Comptroller and Auditor General s Standard Report on the Accounts of the Inland Revenue

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1 Report by the Comptroller ad Auditor Geeral Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue Issued uder Sectio 2 of the Exchequer ad Audit Departmets Act 1921 as ameded by the Govermet Resources ad Accouts Act 2000 Joh Bour Comptroller ad Auditor Geeral 7 October 2005

2 Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue executive summary executive summary 1 Sectio 2 of the Exchequer ad Audit Departmets Act 1921 requires me to examie the accouts of the Ilad Reveue o behalf of the House of Commos to ascertai that adequate regulatios ad procedure have bee framed to secure a effective check o the assessmet, collectio ad proper allocatio of reveue, ad that they are beig duly carried out. I am also required by that Act to examie the correctess of the sums brought to accout ad to report the results to the House of Commos. My audit certificate ad report o the Trust Statemet accout ad this report together satisfy that requiremet. 2 Whilst recogisig that o tax collectio system ca esure that all those who have a tax liability comply with their obligatios, the Natioal Audit Office s work i provided overall assurace that the Ilad Reveue s regulatios ad procedure cotiued to provide a effective check o the assessmet, collectio ad proper allocatio of reveue, ad that they were beig carried out. That overall assurace is subject to reservatios about Tax Credits ad other matters recorded later. The report also describes observatios about maagemet of Corporatio Tax by the Large Busiess Office. 3 The Ilad Reveue prepared a Resource Accout ad a Trust Statemet accout of taxes ad Tax Credits for o a accruals basis, icludig estimates ad forecasts of taxes collectible i respect of , as well as amouts collected. 4 I qualified my audit opiio o the Departmet s Trust Statemet for ad because of the likely level of claimat error ad fraud i respect of Tax Credits. I July 2005 the Departmet examied a sample of awards ad estimated that 3.4% by value of Tax Credits (some 460 millio) were overpaid because of applicat error or fraud. This is lower tha with previous Tax Credits schemes, i both percetage ad absolute terms, but i my view remais uacceptably high. There is o evidece to suggest that the level of error would have falle sigificatly from to Cosequetly I have qualified my audit opiio o the Trust Statemet i respect of Tax Credits. I gave a uqualified audit opiio o the Resource Accout. 5 I preset to Parliamet Value for Moey reports o the ecoomy, efficiecy ad effectiveess with which the Departmet has used its resources. Durig the past year I have reported o Iheritace Tax (HC 17: ) ad Filig of Icome Tax Self Assessmet Returs (HC 74: ). Accrual accouts ad debt maagemet 6 The accouts show icome from taxes of some billio (et of repaymets ad from which 13.8 billio of Child ad Workig Tax Credits were paid) reported o a accrual basis. The balace sheet icludes some 57.0 billio of taxes due at 31 March 2005 which cosists of eforceable debts of 9.6 billio ad 47.4 billio of estimates ad forecasts of taxes i respect of that will become eforceable liabilities i due course. This is explaied i more detail i my certificate ad report o the accout at (see pages 66-67). 7 The legally eforceable tax debt of 9.6 billio icluded some 4.8 billio of PAYE ad Natioal Isurace cotributios, 2.6 billio of self assessmet icome tax ad 1.7 billio of Corporatio Tax. I the year to ed R

3 executive summary Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue March 2005, the Departmet wrote off or remitted icome tax ad corporatio tax debts of 818 millio ad Natioal Isurace cotributios of 280 millio, maily resultig from busiess failure or isolvecy. 8 The Departmet has made good progress o several aspects of debt maagemet i recet years ad has importat work still to do, icludig creatig a ew debt maagemet ad bakig orgaisatio from the former Ilad Reveue ad HM Customs & Excise debt arragemets. The ew Departmet would beefit from settig more specific ad comprehesive performace idicators for debt maagemet ad debt reductio. PAYE 9 The Departmet s Iteral Audit Office highlighted sigificat ad widespread errors i PAYE. They estimated for the first time that these problems had resulted i aroud 575 millio per aum of tax due ot beig pursued by the Departmet; ad that taxpayers were ot beig advised of aroud 295 millio per aum potetially repayable to them. The mai cause was the Departmet s failure to fialise ad calculate correctly tax liabilities where people had more tha oe source of employmet icome. I the summer of 2005, the Departmet prepared a actio pla to correct these weakesses over a umber of years. Repaymets 10 I the Departmet issued tax repaymets amoutig to 13.1 billio, of which 8.7 billio related to Icome Tax ad 4.0 billio to Corporatio Tax. I May 2004, the Departmet s Repaymets Risk Review Group reported serious risks of duplicate repaymets, ad made recommedatios to address the problem. I Jue 2005 the Departmet prepared a actio pla to implemet all the recommedatios. 11 The Departmet recogised that pressure to meet repaymet targets might udermie the quality of work ad checks udertake to esure accuracy ad avoidace of error. Deficiecies i maagemet iformatio ad lack of formalised, specific accoutabilities have made it difficult for the Departmet to esure the proper cotrol of repaymets ad prevet or detect error ad irregularities. I respose to the NAO s recommedatios, the Departmet made a seior officer accoutable for makig improvemets. Tax Credits 12 The Departmet paid 15.8 billio uder the ew Tax Credits schemes. These schemes represeted a major challege for the Departmet. Claimats ecoutered problems as the system wet live i April 2003 which cotiued to have ramificatios throughout Tax Credits are a substatial part of the icome of the poorest families who receive them. The Departmet recalculates the value of awards aually, i a process called reewal, the first of which i idetified that oe third of recipiets of awards had bee overpaid a total of some 1.9 billio i Subsequet backdated paymets i respect of awards brought the total overpaymets for that year to 2.2 billio. This was maily because family icome had icreased by more tha 2,500 compared with the icome declared at the time of the origial applicatio for Tax Credits. Half of the total overpaymets related to some 283,000 families who had bee overpaid by 2,000 or more. Overpaymets are recovered where possible from future paymets of Tax Credits. The Trust Statemet accout has provided for 961 millio of doubtful debts as at 31 March 2005 i respect of tax credit overpaymets. The aual basis of the Tax Credit award meas that recipiets eed to be able to aticipate ad pla for the cosequeces of chages i their icome. This is clearly a problem for may families util they become used to the implicatios of the aual calculatio of their etitlemet. I May 2005, the Paymaster Geeral aouced plas to improve sigificatly the Tax Credit system. 13 I my last report, I oted that software errors were expected to lead to further write-offs, i additio to the 37 millio the Departmet had calculated ad writteoff i I , the Departmet calculated that they should write off some 2 millio of Tax Credits caused by major software errors i ad that together resulted i overpaymets of 174 millio. The Departmet also wrote off 33 millio i respect of some maual paymets made i By 30 Jue 2005 the Departmet had calculated ad writte off a further 95 millio whe official error relief had bee grated to claimats who disputed the recovery of their overpaymet. The Departmet expect to have further write-offs durig i respect of cotiuig work o ad cases. R

