Press Notice No. 1 of Session 2003-04, dated 13 January 2004
TACKLING FRAUD AGAINST THE INLAND REVENUE (HC 62)
Mr Edward Leigh MP, Chairman of the Committee of Public Accounts, said today that those contemplating tax fraud may well calculate that the chance of being caught is remote, and urged the Inland Revenue to step up considerably their fraud investigation work, and pilot national publicity campaigns.
Mr Leigh was speaking as the Committee published its 1st Report of this Session, which examined the Inland Revenue's progress in assessing the risks of fraud and developing a strategy to counter it; the measures being taken to tackle tax fraud and fraud in tax credits; and their use of sanctions and publicity to deter fraud. The Revenue collect around one half of all public revenue: £214 billion in direct taxes and national insurance contributions in 2001-02 from around 30 million taxpayers. They also distributed £5.7 billion in tax credits to over one million claimants on low incomes, and this is set to rise to over £15 billion by 2003-04, following the introduction of new tax credits from April 2003.
The Committee found that the Revenue have not estimated the direct tax gap, which is the difference between full and actual compliance with the tax rules, and should focus their work on making a reasonable estimate so that they can judge the effort needed for a given reduction in losses. The Revenue first set out their tax compliance strategy in the 1980s. Their business has since expanded significantly and the environment in which they operate has changed, and they should set a date for completing and publishing their revised compliance strategy including an explicit strategy for preventing, detecting, investigating and deterring fraud, and the performance measures by which they will assess achievement.
The low number of fraud investigations and prosecutions is not commensurate with the potential sums at stake in lost revenue. Nor has the overall scale of work kept pace with the expansion in the Revenue's business. Investigation work on tax fraud appears to have reduced as work on tax credit fraud has increased, despite additional resources being provided. The financial returns on investigations suggest that it would be cost-effective to do many more. The Revenue should increase the level of investigations and prosecutions sufficiently to permit a meaningful evaluation of the effects of doing so. They should also seek to increase the effectiveness of such work by greater publicity to heighten public awareness about the risk of detection and punishment for those who commit fraud.
To date the results of work aimed at using the new offence of evading income tax, which is particularly relevant in tackling fraud in the shadow economy, have been limited. In increasing the level of prosecutions the Revenue should extend the coverage across all taxpayer groups, to include all sizes of business and lower value cases, so that deterrence is maintained across the entire taxpayer base.
There is a difficult balance to be struck in offering those in the shadow economy the incentive to regularise their tax affairs while not giving them an unfair advantage over those who have complied fully. While it remains important to punish serious abuse, the Revenue should also examine opportunities to secure higher levels of voluntary compliance and payment of tax due, for example by improving arrangements for payment by instalment and interest on arrears of tax.
The Revenue expect prosecutions for new tax credit fraud to rise as new powers take effect, but they see civil penalties as their primary weapon. The Department for Work and Pensions prosecute more than twenty times as many cases per £100 million spent. The Revenue should work with the Department for Work and Pensions to secure greater consistency in the scale and nature of sanctions applied.
To those involved in or contemplating fraud the chances of getting caught could appear minimal, since the Revenue only carry out 400 serious fraud investigations and 60 prosecutions a year on a customer base of more than 30 million. The 12:1 financial return achieved by the Special Compliance Office, which excludes the yield from criminal prosecution work and wider deterrent effects, suggests that a substantial increase in investigation activity would be cost-effective. More prosecutions should also bring opportunities to make greater use of the confiscation and restraint powers to deprive fraudsters of the wider proceeds of their crime.
Mr Leigh said today:
"Although the Inland Revenue have not estimated the tax gap, the number of fraud investigations and prosecutions is certainly low compared with the potential loss to the public purse. Indeed, with only 400 serious fraud investigations a year against 30 million customers, those contemplating tax fraud may well calculate that the chance of being caught is remote.
I urge the Revenue to step up considerably their fraud investigation work and to pilot national publicity campaigns highlighting the unacceptability of fraud and the consequences of getting caught, along the lines of those undertaken by the Department for Work and Pensions and HM Customs and Excise."
to view Report