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Sir John Bourn, head of the NAO, today published a report on the Inland Revenue’s accounts for the year 2004-2005. The Inland Revenue collected some £256.9 billion in the year. Sir John confirmed that overall the Inland Revenue continued to secure an effective check over the assessment, collection and allocation of tax during the year. However, he has qualified his opinion in respect of Tax Credits for the third year running because of the likely level of claimant error and fraud.

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Qualified Audit Opinion in respect of Tax Credits Fraud and Error

The Inland Revenue distributed some £15.8 billion in 2004-05 on Tax Credits. The high level of overpayment under earlier Tax Credit schemes led Sir John to qualify his audit opinion on the Trust Statement for 2002-03 and 2003-04. The Inland Revenue told the Committee of Public Accounts in January 2005 that they were undertaking work to provide more information on the level of claimant fraud and error under the new Tax Credits. This exercise is not due to be completed until Spring 2006. In July 2005, however, the Department produced interim results which indicated that it had overpaid 3.4 per cent because of claimant fraud and error in 2003-04 (some £460 million).

The Department believes these interim results are subject to a wide margin of error because they are based on work that had been completed by May 2005 and it is likely that these cases were more compliant. The final results are likely to show an increase in the proportion of cases involving claimant fraud and error.

Sir John concluded that, while the interim work suggests that the level of claimant fraud and error is lower than with the previous Tax Credits, it remained unacceptably high in both the amount and percentage terms. Sir John has therefore qualified his audit opinion on the 2004-05 Trust Statement account.

Tax Credit Overpayments

The value of awards is recalculated annually and the Department identified that one third of recipients of 2003-04 awards had been overpaid a total of some £1.9 billion in 2003-04. Subsequent backdated payments in respect of 2003-04 awards brought the total overpayments for that year to £2.2 billion. Overpayments are recovered where possible from future payments of Tax Credits. The Trust Statement account has however provided for £961 million of doubtful debts in respect of tax credit overpayments for 2003-04 and 2004-05.

The annual basis of tax credit awards means that recipients need to be able to anticipate and plan for the consequences of changes in their income. This is clearly a problem for many families until they become used to the implications of the annual calculation of their entitlement.

Pay As You Earn

The Department’s Internal Audit Office highlighted significant and widespread errors in PAYE. They estimated for the first time that these problems had resulted in around £575 million per annum of tax due not being pursued by the Department; and that taxpayers were not being advised of around £295 million per annum potentially repayable to them. The main cause was the Department’s failure to calculate correctly tax liabilities where people had more than one source of income.

Large Business Office management of Corporation Tax

The Large Business Office (LBO) handled the tax affairs of some 800 large entities and employers which generated some £18.4 billion of tax in 2004-05. The LBO was integrated with the Customs and Excise equivalent in April 2005 to form the Large Business Service of HM Revenue and Customs.

The management by large businesses of their tax affairs will continue to pose a challenge and the Department has in place a number of important initiatives to improve its effectiveness. It must continue to modernise its work to ensure it matches the sophistication of large businesses with equivalent Departmental expertise and methods.

Tax Accruals

The Trust Statement account was prepared on an accruals basis in 2004-05. For the first time, it incorporates a balance sheet disclosing debtors and some £45 billion of accrued revenue receivable. This figure includes estimates of tax liabilities not due for payment until after the end of 2004-05, but relating to that year. Sir John’s audit certificate refers to fundamental uncertainty regarding these tax accruals but his audit opinion is not qualified in this respect.

“Although there is some limited interim evidence that the level of claimant error and fraud involved in the payment of the new Tax Credits may have fallen, that level remained unacceptably high and therefore I have once again qualified my audit opinion on the Inland Revenue’s Trust Statement. The Department expects to have final results for the levels of fraud and error for 2003-04 awards in the Spring of 2006. It must use these results to target a year on year reduction in the amount of fraud and error. It must also ensure that confidence in the fairness of the schemes is not undermined by unacceptable levels of unjustified payments.

“The fact that tax credits awards are made on a provisional basis represents a significant cultural shift for many claimants. The need to repay the Department for overpaid awards has clearly caused difficulty for many families. The Department needs to understand better how claimants can be helped to cope with overpayments: some £2.2 billion in respect of 2003-04 awards.”

Sir John Bourn


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