4 Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue executive summary 14 The Departmet s measures to esure that Tax Credit applicats complied with their obligatios ivolved routie pre-paymet checks o all claims; risk based ivestigatios; verificatio of childcare expediture; ad ivestigatios of suggestios that orgaised crime was targetig Tax Credits. The Departmet will eed to maitai compliace work to esure that cofidece i the fairess of the schemes is ot udermied by uacceptable levels of ujustified claims. Large Busiess Office maagemet of Corporatio Tax 15 The Large Busiess Office (LBO) hadled the tax affairs of some 800 large etities ad employers which geerated some 18.4 billio of tax i The mai objectives were to safeguard the flow of reveue from large busiesses ad employers; eable customers to meet their obligatios without uecessary cost, whilst effectively tacklig ad deterrig o-compliace. The complexity ad sophisticatio of tax maagemet i the large busiess sectors, icludig EU ad other iteratioal dimesios, pose some of the most difficult ad potetially costly challeges for the Departmet, both i terms of admiistratio cost ad loss of reveue. 16 The LBO geerated a additioal tax yield of some 2.1 billio i respect of primarily from the examiatio of specific tax issues. Good quality ad prompt tax risk assessmets are essetial to achievig the best deploymet of the Departmet s resources ad the most effective compliace effort. For some years the LBO had bee developig sector specialist kowledge ad structures to improve tax risk idetificatio. The Departmet recogised that there was sigificat developmet work to do before sector based approaches to risk assessmet became fully effective. The compilatio of data ad calculatio of fiacial ratios used i tax risk assessmets were largely maual, time cosumig ad resource itesive, ad ot eased by the data beig supplied by corporate taxpayers maily i hard copy format rather tha electroically. 17 I 2004, the Departmet lauched a project called Better Data for Corporatio Tax. This was iteded to achieve a step chage i the effectiveess of compliace work through better use of maagemet iformatio to improve the targetig ad effectiveess of equiry work i the LBO. There were also importat iitiatives i iteral quality assurace of Corporatio Tax case work, maagemet ad structural reorgaisatios, employmet of specialists, ad ew compliace processes with some customers. These iitiatives are cotiuig withi the itegratio plas for the ew Departmet. 18 The LBO was itegrated with the Customs ad Excise equivalet i April 2005 to form the Large Busiess Service of HM Reveue ad Customs, with a missio to make a substatial cotributio to fiacig the UK s future by closig the tax gap. The maagemet by large busiesses of their tax affairs will cotiue to pose a challege ad the Departmet must cotiue to moderise its work o Corporatio Tax withi the large busiess sectors. The Departmet must esure that its various iitiatives eable it to match the sophisticatio of large busiesses with equivalet Departmetal expertise ad methods. Itegratio to form the ew Departmet 19 HM Reveue ad Customs (HMRC) brought together most of the fuctios of the Ilad Reveue ad HM Customs ad Excise from 18 April Itegratio offers the opportuity for the ew Departmet to adopt a more effective approach to taxpayer compliace across all tax streams. The Departmet reviewed the effect of the itegratio o its compliace strategy ad sought to develop a better uderstadig of the tax gap ad other measures to help taxpayers comply with their obligatios. R

5 executive summary Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue There are also risks ivolved i the itegratio of two large departmets, icludig risks that existig work priorities could be disrupted. The ew Departmet is resposible for a umber of the Govermet s omiated missio critical projects ad it eeds to remai focused o them. These projects are: Tax Credits; Moderisig Stamp Duty; Pesios Simplificatio; Moderisig PAYE Processes for Customers; Madatory Electroic Paymets by certai taxpayers; The e-services Programme; Iformatio Cetre Programme (icludig the missio critical project, Better Data for Corporatio Tax (see paragraph 3.31 below)); Reform of the Costructio Idustry Scheme. 21 The 2004 Spedig Review required aual efficiecy savigs of 507 millio by , icludig staff reductios. The combied Departmet had 98,370 Full time Equivalet staff i post at 1 April 2004 ad plaed to reduce this by a et 12,500 by 1 April By July 2005, the Departmet had idetified how the forecast savigs would be achieved. 22 It is importat that the staff reductios do ot adversely affect service provisio ad the Departmet s capacity to deliver the ew IT systems uderpiig iteded efficiecy gais. The Departmet has established a Efficiecy Programme Board which was tasked with maagig these risks ad esurig delivery agaist targets. R

6 Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue part oe Part oe Scope of the audit ad sigificat developmets Audit scope ad approach 1.1 Sectio 2 of the Exchequer ad Audit Departmets Act 1921 requires me to examie the accouts of the Ilad Reveue o behalf of the House of Commos to ascertai that adequate regulatios ad procedure have bee framed to secure a effective check o the assessmet, collectio ad proper allocatio of reveue, ad that they are beig duly carried out. I am also required by that Act to examie the correctess of the sums brought to accout; ad to report the results to the House of Commos. My audit certificate ad report o the Trust Statemet accout ad this report together satisfy that requiremet. 1.2 This report describes a umber of sigificat developmets o Tax Credits ad the maagemet of Corporatio Tax by the Large Busiess Office. The results of my work ot detailed i this report ad suggestios of further improvemets i cotrols have bee otified to the Departmet i maagemet letters. 1.3 The Natioal Audit Office review periodically existig ad ew systems ad sigificat chages to them, ad udertake test examiatios of idividual trasactios ad balaces as ecessary. The audit approach emphasises aspects of the Departmet s maagemet cotrol over busiess ad tax streams, icludig accoutability; corporate goverace procedures; maagemet iformatio; quality assurace procedures; risk aalysis; ad the Departmet s idetificatio of obstacles to the assessmet ad collectio of taxes. The Natioal Audit Office also review Departmetal progress i respose to recommedatios arisig from my reports ad those of the Committee of Public Accouts. Accrual Accouts ad Qualified Audit Opiio 1.4 For , the Ilad Reveue have preseted a Trust Statemet accout o a accruals basis showig how much had bee collected from or paid to idividuals, corporate taxpayers ad other Govermet Departmets. This accout icludes estimates ad forecasts of taxes collectible i respect of , as well as amouts collected. 1.5 I qualified my audit opiio o the Trust Statemet accouts for ad i respect of ocompliace by Tax Credit claimats. I have also qualified my audit opiio i respect of Tax Credits this year, as is discussed i Part 2 of this report. Taxes ad Natioal Isurace collectible ad Tax Credits payable 1.6 I the Departmet collected some billio, some 9.6 percet up o the previous year. The mai icreases were Icome Tax ad Natioal Isurace (up by 14.4 billio) ad Corporatio Tax (up by 5.5 billio). Figures 1 ad 2 overleaf show the treds i collectios of recet years. 1.7 Receipts icreased across all tax streams i The Departmet cosider that the recet tred of decliig corporatio tax receipts was reversed largely as a result of better compay profitability across most sectors of the ecoomy. Corporatio Tax is discussed i more detail i part three of this report. R

