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Sir John Bourn, head of the NAO, today published a report on the Inland Revenue’s accounts for the year 2003-04. 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.

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Qualified Audit Opinion

The Inland Revenue distributed some £13.5 billion in 2003-04 on Child Tax Credit and Working Tax Credit. The high level of overpayment under earlier tax credit schemes – some 10 per cent to 14 percent by value – led Sir John to qualify his audit opinion on the Trust Statement for the previous year, 2002-03.

The Inland Revenue told the Committee of Public Accounts in December 2003 that claimant error rates under the new Tax Credits payable from 2003-04 might be half the rates under the previous schemes. They have not yet estimated the level of financial error on the new Tax Credits and so Sir John has no evidence that error has reduced significantly to enable him to give an unqualified audit opinion. He has therefore qualified his audit opinion on the 2003-04 Trust Statement account.

Problems with the start of Child and Working Tax Credits in April 2003

The systems did not work as intended when the Inland Revenue introduced Child and Working Tax Credits in April 2003, causing problems for claimants, employers and the Department. They had to move staff from other tax work to help with these problems. They plan to recover fully from the impacts of the initial Tax Credits problems by the end of 2004-2005.

Stamp Duty Land Tax

Stamp Duty Land Tax, introduced on 1 December 2003, was implemented without the introduction of an automated system and the success of the interim, manual arrangements is a credit to those involved.

The Department is developing IT systems to remedy the limitations in procedures and controls during manual running. During that period, some checks on returns and tax payable were undertaken to a lower level than planned and the Department plans to introduce a more comprehensive approach. This will be fully effective only once the IT systems are in place.

"The probable level of overpayment of the new Tax Credits as a result of claimant error and fraud has led me to qualify my audit opinion on the Inland Revenue Trust Statement for a second year.

"It is important that the Inland Revenue tests the claims for new Tax Credits, as planned; and that it quantifies the financial implications of claimant error and fraud as soon as possible. The Department expects a result in respect of 2003-04 by July 2005, in time for the 2004-05 accounts.

"The successful introduction of Stamp Duty Land Tax, has reduced the opportunities for tax avoidance. Some issues remain and the Department should continue to review the tax revenues still at risk, even though these new arrangements have been introduced, and identify new ways of countering avoidance of Stamp Duty."

Sir John Bourn


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