Committee of Public Accounts


Press Notice No. 37 of Session 2005-06, dated 25 April 2006


THIRTY-SEVENTH REPORT: INLAND REVENUE STANDARD REPORT: NEW TAX CREDITS (HC 782)

Mr Edward Leigh MP, Chairman of the Committee of Public Accounts, said today:

"An element of overpayment to claimants was an inherent part of the design of the Tax Credits system. What came out of the blue for the Government was that overpayment would routinely occur on such a gigantic scale - an estimated £2.2 billion for 2003-04 and probably again for 2004-05. This is a deplorable situation for the hundreds of thousands of vulnerable families who have to find money for repayments. HM Revenue and Customs is struggling to extricate itself from this morass, but about £1 billion of debt from the first two years of the scheme will probably never be recouped. It is too early to tell if the changes to the scheme announced in the Pre-Budget Report will be successful, but it is worrying that the Department could not provide detailed information on the estimated cost of these changes which might be significant.

"HMRC still hasn't been able to come up with a reliable estimate of the amount of public money being overpaid under the Tax Credit scheme as a result of fraud and error. It expects to have a final estimate by Spring 2006 - but only in respect of the year 2003-04. The information will then be well out of date. Doubts about HMRC's controls over fraud were certainly not lessened when evidence emerged late last year of a serious assault on the system by organised criminals.

"The computer system underlying the Tax Credits system has been highly problematic from the outset. There were serious difficulties in its introduction. In use it is fragile and complicated to the point where HMRC itself feels it does not fully understand its workings. And software errors have led to unforeseen overpayments.

"The Department has announced a settlement of over £70 million in compensation from its previous IT contractor, EDS. But the agreement dictates that, if the Department is to secure £26.5 million of this sum, EDS must win further work from the Government. This is an unwelcome arrangement which places the Government in an invidious position."

Mr Leigh was speaking as the Committee published its 37th Report of this Session.

In 2004-05 HM Revenue and Customs (the Department) paid £15.8 billion of Tax Credits. The Department recalculates each award annually and has identified that for 2003-04 it overpaid some £2.2 billion to some 1.9 million families. The Department estimates that there will be a similar level of overpayments for 2004-05 awards. This is primarily due to the nature of the scheme; awards are provisional and based on incomes of the previous year. Final awards are based on actual incomes and because incomes tend to increase many applicants have been overpaid. This level of overpayments is far higher than the Government envisaged when the schemes were designed.

The recovery of these overpayments has caused hardship to many families and the Department has struggled to manage disputes with applicants about recovery. It has made a provision for some £1 billion of doubtful debts.

The Chancellor's Pre-Budget Report included new measures to simplify the Tax Credit scheme and reduce levels of overpayments. The main change, as from 2006-07, will be to raise from £2,500 to £25,000 the threshold for increases in income which will be disregarded when provisional awards are re-assessed. There will also be new responsibilities on claimants to tell HMRC promptly about changes in their circumstances. The Department considers that these measures should eventually reduce overpayments by one third and limit automatically the rate of recovery of overpayments. Awards for the first three years of Tax Credits, will however, continue to be subject to the original provisions.

The Comptroller and Auditor General qualified his opinion on the Inland Revenue's Trust Statement as Tax Credit overpayments arising from claimant error and fraud were initially estimated at around 3.4% by value, some £460 million. This is an early estimate and the figure is expected to rise once the Department's investigations have been completed. The Department closed the Tax Credits internet facility on 2 December 2005 because of attempts to defraud that system.

There were serious problems with the computer systems during the introduction of Tax Credits in April 2003, which continued to have ramifications in 2004-05. The Department considered that EDS (its former IT supplier) was responsible for these problems and sought compensation. On 22 November 2005 the Department announced that it had concluded a settlement of £71.25 million with EDS. Of this sum, £26.5 million will depend on EDS winning future work from the Government. The terms of the agreement are subject to a confidentiality provision.

The Committee attaches great importance to difficulties experienced in the implementation of Tax Credits and will wish to return to this subject in the future to establish the extent to which these difficulties have been addressed.


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