7 part oe Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue Ilad Reveue mai Tax ad Natioal Isurace Receipts Tax ad Natioal Isurace Receipts billio Stamp Taxes Natioal Isurace Cotributios Other Corporatio Tax Icome Tax Source: Ilad Reveue accouts Tax ad Natioal Isurace receipts (et of repaymets) ad Tax Credit paymets Source: Ilad Reveue accouts Net accrual b b b b adjustmets 1 b cash Cash Cash Cash b Accrual 2 Icome Tax (Gross of Tax Credits) Natioal Isurace Cotributios Corporatio Tax Stamp Taxes Iheritace Tax Capital Gais Tax Petroleum Reveue Tax Other Total receipts Child ad Workig Tax Credit paymets (gross) NOTE 1 Net accrual adjustmet is the differece betwee the accruals at the start ad ed of the year. The et accrual adjustmet is added to the receipt or paymet i the year to arrive at the tax or paymets due o a accruals basis. 2 Figures as show i the accruals based trust statemet. R

8 Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue part oe 1.8 Accruals i the year-ed balaces mea that reveue of billio recogised for is some 3.4 billio higher tha would have bee the case if et reveue had bee recogised o the o accruals accoutig basis used i previous years. Note 1 to the Trust Statemet accout explais the detailed accoutig policies applied to the mai reveue streams. Debt ad Debt Maagemet 1.9 The amout of tax owed to the Departmet at the ed of was some 9.6 billio icludig 4.8 billio of PAYE ad Natioal Isurace cotributios, 2.6 billio self assessed icome tax ad 1.7 billio Corporatio Tax. Aroud 40 per cet of the total was aged 0-3 moths; 20 per cet 4 12 moths ad 40 per cet over 12 moths. These figures are ot directly comparable with those i the Trust Statemet balace sheet as the defiitio of accruals for that accout differs from that for debt maagemet purposes. The Trust Statemet is ot iteded to be used as a measure of debt maagemet. Furthermore, both sets of figures exclude some 20 billio of stadovers. These are estimated liabilities where collectio caot be eforced as they are uder appeal by the taxpayer. Much of this amout is likely to be cacelled as ot due oce relevat equiries are complete. Ay debts that do arise oce a appeal has bee settled are the eforced. The Departmet wrote-off tax debts of 818 millio (year to March 2005) ad 280 millio of Natioal Isurace cotributios I April 2001 the Departmet formed the Receivables Maagemet Service to be resposible for collectig debts, receivig ad accoutig for paymets ad followig up the mai areas of outstadig tax returs (PAYE ad Self-Assessmet). Its objective is to collect tax promptly ad to keep debts to a miimum. The Departmet had differet debt maagemet targets to HM Customs ad Excise (HMCE). For example HMCE had a target for outstadig debt, whereas the Departmet measured paymet ad filig o time ad after 12 moths. The Departmet achieved the majority of its published targets for receivig paymets ad for filig of returs from the differet classes of taxpayer i The target for the percetage of self assessmet taxpayers who paid by the due date was arrowly missed because the Departmet s Receivables Telephoe Cetre was uable to carry out as may telephoe remiders as plaed because of other busiess priorities. The Departmet expects to meet the target for The Departmet uses a automated Itegrated Debt Maagemet System to maage the collectio ad eforcemet of debts for Pay As You Ear ad Corporatio Tax. The system was itroduced i November 1999 i respose to the 1994 Fudametal Expediture Review which compared the Departmet s debt maagemet process with best practice i the private sector. Its objectives are to improve efficiecy, reduce costs ad tax arrears ad to icrease tax flow. The Departmet plaed to exted the system to iclude Icome Tax Self Assessmet i The Departmet had cocers about some aspects of the Natioal Isurace cotributios registered as due withi the Natioal Isurace recordig system, which was historically separate from the Departmet. The Natioal Isurace debt arragemets are ot fully itegrated ito the Departmet s systems. The debt recorded stood at 1.24 billio at the ed of icludig 616 millio over 6 years old which the Departmet could o loger collect. However the Departmet had doubts about the reliability of these records. Followig ivestigatio of a sample of records, the Departmet cocluded that it was appropriate to remove 283 millio of Natioal Isurace cotributios erroeously recorded as due ad wrote off the balace of 333 millio as time-barred debt. The Departmet has set up a workig group to improve the future maagemet of Natioal Isurace debt The Departmet has take a umber of steps to improve debt maagemet i recet years, icludig developig maagemet iformatio about the debts. The Departmet moitors collectible debt balaces, age profiles of debts, statistics o total debt ad debt for each tax stream, performace agaist targets, risks ad challeges for the future. Where possible debt maagemet is automated to help esure efficiet ad cosistet treatmet. However, the Departmet is aware of the eed for more robust aalysis of debt by customer, busiess area ad type, ad the eed to improve its ability to idetify high risk taxpayers ad behaviours so as to target resources ad attetio most effectively I 2003, the Departmet started work o a Debt Aalysis Matrix that it saw as a major iformatio tool to improve busiess performace ad help reduce debt. It is iteded to eable maagemet to address bottleecks or delays i iteral processes, to iform policy decisios about the effect of tax regimes o levels of debt ad to cotribute to the iformatio eeded for tax accrual ad debtor accouts. The Departmet expect to develop the Matrix further. R

9 part oe Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue HM Reveue ad Customs 1.15 I July 2003, the Chacellor of the Exchequer aouced a major review of the orgaisatios dealig with tax policy ad admiistratio. The review led by Gus O Doell reported i March 2004 ad recommeded that a ew Departmet should be created. HM Reveue ad Customs (HMRC) was established i April 2005 by the Commissioers for Reveue ad Customs Act which brought together most of the fuctios of the Ilad Reveue ad HM Customs ad Excise Good goverace is vital for ay orgaisatio, particularly oe as complex ad wide ragig as HMRC. A group of Commissioers has statutory resposibility ad authority for ruig the ew orgaisatio. They have created a departmetal Board, icludig several o- Executive Directors, resposible for strategic oversight ad providig advice. They are also supported by a umber of Committees, of which the Executive Committee, chaired by the Chairma of HMRC, is resposible for strategy ad drivig performace across the busiess. Other top-level groups iclude a Operatig Committee ad a Audit Committee comprised of ad chaired by No-Executives. Core maagemet processes iclude a aual plaig ad performace maagemet cycle, with a importat feature beig a quarterly Chairma s review of each of HMRC s 36 busiess uits Efficiet ad effective Iformatio Techology (IT) is essetial to the admiistratio of taxes. I October 2004, the Departmet made a ew Board-level post of Chief Iformatio Officer (CIO). The departmetal itegratio offered the opportuity of improvig the service IT provided. The CIO s uit has take a more active role i idetifyig ad pursuig busiess opportuities, with a more customer-focused approach. I brigig the IT together, the Departmet is udertakig a o-goig programme of health checks of the IT systems ad the NAO will moitor the resultig chages Itegratio offers the ew Departmet the opportuity to adopt a more effective approach to taxpayer compliace across all tax streams. The Departmet reviewed the implicatios of the itegratio for its compliace strategy ad the tax gap There are also risks ivolved i the itegratio of two large departmets. The Departmet set up a Chage Maagemet Cetre to oversee the chages, provide iformatio ad make recommedatios o risks posed by the Departmet s capacity to deal with the umber of plaed chages. There were risks that existig priorities could be disrupted. The ew Departmet is resposible for a umber of the Govermet s omiated missio critical projects ad it eeds to remai focused o them. The projects are: Tax Credits Moderisig Stamp Duty Pesios Simplificatio Moderisig PAYE Processes for Customers Madatory Electroic Paymets by certai taxpayers The e-services Programme Iformatio Cetre Programme (which icludes the missio critical project, Better Data for Corporatio Tax) Reform of the Costructio Idustry Scheme. Corporate Social Resposibility 1.20 Corporate Social Resposibility (CSR) ivolves doig busiess i a resposible way to improve the positive impact o society ad the eviromet. The most widely used ad recogised bechmarkig tool for CSR is Busiess i the Commuity s Corporate Resposibility Idex (CRI). The CRI rigorously ad idepedetly assesses how effective a busiess has bee i traslatig its CSR ageda ito resposible busiess practice. I November 2004 the Ilad Reveue became the first govermet departmet to complete BitC s Corporate Resposibility Idex (CRI). They also achieved the Big Tick stadard for each of their etries ito the 2004 Awards for Excellece CSR will also be a importat part of how HMRC does busiess. Buildig o the work of the Ilad Reveue ad HM Customs ad Excise, HMRC will give high level leadership for CSR via a CSR Steerig Group chaired at Board level, through to seior maagers with key CSR resposibilities. With measurable targets ad clear accoutability at seior level, HMRC will esure that CSR activities remai focused o supportig the ew Departmet s objectives. Examples of this iclude: R

