HMRC has been strongly criticised by MPs for its poor performance in cutting tax credits fraud and error which mean the department will miss its target for making savings of £5bn.
A report by the Public Accounts Committee (PAC) says HMRC failed to meet its target of reducing tax credit error and fraud to 5% by 2010/11 by a wide margin.
The actual level of error and fraud was 8.1%, or £2.3bn, some £850m higher than HMRC had expected. It had to revise its estimates for the amount of tax credits error and fraud prevented from £1.4bn to £480m.
The department's target from the 2010 spending review was to save £8bn by 2014/15 but it has now said it estimates it will achieve only £3bn of savings by that date, a result which the PAC chair Margaret Hodge described as 'hugely disappointing'. HMRC also wrote off £1.7bn of tax credit debt in 2011/12 as uncollectable.
Hodge said: 'HMRC thinks that it is responsible for only 2.5% of tax error credit. This looks far-fetched in the light of evidence from Citizens Advice on the inaccuracy of HMRC advice to claimants over the phone.'
Anthony Thomas, chairman of the Low Incomes Tax Reform Group, said: 'A common failing of tax credit claim investigations by HMRC, so far has been a one-size-fits-all approach which tends to ignore the subtleties of a highly complex system, leading to far too many claimants being deprived of entitlements which are rightfully theirs.
'Of the total amount attributable to 'fraud and error' in tax credits, about two-thirds is accountable for by error, one-third by fraud. Yet HMRC's strategy is almost exclusively reliant on anti-fraud measures. A more productive approach, and one that would enable HMRC to achieve its targets more effectively, would be to devote more resources to educating claimants to avoid error in the first place.
The PAC called on HMRC to use a wider set of data to identify patterns and trends in claimant behaviour, and to improve its understanding of why claimants do not always report changes to their circumstances as this is when the majority of error happens.
In its response to the report, HMRC said: 'Work with the private sector has improved the data we use to make sure claimants' information is accurate and fraudulent claims identified. We are also getting tougher with claimants about the proof they need to support their claims; for example on childcare costs and on school leavers. From 2014 the new RTI system will provide accurate and up-to-date information for tax credit claims, significantly reducing fraud and error.'
Anthony Thomas, chairman of the Low Incomes Tax Reform Group, said: 'HMRC have been stepping up their investigations into tax credit claims. A common failing of such investigations so far has been a one-size-fits-all approach which tends to ignore the subtleties of a highly complex system, leading to far too many claimants being deprived of entitlements which are rightfully theirs.
'Of the total amount attributable to 'fraud and error' in tax credits, about two-thirds is accountable for by error, one-third by fraud. Yet HMRC's strategy is almost exclusively reliant on anti-fraud measures. A more productive approach, and one that would enable HMRC to achieve its targets more effectively, would be to devote more resources to educating claimants to avoid error in the first place.
