Press Release - HMRC Standard Report 2006-07
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
Sir John Bourn, head of the National Audit Office, said
today:
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.”
Notes for Editors
- Press notices and reports are available from the date of
publication on the NAO website, which is at www.nao.org.uk. Hard
copies can be obtained from The Stationery Office on 0845 702
3474.
- The Comptroller and Auditor General, Sir John Bourn, is the
head of the National Audit Office which employs some 850 staff. He
and the NAO are totally independent of Government. He certifies the
accounts of all Government departments and a wide range of other
public sector bodies; and he has statutory authority to report to
Parliament on the economy, efficiency and effectiveness with which
departments and other bodies have used their resources.
Press Notice 33/07
All enquiries to Neil Gadhok, NAO Press Office:
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