10 Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue part oe workig with schools ad homelessess agecies to help people become employable ad employed, through metorig, iterview coachig ad CV assistace; workig with drug rehabilitatio orgaisatios to help educate agaist drug use, to protect future vulerable members of society ad cotribute to the improvemet of frotiers work; ad eablig HMRC staff to udertake voluteerig or persoal developmet commuity activities amogst socially excluded commuity groups so staff better uderstad customers eeds, resultig i improved customer service, improved customer perceptio of the Departmet ad esurig HMRC is see as a employer of choice amogst those groups. Sustaiable Developmet 1.22 As part of its respose to the Govermet s Sustaiable Developmet objectives, the Departmet developed a strategy, a policy statemet ad various iitiatives. It published o the Departmet s web site (www.hmrc.gov.uk/about/sd-report pdf) its Sustaiable Developmet Report for 2002 to 2004 recordig achievemets ad performace agaist objectives ad targets. The Departmet emphasised the sigificace of its policy iitiatives that affect tax payers, such as ehaced tax allowaces for waterefficiet techologies. The report highlighted the eed to work closely with the PFI parters who operate the Departmet s estate, as may of the objectives such as eergy efficiecy ad water cosumptio relate to the Departmet s use of office space. The report also highlighted that detailed data o utilities cosumed eeds to be improved to facilitate targeted actio to improve performace. The Departmet is workig closely o itegratig arragemets across the ew combied Departmet, ad aims to publish its ext report o performace i the sprig of Efficiecy Savigs 1.23 The 2004 Spedig Review required HMRC to achieve staff reductios ad aual efficiecy savigs of 507 millio by , out of a aual budget of about 4.6 billio. The Departmet had 98,370 Full time Equivalet (FTE) staff i post at 1 April 2004 ad plaed to reduce this by a et 12,500 FTE posts by 1 April By July 2005, the Departmet had idetified how the forecast savigs would be achieved through: Ivestmet i Iformatio ad Commuicatio Techology; Reform of back office fuctios; Savigs i procuremet of goods ad services; ad Improvemets i productive time A sigificat challege for the Departmet was to establish effective goverace ad moitorig arragemets to esure the savigs do ot adversely affect service provisio or the ew IT systems uderpiig iteded efficiecy gais. The Departmet established a Efficiecy Programme Board to maage these risks ad meet targets. The Office of Govermet Commerce cocluded that achievig the Departmet s efficiecy savigs posed a very high but achievable challege. Public Service Agreemets 1.26 Public Service Agreemets (PSAs) ad associated performace targets, are at the cetre of the Govermet s ad the Departmet s performace maagemet systems. PSAs iclude three year targets, egotiated every two years with the Treasury durig the spedig review process. The objectives set by the Spedig Review 2004 were: Improve the extet to which idividuals ad busiesses pay the amout of tax due ad receive the credits ad paymets to which they are etitled; Improve customer experiece, support busiess ad reduce the compliace burde; Stregthe frotier protectio agaist threats to the security, social ad ecoomic itegrity ad eviromet of the Uited Kigdom i a way that balaces the eed to maitai the UK as a competitive locatio i which to do busiess Good quality data are crucial for effective targets ad performace measures ad accoutability. A NAO review i of the Ilad Reveue s relevat data systems foud that risk maagemet teds to focus o risks to busiess delivery rather tha risks to the quality of the uderlyig data. The Departmet ackowledged the eed to improve its approach to data system risks ad subsequetly focused o this through the Performace ad Maagemet Iformatio programme, which with R

11 part oe Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue its Customs couterpart, is ow the HMRC Iformatio Cetre programme. This itroduced a clear framework for accoutability ad the use of data to pla, maage ad improve performace through the PSA ad Cost ad Resource Iformatio project The Departmet targets ad reviews systematically the quality of processes withi its Tax Equiry programme. The Departmet failed to meet the target for the percetage of cases reachig a satisfactory stadard i The mai reaso was delays i dealig timeously with correspodece from taxpayers ad failure to effectively address delays by taxpayers i producig required iformatio. Over recet years the Departmet has itroduced a quality improvemet process ad assurace programme to better uderstad ad deal with the issues. I it istigated a traiig programme to focus o quality improvemet. The Departmet cosidered that the results of these iitiatives should result i quality improvemets over the ext few years. Reform of the Costructio Idustry Scheme 1.29 I 1972 the Departmet established a special tax deductio scheme to deal with the practice, edemic i the costructio idustry, of egagig workers o a cash i had basis, coupled with a poor record of complyig with tax obligatios. The curret Costructio Idustry Scheme was itroduced i Cotractors must deduct a amout from paymets to sub-cotractors, uless the sub-cotractor has met certai criteria which allow paymet to be made gross. The amouts deducted are set agaist tax ad Natioal Isurace cotributios, or i the case of compaies, agaist their paymet obligatios as cotractors or employers. The Scheme is iteded to beefit busiesses ad sub-cotractors sice it ecourages tax compliace across the idustry ad reduces the likelihood of tax evasio This Scheme has suffered from problems sice its itroductio ad busiesses are cocered about the costs to them of operatig it. I , the Departmet bega preparatios for itroducig a ew Scheme desiged to: Reduce the regulatory burde of the Scheme o costructio busiesses; Improve the level of compliace by costructio busiesses with their tax obligatios; Help costructio busiesses to get the employmet status of their workers right I my report o the Ilad Reveue accouts last year, I oted that the Scheme was to be itroduced i April 2006, a year later tha origially plaed. There is a tight timetable for the itroductio of the IT systems eeded to support the ew Scheme ad the Departmet have tried to take o board the lessos of Tax Credits i maagig this risk. Pay As You Ear 1.32 A major programme of work by the Departmet s Iteral Audit Office o the operatio of the curret PAYE busiesses highlighted sigificat ad widespread error. The Departmet kew of may of the uderlyig symptoms but for the first time the fiacial implicatios were quatified. Iteral Audit estimated that aroud 575 millio per aum of tax due had ot bee pursued by the Departmet; ad that taxpayers were ot beig advised of aroud 295 millio per aum potetially repayable. Iteral Audit have calculated that this could mea that 3.8 millio taxpayers have paid too much or too little tax. They cosidered it highly likely that there was additioal tax at risk that had ot bee idetified The mai cause of the uder - ad over -paymets was the Departmet s failure to fialise ad calculate correctly tax liabilities where people had more tha oe source of employmet icome. There is o sigle PAYE accout for idividual taxpayers who have more tha oe job ad iadequate ed of year recociliatios. Differet systems i place ad a lack of commuicatio betwee those systems meas that the Departmet did ot have a whole customer view. Other weakesses idetified icluded: i ii iii iv v Lack of flexibility to move work to where operatioal capacity is best placed to take actio. Iadequate Maagemet Iformatio Systems to help maagers risk-assess operatios ad cotrol PAYE busiess to best effect. Poor quality data throughout the system, iadequate cotrols, ad icosistet approaches. High volumes of paperwork, which have led to difficulties i maagig ad moitorig work volumes, backlogs of work, progress made ad impacts of work doe ad work ot completed. Departmet ot pursuig some PAYE reveue due from a idividual whilst pursuig Tax Credits recoveries. R10

