In 2013-14, the Department for Work & Pensions and HM Revenue & Customs overpaid benefits and tax credit claimants by £4.6 billion because of fraud and error, and underpaid claimants by £1.6 billion, according to today’s report from the National Audit Office. Overpayments increase costs to taxpayers and reduce public resources available for other purposes, while underpayments mean households are not getting the support they are entitled to.
The level of fraud and error is a long-standing and significant problem. The NAO has identified four systemic issues which the departments need to continue to address: establishing clear strategies and governance; designing controls into the way departments work; implementing controls and interventions effectively; and measuring and evaluating performance.
Today’s report finds that the departments have made progress in reducing headline rates of fraud and error. In particular, HMRC’s reductions in tax credits fraud and error overpayments from 8.1% in 2010-11 to 4.4% in 2013-14 are encouraging.
The NAO finds that, based on current estimates, HMRC will meet its spending review target for fraud and error, while DWP is not on track. The departments set targets for reducing fraud and error in 2014-15 to 1.7% of benefit spending for DWP and towards 5.5% of tax credit spending for HMRC. DWP’s preliminary estimates for 2014-15 show overpayments of 1.9%. Changes in the composition of DWP benefits have helped to bring down rates of fraud and error. HMRC still needs to understand fully the reasons for its recent reductions.
The departments have implemented some major changes that should help to reduce fraud and error in the future. For example, DWP is introducing Universal Credit and other changes to the welfare system. HMRC has changed tax credits rules and started a project with the private sector to increase the Department’s capacity. These new opportunities will make it easier to reduce some types of fraud and error, but significant risks still remain. For the next five years, both departments will have to manage fraud and error during a long and complicated transition to Universal Credit. Departments have improved their capability to tackle some risks, for example using data from HMRC’s real-time information system (RTI) to reduce losses due to claimants misstating their income. But they need to develop their approaches for other risk areas, such as claimants not declaring whom they live with, which was the cause of £823 million of fraud and error in 2013-14.
Both departments have strengthened governance over fraud and error initiatives, have improved their understanding of the causes of fraud and error, and are increasingly aiming for prevention in scheme design. However, they need to strengthen how they monitor performance as there will be significant levels of fraud and error after the introduction of Universal Credit. DWP currently estimates that around £5.8 billion of overpayments will still be at risk in 2020.
“For over 25 years we have highlighted concerns about fraud and error, and departments’ limited in-roads into the problem. The government continues to lose large amounts of money through fraud and error overpayments, reducing the money available for other purposes. And many vulnerable people get less support than they are entitled to. There are many reasons to be optimistic about opportunities to reduce fraud and error, in particular through the use of real-time information and introduction of Universal Credit. Real-time information has made it much easier to deal with changes in claimants' earnings. However, the full impact is still uncertain and it will be several years before Universal Credit is fully rolled-out. Departments need to build on recent efforts to develop more integrated and systematic responses to preventing fraud and error.”
Amyas Morse, head of the National Audit Office
Notes for Editors
Spending in 2013-14 on benefits and tax credits
Overall level of fraud and error overpayments on benefits and tax credits, 2013-14
Overall level of underpayments on benefits and tax credits, 2013-14
Spending on benefits and tax credits, 2013-14
Total overpayments due to fraud and error, 2013-14
Total underpayments due to fraud and error, 2013-14
Target for overpayments due to fraud and error in March 2015
Latest fraud and error rate
1.9% (preliminary figures,2014-15)
1. Benefits and tax credits support about 20 million households across the UK. In 2013-14 government departments paid out £193 billion to support a wide range of claimants including pensioners, working people, jobseekers, and disabled people. Almost everyone in the UK gets a state pension, benefit or tax credit at some point in their lives.
2. HM Revenue & Customs (HMRC) manages tax credits. The Department for Work & Pensions (DWP) manages most remaining benefits and state pension. Local authorities are responsible for the day-to-day administration of Housing Benefit. DWP is replacing tax credits and four working age benefits with Universal Credit. The level of fraud and error is a persistent concern in benefits and tax credits. The Committee of Public Accounts has repeatedly called for departments to tackle fraud and error more effectively, and highlighted the scale of losses that could otherwise have been spent on other government objectives.
3. Fraud and error is a complex subject. HMRC and the DWP measure fraud and error differently. They use several technical concepts to define and analyse overpayments which makes it difficult to understand what is really happening to public spending. The NAO is therefore today publishing a fraud and error primer to explain the main concepts and definitions of fraud and error in benefits and tax credits. It aims to help people understand official statistics, departmental accounts and related publications
4. Press notices and reports are available from the date of publication on the NAO website. Hard copies can be obtained by using the relevant links on our website. The National Audit Office scrutinises public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Sir Amyas Morse KCB, is an Officer of the House of Commons and leads the NAO, which employs some 810 people. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund have used their resources efficiently, effectively, and with economy. Our studies evaluate the value for money of public spending, nationally and locally. Our recommendations and reports on good practice help government improve public services, and our work led to audited savings of £1.15 billion in 2014.