July 15, 2008 3:00 am

Audit spots possible £1.5bn tax credit error

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The public spending watchdog has refused to sign off the accounts of Revenue & Customs for the sixth successive year after discovering that as much as £1.5bn may have been overpaid in tax credits.

Tim Burr, head of the National Audit Office, said levels of tax credit error and fraud were "significant" when compared with the expenditure of the scheme. The Revenue has announced its intention to reduce overpayments to less than 5 per cent by 2011.

"HMRC now has a target and has developed a strategy for reducing error and fraud. It will need to monitor how the measures it adopts are contributing to the achievement of the target and to respond effectively," Mr Burr said.

The NAO's criticism is embarrassing for Gordon Brown, who as chancellor made reform of tax and benefits central to economic policy and who has been struggling to regain his authority as prime minister after bowing to pressure from Labour rebels in the row over the abolition of the 10p tax rate.

The report is also a setback for the Revenue & Customs, which has been struggling to gain public trust since its creation in 2005 and which last month saw the appointment of its third chairman in three years.

The department has been under pressure to maximise revenues while struggling to cope with a demoralised workforce, the threat of strikes, a requirement to cut costs by 5 per cent a year in real terms, repeated information technology glitches and resistance from business to its aggressive stance against tax avoidance.

According to the NAO, in the four years since the tax credits scheme was introduced, the department has overpaid by £7.3bn. The report explains claimants have not always understood their obligations or received the support they needed from the department.

As a result, the NAO says, over and underpayments have occurred because the department has made payments based on "out of date information".

The NAO report shows that at the end of March 2008, there were 16.2m cases where records of income tax payments collected through PAYE for earlier years still needed to be "reconciled and cleared".

As a result of an "error" of non-collection, 420,000 pensions would be affected with a tax loss of £135m a year.

Edward Leigh, chairman of the parliamentary public accounts committee, warned that the Revenue's latest identified shortcomings would add to the financial woes of "vulnerable families" who have been overpaid and face long-term repayments to the government "through no fault of their own".

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