12 Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue part oe vi vii The possibility that some Tax Credit recipiets are asked to refud overpaymets at the same time as the Departmet retaied PAYE refuds due. Failures to effectively address employers o compliace with their obligatios The Departmet udertook to carry out Health Checks across PAYE, leadig to a full risk assessmet ad completio i the summer of 2005 of a Actio Pla for recovery. The Departmet recogised that remedial actio requirig major structural chage ca oly be delivered over the loger term. Moderisig PAYE Processes for Customers 1.35 I April 2002, the Govermet aouced that it would implemet the recommedatios of Patrick Carter s Review of Payroll Services. Regulatios, laid i 2003, came ito force i April 2005 to madate olie filig of large ad medium employers ed of year returs ad to ecourage volutary o lie filig by small employers. The Departmet established i early 2003 a Moderisig PAYE Processes for Customers (MPPC) Programme to deliver the ew busiess processes, IT ifrastructure ad support for employers to give effect to those regulatios Over the period to , the Departmet also plas to moderise other elemets of the PAYE processes ad itroduce a more flexible computer platform for PAYE. The itetio is to achieve sigificat efficiecy savigs, improve customer service i PAYE for both employers ad employees, simplify compliace for small busiess ad ecourage use of olie services. Oe importat elemet is a plaed sigle customer view for all sources of employmet icome. The Departmet expects this to help address may of the issues idetified i paragraph The scope of the project was reduced i the summer of 2005, thus limitig oe of the major beefits origially expected a major icrease i the extet of automatic recociliatio ad clearace of customer records after the ed of the tax year. Sped to Save 1.37 The Fiace Act 1998 provides for me to examie ad report o covetios ad assumptios uderlyig the fiscal projectios that are submitted to me by the Treasury for examiatio. As a result of measures aouced i the 2003 ad 2004 Budgets, the Ilad Reveue itroduced two ew Sped to Save packages: (i) desiged to promote taxpayer compliace; ad (ii) to couter tax avoidace ad fraud I my report o the 2003 package of measures (HC 627, Sessio ), I oted the importace of detailed arragemets beig put i place to moitor ad evaluate the measures. Durig , the NAO oted that there had bee earlier delays i itroducig comprehesive cetral moitorig procedures over this package of measures. The Departmet made improvemets towards the ed of 2004, which helped to idetify areas where remedial actio was eeded. Tax Repaymets 1.39 I the Departmet repaid 13.1 billio of tax, icludig 8.7 billio Icome Tax ad 4.0 billio Corporatio Tax. Repaymets are geerated ad authorised by seve systems that assess ad record the tax affairs of idividuals ad compaies. Claims are dealt with o a process ow, check later basis ad paymet istructios set to a cetralised system that makes the paymet to taxpayers. No idividual i the Departmet had overall resposibility for repaymets ad o idividual was specifically resposible for repaymets uder each tax stream. The Departmet has two Public Service Agreemet (PSA) targets for Repaymets: 97 per cet dealt with withi 15 workig days; ad 97 per cet calculated correctly by specialist repaymet offices. I the Departmet achieved 99.5 per cet o the former ad 98.1 per cet o the latter I May 2004 the Departmet s Repaymets Risk Review Group reported serious risks icludig duplicate repaymets ad it commeted o the paucity of reliable maagemet iformatio about repaymets. It made a umber of fudametal recommedatios, some of which it took forward. Followig the NAO review, the Departmet prepared a actio pla i the summer of 2005 coverig all of the recommedatios. R11

13 part oe Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue The Departmet s cetralised repaymets system is old ad has certai problems which the Departmet plaed to address by replacig the system. The plaed replacemet, the Paymets Made Framework (PMF), was used for Tax Credits. As at 30 Jue 2005 the Departmet had o plas to move repaymets to PMF ad o timetable had bee set for replacemet of the old system I , the Departmet udertook a review of the effectiveess of the routie ati-fraud checks o repaymets ad cosidered cetralisig the work to improve the quality of those checks. The Departmet plaed to udertake i the Autum of 2005 a feasibility study of ehaced risk profilig of repaymet fraud usig data from differet HMRC systems The Departmet recogises the dager that pressure to meet repaymet targets might udermie the quality of work ad checks to esure accuracy ad avoid error. The deficiecies i maagemet iformatio ad lack of formalised, specific accoutabilities made it difficult for the Departmet to esure the proper cotrol of repaymets ad to prevet or detect error ad irregularities. I respose to the NAO s audit recommedatios, the Departmet made a seior officer accoutabable for makig improvemets. Coclusio 1.44 The accouts show icome from taxes of some billio (et of repaymets ad from which 13.8 billio of child ad workig Tax Credits were paid) reported o a accrual basis. The balace sheet icludes some 57 billio of taxes ad Natioal Isurace cotributios due at 31 March This figure is a combiatio of estimates ad forecasts of taxes that will become eforceable liabilities i due course i respect of ad so it does ot represet the legally eforceable debt as at 31 March This is explaied i more detail i my certificate ad report o the accout (see pages 66-67) The Departmet has made good progress o several aspects of debt maagemet i recet years ad has importat work still to do, icludig creatig a ew debt maagemet ad bakig orgaisatio from the former Ilad Reveue ad HM Customs & Excise debt arragemets. The ew Departmet would beefit from settig specific ad comprehesive performace idicators for debt maagemet ad debt reductio The Departmet s Iteral Audit Office highlighted sigificat ad widespread errors i PAYE. They estimated for the first time that these problems had resulted i aroud 575 millio per aum of tax due ot beig pursued by the Departmet; ad that taxpayers were ot beig advised of aroud 295 millio per aum potetially repayable to them. The mai cause was the Departmet s failure to fialise ad calculate tax liabilities correctly where people had more tha oe source of employmet icome. I the summer of 2005, the Departmet defied a actio pla to correct these weakesses over a umber of years I the Departmet issued tax repaymets amoutig to 13.1 billio, of which 8.7 billio related to Icome Tax ad 4.0 billio to Corporatio Tax. I May 2004, the Departmet s Repaymets Risk Review Group reported serious risks of duplicate repaymets, ad made recommedatios to address the problem. I the summer of 2005 the Departmet prepared a actio pla to implemet all the recommedatios over a umber of years The Departmet recogised that pressure to meet repaymet targets might udermie the quality of work ad checks udertake to esure accuracy ad avoidace of error. Deficiecies i maagemet iformatio ad lack of formalised, specific accoutabilities have made it difficult for the Departmet to esure the proper cotrol of repaymets ad prevet or detect error ad irregularities. I respose to the NAO s recommedatios, the Departmet made a seior officer accoutable for makig improvemets Legally eforceable tax debt at the ed of was some 9.6 billio, icludig some 4.8 billio of PAYE ad Natioal Isurace cotributios, 2.6 billio of self assessmet icome tax ad 1.7 billio of Corporatio Tax. The Departmet wrote off or remitted icome tax ad corporatio tax debts of 818 millio ad 280 millio of Natioal Isurace cotributios i the year to ed March 2005, maily resultig from busiess failure or isolvecy. R12

