The Committee’s Fourth Report of this Session, published October 28 2015, examines fraud and error in the payment of benefits and tax credits – a significant and long-standing problem.
HM Revenue & Customs (HMRC) manages tax credits and paid out £29 billion to 4.7 million claimants in 2013-14. The Department for Work & Pensions (DWP) manages most remaining benefits and the state pension, paying out £164 billion in 2013-14 to 18 million people.
Since 2010 both departments have made progress in reducing headline rates of fraud and error, particularly HMRC in tax credits. Yet in 2013-14, DWP and HMRC still overpaid claimants by £4.6 billion because of fraud and error, and underpaid claimants by £1.6 billion.
Overpayments increase costs to taxpayers and reduce public resources available for other purposes. Underpayments mean households do not get the support they are entitled to.
Meg Hillier MP, Chair of the PAC, said today:
"The high levels of fraud and error scrutinised by the Public Accounts Committee are a matter of great concern. Put simply, far too much taxpayers’ money has gone where it shouldn’t – and too little where it should.
Legitimate claimants have missed out on vital support running into thousands of millions of pounds. At the same time, overpayments cost every UK household about £200 a year.
Against this backdrop, the PAC would expect to see Government departments setting firm targets for reducing fraud and error, with a clear focus on making best use of the public pound.
Yet while HMRC has made progress in tackling tax credit fraud and error, it has no meaningful framework for making further progress during the transition to Universal Credit. This is not good enough. Similarly, the DWP must be far clearer in setting targets for reducing fraud and error for individual benefits.
The PAC has been told welfare reform will help HMRC and the DWP tackle some of the issues raised by this inquiry. That may be so - but changing the benefits structure is not a ‘magic bullet’.
Departments must take active responsibility for identifying potential problems, and implement effective plans for dealing with them.
It is alarming that despite issuing tens of thousands of fines in recent years, along with many other penalties, the DWP is unable to produce any evidence of the effect this approach has had – for good or ill - on people’s behaviour.
I am also concerned that steps taken by HMRC to tackle tax credit fraud and error – including employing a private contractor to check claims – has resulted in a blunt instrument approach to enforcement that does not properly take into account the human impact of its response, particularly on vulnerable claimants."
High levels of benefits and tax credits fraud and error remain unacceptable. Overpayments cost every household in the UK around £200 a year and waste money that government could spend on other things. HM Revenue & Customs (HMRC) and the Department for Work & Pensions (DWP) have made some progress in tackling fraud and error, but both departments have shown a paucity of ambition.
HMRC has reduced fraud and error, but does not fully understand how it has achieved this, or how much further it can go. DWP did not meet its 2014-15 target for reducing fraud and error, and is relying on welfare reforms to make future improvements. These reforms will not solve all the problems, and DWP expects fraud and error to still be £5.8 billion in 2020-21, once Universal Credit has been fully rolled-out.
While the departments can recover some of the money overpaid, this can create huge difficulties for people as they struggle to pay back money paid to them in error. During the next few years both departments must improve their understanding of what reductions are possible, and increase their focus on preventing both underpayments and overpayments due to fraud and error. We intend to return to the issue often during this Parliament.
Summary of conclusions and recommendations
- HMRC’s recent reduction in tax credits fraud and error is encouraging, but it does not know what further reductions are possible. We were disappointed with HMRC’s failure to estimate what level for fraud and error it might achieve, and its unwillingness to set targets for reducing fraud and error further during this Parliament.
Recommendation: HMRC should set regular targets for reducing fraud and error in tax credits during the transition to Universal Credit, based on an assessment of how recent reductions were achieved for each major risk area and the level of further reductions that are achievable.
- DWP has not met its overall target for reducing fraud and error, despite being helped by changes in the mix of benefits. It agreed that tackling fraud and error needs a more detailed benefit-by-benefit approach, and it has recently started to develop strategies for individual benefits.
Recommendation: DWP should build on its development of individual strategies by publishing targets for reducing fraud and error for each major benefit, having assessed what level of further reductions is achievable, and set out clear operational plans to deliver this.
- The likely impact of welfare reforms on fraud and error is promising, but the reforms will not solve all the problems of tackling erroneous benefit payments. Both departments stressed that reforms, such as the roll-out of Universal Credit and introduction of the New State Pension, would reduce the complexity of benefits and help tackle some causes of fraud and error. However, we were surprised that DWP still expects fraud and error to increase from £4.6 billion in 2013-14 to £5.8 billion in 2020-21, and that Universal Credit will only save £0.5 billion each year in fraud and error overpayments when it is fully rolled-out.
Recommendation: DWP must set out how it will target the causes of fraud and error that will remain after the introduction of welfare reforms, and update the Committee each year with clear forward projections for fraud and error, based on the latest information available, so that we can assess its performance. The Departments should have a strategy in place to identify and minimise the key risks of fraud and error arising from implementing and operating major reforms, including setting targets for what levels of fraud and error will arise.
- The departments have made little progress in preventing fraud and error over- and underpayments occurring. In recent years both departments have concentrated on detecting and correcting fraud and error. Although this emphasis has enabled them to achieve savings from correcting erroneous claims, we are concerned that their reliance on such activities puts a burden on claimants which could be avoided if more errors were prevented in the first place.
Recommendation: Both departments should improve their understanding of the reasons why claimants make mistakes, and use this to develop stronger preventative measures; and set targets for reducing underpayments, in order to galvanise efforts to tackle this neglected issue. They should report back to the Committee in 6 months on progress they have made in relation to initiatives exploiting third party data.
- HMRC has not given sufficient consideration to how its activities to tackle tax credits fraud and error might affect people, including more vulnerable claimants. HMRC has made changes to the way it interacts with claimants, for example introducing new reporting requirements and using digital accounts. But we are concerned that HMRC fails to support claimants adequately, is quick to blame claimants when errors occur, and does not accept responsibility for contributing to mistakes itself. HMRC has employed a private sector partner to increase the number of tax credits claims that are checked, but we are concerned that the contractor’s approach has been excessively threatening.
Recommendation: HMRC should work with the government-wide Fraud, Error and Debt Steering Group to commission an independent review of claimants’ experience of the tax credits process. The review should include the impact of using its private sector contractor and identify ways to reduce unnecessary burdens on people.
- DWP does not understand the deterrent effect of the penalties it applies. Since 2012 it has imposed nearly 70,000 penalties for fraud, including prosecutions, cautions and stopping benefits, and more than 150,000 fines for claimant error. However, DWP has no evidence regarding the impact of penalties on the behaviour of general claimants or fraud offenders.
Recommendation: DWP should assess the impact of its enforcement approach, including modelling and reviewing evidence on the deterrence effects of its penalty regime, to establish how effectiveness could be improved.