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Head of the National Audit Office Sir John Bourn today reported to Parliament on the National Insurance Fund (GB) account 2003-2004. This account is the responsibility of the Inland Revenue and benefit payments are made from the Fund by the Department for Work and Pensions.

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Sir John has qualified the National Insurance Fund Account in respect of Incapacity Benefit, paid out of the Fund, because of the number of cases where DWP was unable to locate the supporting papers providing evidence of customers’ entitlement.

Individuals have to pay or be credited with sufficient National Insurance contributions each tax year to qualify for benefit or basic state pension purposes. The former Contributions Agency used to send Deficiency Notices to individuals who had not contributed enough. However, the Agency suspended this practice after 1995-96 in order to focus resources on priorities during the early years of the new NIRS2 system. Between October 2003 and September 2004 the Inland Revenue started writing to working age customers who should have received a Deficiency Notice in respect of the previous six years up to 2001-02, with DWP taking responsibility for writing to those who had reached State Pension age in the period. The production of Deficiency Notices was then resumed by the Inland Revenue as an annual exercise in late 2004.

The Inland Revenue achieved significant success in issuing over 10 million Deficiency Notices in the past year. The Inland Revenue and the DWP estimates of administrative costs for their Deficiency Notice exercises together amount to almost £100 million. They estimate that the exercises will generate £81 million in additional NI contributions. The DWP estimates that individual’s benefit entitlement will increase by £103 million by the end of their exercise.

The Inland Revenue has taken, and has in hand, a range of important initiatives to assist employers in improving the quality of the information they send to the Revenue in their end of year employee returns. Nevertheless, employers’ information continues to generate each year over two million National Insurance contribution records that cannot be matched to the relevant contributors, despite the Inland Revenue’s efforts to trace them. Some of these non-matched items might have an impact on benefit payment.

"Issuing millions of retrospective Deficiency Notices to the public will cost an estimated £100 million but the full increase in people’s entitlement to benefits as a result of the exercise is not yet known, particularly for those who have retired in recent years. I will consider further progress in future years.

"The Inland Revenue takes all reasonable action to trace and update its National Insurance contribution records; however, poor quality NI contributions information from some employers will for years to come continue to cause difficulties for the Inland Revenue and potentially for the individuals whose benefits depend on that information."

Sir John Bourn


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