14 Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue part two Part two Child ad Workig Tax Credits Itroductio 2.1 I April 2003 the Govermet replaced Workig Families Tax Credit ad Disabled Perso s Tax Credit with Child Tax Credit ad Workig Tax Credit (Tax Credits). These chages were part of the reforms of the tax ad beefit systems aimed at relievig child ad i-work poverty. My Stadard Reports for ad recorded serious problems durig the itroductio of the ew Tax Credits. These icluded delays i makig awards to claimats, overpaymets, software errors ad the failure of essetial cotrols. This part of my report examies the Departmet s progress i recoverig from these problems ad completio of the Departmet s first aual reewal of Tax Credit claims i At the time of my reports for ad it had ot bee possible for the Departmet to determie a robust estimate of the level of claimat error ad fraud for the ew Tax Credits. A Departmetal exercise i idicated that they had overpaid some 10 to 14 per cet by value of the former tax credits because of claimat error or fraud. Whilst the desig of the ew Tax Credits ad supportig systems are very differet from the former Tax Credits ad should have reduced the risk of error ad fraud, the Departmet had o evidece that error rates had i fact falle. I therefore qualified my audit opiio o the Trust Statemet accouts for ad I my report for , I oted that the Departmet plaed to udertake work to provide more iformatio o the level of fraud ad error. This examiatio ivolves a full check of 4,700 radomly selected claimats. This exercise is ot due to be completed util Sprig I July 2005 the Departmet produced iterim fidigs which idicated that it had overpaid 460 millio (aroud 3.4 per cet by value) because of claimat error ad fraud i The Departmet believes that these iterim results are subject to a wide margi of error because they are based o work that had bee completed by May 2005 ad it is likely that these cases were more compliat. The fial results are likely to show a icrease i the proportio of cases ivolvig claimat fraud ad error. Whilst this work suggests that the level of error is lower tha with the previous Tax Credits, it remaied i my view uacceptably high i both the amout ad percetage terms. There is o evidece to suggest that the level of error would have falle sigificatly from to Cosequetly, I have qualified my audit opiio o the Trust Statemet accout i respect of Tax Credits. 2.4 This part of my report provides a overview of the mai features of child ad workig tax credit ad discusses the overpaymets that have arise from the ature of the schemes. R13

15 part two Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue The mai features of the Child ad Workig Tax Credit are set out i Figures 3 ad The Departmet paid 15.8 billio i Tax Credits to 5 millio families durig Figure 5 provides further details o the cost of Tax Credits ad the umber of families beefitig from Tax Credits. 3 Mai Features of Child Tax Credit Child Tax Credit Available to those aged 16 or over, ordiarily residet ad preset i the UK whether workig or ot, ad who are resposible for at least oe child. Normally paid directly ito the bak accout of the mai carer. Elemets Family Elemet (oe per family) Higher Family Elemet (i first year of child s life) Child Elemet (for each child) Disability Elemet (for each disabled child) Severe Disability Elemet (for each severely disabled child) Aual Rates ,625 2, Aual Rates ,690 2, Source: Natioal Audit Office NOTE The Family Elemet is reduced by 6.67p for every 1 of icome over 50,000, i most cases. For families etitled to Child Tax Credit but ot Workig Tax Credit, the Child Elemet is reduced by 37p for every 1 of icome over a limit of 13,480 ( 13,910 for ). For families etitled to both Child Tax Credit ad Workig Tax Credit, the child elemet is reduced i the same way after Workig Tax Credit, icludig ay childcare elemet, has bee fully withdraw. 4 Mai Features of Workig Tax Credit Workig Tax Credit Available to people aged 16 or over, workig at least 16 hours per week, with depedet childre or a disability or, for those without childre or a disability, aged 25 years or over ad workig at least 30 hours per week. Elemets Basic Elemet Secod adult ad Loe Paret Elemet 30 Hour Elemet Disabled Worker Elemet Severe Disability Elemet Elemet for claimats aged 50 ad above, workig Hours Elemet for claimats aged 50 ad above, workig 30+ Hours Childcare Elemet - childcare costs caot exceed 135 per week for oe child ad 200 per week for two or more childre Aual Rates 1,570 1, , ,075 1, % of costs Aual Rates 1,620 1, , ,110 1, % of costs Source: Natioal Audit Office NOTE A award is reduced by 37p for every 1 of aual icome over a limit of 5,060 ( 5, ). R14

