new to Self Assessment to remind them of their responsibilities.

The Department has evidence of organised criminal activity to obtain fraudulent repayments, sometimes using unsolicited returns. It introduced improved controls in April 2007 to specifically monitor unsolicited returns and is reviewing the effectiveness of its existing automated checks for identifying high risk repayments. It needs to closely monitor the success of these measures in deterring organised crime.

VAT: missing trader fraud

The Department has strengthened measures to deal with missing trader fraud, following an increase in fraudulent activity in 2005-06. The successful UK application for a ‘reverse charge’ was approved by the Council of the European Union in April 2007, and introduced in June 2007. But the NAO report points out that this has been limited to goods commonly associated with fraud and that there is a danger the organised criminals will divert their attention to other goods not covered by the derogation.

Missing trader fraud is a European wide problem, states the NAO. And in the long term it can only be tackled with the co-operation of other European Union member states


Publication details:

ISBN: 0102946450 [Buy from TSO]

HC: 626 2006-2007