16 Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue part two 5 Scheme Overview Child ad Workig Tax Credits paid by the Ilad Reveue Families beefitig 1 : Of which Child Tax Credit 2 Workig Tax Credit Amout paid by Ilad Reveue Admiistrative cost to Ilad Reveue Staff employed by Ilad Reveue millio 4.4 millio 1.6 millio 13.5 billio 406 millio 7, (provisioal) 5.0 millio 4.8 millio 1.8 millio 15.8 billio 422 millio 8,200 Source: HMRC NOTES 1 Figures represet the average umber of families beefitig i the year. Some families beefit from both Child ad Workig Tax Credits 2 From April 2004, families claimig Icome Support ad Job Seeker s Allowace for the first time bega to receive Child Tax Credit istead of receivig the child premia i their beefits. 2.7 Child Tax Credit ad the childcare elemet of Workig Tax Credit are geerally paid directly ito claimats bak accouts. Where the claimat was a employee, the elemets of Workig Tax Credit apart from childcare were paid via the employer. Paymet via employer will be phased out betwee November 2005 ad April 2006 ad replaced by direct paymet by the Departmet. 2.8 Tax Credit awards were iitially based o the claimat s icome for the precedig tax year. Claimats were ecouraged, but ot formally required, to advise the Departmet of icome chages durig the year. The Departmet cosidered the eed to revise awards durig the year, if claimats reported chages i their icome or circumstaces. Awards were revised where claimats icomes icreased by over 2,500 ad the Departmet sought recovery of the resultig overpaymets. Award reewal, overpaymet ad recovery 2.9 I the six moths after the ed of the tax year, i a process termed Reewal, the Departmet asked claimats to cofirm their circumstaces, icludig their actual icome for that year eded, ad where there had bee chages the Departmet recalculated the award. Uderpaymets were paid as a lump sum, ad overpaymets recovered, where possible, from future paymets of Tax Credits over the rest of the year or loger periods, or otherwise directly from claimats The Departmet published statistics o fialised awards o its website o 1 Jue 2005 which showed that 5.67 millio awards had bee made i the year. The reewals process durig resulted i o further chages to etitlemet for some 3.08 millio families. This was maily where aual icomes had icreased by less tha 2,500 (icreases below this amout are disregarded) or because claimats had reported chages i time for the Departmet to fully adjust paymets i year. The Departmet estimated that the fial etitlemet to Tax Credits i would have bee about 800 millio lower without the 2,500 disregard. I some 1.88 millio families had bee overpaid a total of 1.93 billio (average just over 1,000), ad 0.71 millio families had bee uderpaid by 464 millio (average 650). Half of the total amout overpaid represeted cases overpaid 2,000 or more, affectig some 283,000 families. Figure 6 shows the distributio of these uderpaymets ad overpaymets Tax Credit paymets ca be backdated ad some awards were paid i creatig further overpaymets. The Departmet estimated that the total overpaymet of awards was therefore 2.2 billio. Some 391 millio was recovered i either directly from claimats or through adjustmets to Tax Credit paymets i the later part of the year. The Departmet also wrote off some 95 millio of overpaymets. It further cosidered that some 481 millio to be irrecoverable because claimats successfully coteded that they could ot repay because R15

17 part two Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue Fialised awards uderpaid or overpaid (Excludig awards with uderpaymets or overpaymets uder 10) Bad of uderpaymet uderpaid uderpaymet overpaid overpaymet or overpaymet awards at 5 April 2004 awards at 5 April 2004 (thousads) ( millios) (thousads) ( millio) Up to to to to to 1, ,000 to 2, ,000 to 5, Over 5, Total ,879 1,931 Source: HMRC (Figures may ot sum due to roudig.) of hardship, or because the Departmet had difficulty i tracig claimats o loger etitled to receive Tax Credits. To prevet hardship to claimats, recovery of amouts overpaid ca take place over several years. Full recovery of the remaiig overpaymets is expected to take at least 5 years as show i Figure 7. 7 Expected year of recovery of award overpaymets outstadig at April 2005 Source: HMRC billio Total overpaymet for recovery 1.3 Expected recovery: Later The Departmet expects the amouts eedig to be recovered to grow over the ext few years, as a result of overpaymets for further cycles. The Departmet does ot ask claimats to pay off overpaymets i a lump sum if they are cotiuig to receive Tax Credit paymets The Departmet estimated i July 2005 that overpaymets for awards were likely to be similar to those for ad the Trust Statemet accout icludes a provisio of 480 millio i respect of awards. The umber of households overpaid was much higher tha the govermet s estimates whe the schemes were desiged. The Departmet cosidered that this was because the origial assumptios overestimated the umber of claimats who would report icome chages durig the year ad also uderestimated the growth i claimat icomes. The operatio of Tax Credits 2.14 This sectio of my report looks at: Tax Credit targets; cotrols over paymets; errors due to software problems ad writes-off; complaits; ad improvig claimats compliace ad customer service. Tax Credit targets 2.15 The Departmet checks the accuracy of the processig of claims icludig chages i circumstaces ad reewals. Its Public Service Agreemet icludes a target accuracy of 90% for processig. Figure 8 shows that the accuracy of processig improved i ad the 90% target was exceeded. The sigificat improvemet over reflects cotiuig efforts by the Departmet to idetify reasos for iaccuracy ad to itroduce ew procedures to prevet error. R16

18 Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue part two 8 Accuracy of processig ad calculatig awards Source: HMRC % % % % Target Accuracy Tax Credits Scheme ot i existece Workig Families Tax Credit Scheme ot i existece Disabled Persos Tax Credit Scheme ot i existece 2.16 The Departmet s research idicated that iaccuracy was maily due to: iputtig of icome from wrog fiacial year; iputtig of icorrect icome; ad/or omissio of a parter s icome, whe claimat otified a chage i their ow icome The Departmet s Iteral Audit Office reported i February 2005 that Tax Credit system cotrols were ot sufficiet to give assurace that data were beig accurately ameded ad that all chages were legitimate. The Departmet accepted all the recommedatios i the report ad implemeted a improvemet pla i March 2005, icludig improved cotrols, additioal supervisory checks ad additioal traiig. Cotrols over paymets 2.18 I my last report, I oted that the Departmet had ot bee able to perform the plaed daily recociliatio of paymets authorised with paymets made. Delays i completig these recociliatios meat that some icorrect paymets to claimats were ot promptly detected. The delays could also have cotributed to poor customer service as departmetal staff may ot have had a complete record of all paymets made whe dealig with some queries. Checkig of paymets authorised agaist paymets made i respect of was completed i Jauary 2005 ad resulted i adjustmets to some claimat records. Work o paymets was completed i May The Departmet adjusts the record of paymets authorised so as to match the details provided o bak statemets. The Departmet plas to itroduce a fully automated daily check of paymets authorised agaist paymets made i the secod half of This will elimiate the eed for sigificat work i retrospective checks The Departmet also had difficulty i recocilig its ow record of paymets issued with those cleared through the baks. This recociliatio is complicated by the eed to take ito accout some 400,000 paymets i respect of both ad which had ot bee allocated to claimats accouts at the ed of The amout of Tax Credit expediture paid via employers show i the Trust Statemet Accout is based o awards made by the Departmet. It could oly kow that these amouts were actually paid to claimats by checkig agaist the istructios issued by the Departmet to employers. The Departmet sought to obtai assurace by recocilig a sample of amouts reported as paid by employers to the Departmetal record of awards The recociliatio exercise was completed i February 2005 ad the recociliatio rate was 78.9 per cet; the Departmet was uable to recocile the remaiig 21.1 per cet. The Departmet required employers to correct awards where errors were foud. The exercise idicated that, of the total 2 billio paid out by employers, there was a likely et overpaymet of 20 millio (withi a estimated et rage of 11 millio uderpaid to 51 millio overpaid). Give that this was the first recociliatio exercise for the ew Tax Credits ad that this was the first year employers had operated the ew scheme, the Departmet believed the result of the exercise to be reasoable. The recociliatios were i progress at the time of this report. R17

19 part two Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue Errors ad writes-off 2.22 The Trust Statemet accout shows that the Departmet wrote off 123 millio ad made provisio of 961 millio for future writes-off. Further writes-off may be recorded i the accouts for I my report I oted that certai software errors had resulted i overpaymets calculated as 94 millio i of which the Departmet had writte-off overpaymets of less tha 300 totalig some 37millio. I also oted that the Departmet expected further write-offs i respect of the balace of 57 millio. I additio, the Departmet calculated ad wrote off other overpaymets of some 2 millio that it cosidered had bee caused by software errors The Departmet calculated that the software errors referred to i the previous paragraph resulted i further icorrect paymets i of 7.9 millio. Various other icorrect paymets have also resulted from other system miscalculatios. The Departmet aims to recover as may of these icorrect paymets as it ca i accordace with its usual policies. The Departmet cotiued i to ivestigate the reasos for these icorrect paymets with a view to correctig ay software errors Further software ad other errors, maily omittig the icome of oe parter from joit claims led to overpaymets of aroud 80m durig ad ad affected 88,000 households. The largest idividual overpaymet was over 20,000. The Departmet is attemptig to recover all of these overpaymets The uexpected problems at the time of the itroductio of Tax Credits i 2003 caused the Departmet to issue 500,000 maual cheque paymets totallig 170 millio, with the supportig documetatio beig iadequately completed i some cases. I , the Departmet wrote-off 33 millio because the records were ot good eough to costeffectively match them to claimats There was some particular disruptio due to software failigs that meat the Departmet could ot access ad set up awards or make automated paymets. This resulted i temporary maual paymets util the claimats records were reistated. This time-cosumig process affected approximately 35,000 records. The Departmet has made system chages to reduce this problem. Complaits 2.28 The Departmet s Tax Credit Office received complaits i aroud 51,000 cases i ad had difficulties maagig this workload. This had a detrimetal effect o its aim to deal with 80 per cet of correspodece withi 15 workig days of receipt, which it was uable to meet. The level of complaits was far higher tha i ay other area of the Departmet s work. This required icreased staffig from aroud 200 i April 2004 to a peak of aroud 400 staff i April The Departmet recorded coversatios betwee claimats ad Call Cetre advisers. Those recordigs ca be used to assist i the resolutio of subsequet complaits. However, i some cases, the Departmet could ot retrieve the recordig due to limits i retrieval capacity ad difficulty i tracig the call o the tapes. The Departmet decided to purchase a ew digital recordig system to facilitate faster call retrieval i greater volumes ad it plaed to ehace storage capacity The Departmet s policy is that the claimat should ot have to repay back all or part of a overpaymet due to a mistake by the Departmet ad if it was reasoable for the claimat to thik the award was right. This is termed Official Error Relief. I the Departmet received aroud 217,000 disputes agaist the recovery of overpaymets. The Departmet faced severe difficulties i maagig this level of work ad itroduced streamlied procedures from April 2005 for dealig with Official Error Relief. These procedures were likely to be more geerous to claimats i may situatios ad at that time the Departmet estimated that the ew procedures were likely to result i a et loss of 46.5 millio. This was a departure from the criterio the Departmet previously applied that procedures resultig i a loss to the Exchequer ca oly be justified if there is a greater savig i admiistrative cost. But the Departmet could see o other way to maage the problem withi the resources available Figure 9 shows the umber of cases i which complaits were received i ad the amout of compesatio paid. The Departmet paid compesatio to complaiats i accordace with its published Code of Practice 1, Puttig thigs right, for the costs they icurred as a direct result of the Departmet s mistakes or delays ad for the worry or distress caused. Paymets for worry ad distress are ot iteded to put a value o the upset caused but ackowledge that the Departmet was resposible. R18

20 Comptroller ad Auditor Geeral s Stadard Report o the Accouts of the Ilad Reveue part two 9 Source: HMRC Complaits ad compesatio year to march 2005 Cases i which complaits received 51,000 Dealt with o first cotact from claimat 92% Number of compesatio paymets made 20,000 Compesatio paid 1.24 millio Average compesatio Uder the Departmet s Code of Practice, compesatio paymets for worry ad distress usually rage from 25 to 500, but are usually below 100. The Departmet traied its complait hadlers to make decisios o compesatio i accordace with its policy. All compesatio recommedatios were reviewed by a more seior perso to esure cosistecy. Aroud 5 per cet of customers compesated have complaied about the level of compesatio, which the Departmet cosidered to be reasoable The Departmet s decisios o complaits ad compesatio decisios are fial, although if claimats are uhappy with the decisio they could ask the Departmet to review their case agai. There is o right of appeal to a idepedet body specifically dealig with Tax Credits, but if claimats are uhappy with the way the Departmet hadle their complait or request for compesatio, they ca ask the Adjudicator to review their case or cotact their MP. Claimats ca also refer their case to the Parliametary ad Health Service Ombudsma (the Ombudsma) The Adjudicator is a idepedet body which cosiders routiely whether or ot HMRC has applied its discretio appropriately whe ivestigatig cases of complaits ad redress. The Adjudicator has foud i the claimats favour i 86 per cet of the Tax Credit ivestigatios completed. May of these complaits cocered the Departmet s hadlig of overpaymets arisig from a Ilad Reveue mistake. I Jue 2005, the Adjudicator reported that commo themes i these ivestigatios icluded: Coflictig iformatio o award otices, which makes it virtually impossible for claimats to uderstad what they are due; Difficulties faced i cotactig the Tax Credit Helplie ad istaces where icorrect advice was give; Failure by the Departmet to update claimats records; Delays i claimats receivig their correct etitlemet; Paymets made to the wrog bak accout Citizes Advice Bureaux (CAB) dealt with 144,000 Tax Credit equiries i ad 151,000 i , the two most frequet issues reported beig poor admiistratio by the Ilad Reveue ad the recovery of overpaymets. I Jue 2005, the CAB comprehesively reported may cases where claimats had faced problems with Tax Credits. The CAB commeted that the complexity of Tax Credits made it difficult for claimats to uderstad ad that substatial levels of error have dimiished cofidece i Tax Credits. The Departmet has a dedicated helplie for itermediaries such as CAB which provides priority access to advice ad case iformatio. The itroductio of a system with a provisioal aual award was a culture chage for may claimats who were used to budgetig ad receivig beefits o a weekly basis. The system does ot guaratee a weekly icome ad i some of the CAB cases i claimats saw their paymets cut with o advaced warig as they were foud to have bee overpaid for earlier moths Members of Parliamet too received a large volume of complaits from costituets ad the Departmet has a dedicated telephoe helplie to aswer their questios o behalf of costituets The Ombudsma received may complaits from Members of Parliamet o behalf of claimats ad upheld 79 per cet of these. I Jue 2005, the Ombudsma issued a special report o the admiistratio of Tax Credits. This report commeted that the itroductio of Tax Credits had bee broadly successful, but cocluded that the delivery of Tax Credits does ot take proper accout of the eeds of some of the poorest customers. It oted that Tax Credits had brought the Departmet a ew customer group which has created fresh challeges which it has yet to meet. Disputes about the recovery of overpaymets after the year ed ad excess paymets R19

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