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TAX CREDITS FIASCO — these words now seem to be inextricably linked; well that is until 'fiasco' extricates itself from the clutches of HMRC and goes on to its next 'gig' with the Ministry of Defence where it may appear alongside 'defence procurement'. Everything is relative and with the Committee of Public Accounts now reporting that the cost of the largest defence projects have soared by £4.8 billion in the past two years, HMRC is not the only government department currently 'under fire'.
On the other hand, perhaps the taxpayers might at least see some ships or planes from the MOD for their money, albeit at a rather higher price and later date than they originally expected. However, according to the latest Annual Report from the Comptroller and Auditor General (CAG) into the Inland Revenue Accounts for 2004-05, taxpayers (well the ones without children and/or earning more than £58,000 p.a.) appear to have nothing to show for the overpayments of tax credits, other than the fact that they have injected what would appear to be another £1 billion — tax free I would hasten to add — into the country's economy.
Customer satisfaction and confidence
If I spend my money on some goods or services, the least that I (and the law) require is that they be of 'satisfactory quality'. If they are not, not only do I want my money back, but I am probably not going to go back because my confidence in that company has been damaged. As we are always being told, we are also 'customers' of HM Revenue and Customs and it seems to me that the very least satisfaction that I should be able to get from the payment of my taxes is that they are being used to good effect. I may not like what they are being used for and I have an opportunity every four of five years to have some say in that, but I should at least know that the money is not being wasted.
What continues to concern me, especially in the light of HMRC and the Government's efforts to tell us that we must pay the proper amount of tax and bearing in mind that press reports indicate that the Chancellor will need to raise an additional £10 billion of taxes next year ('3 pence on income tax') is that continuing failures to operate a system must lead to a drop in confidence in the tax system itself.
The Low Incomes Tax Reform Group stated on 13 October that 'according to a recent report in The Guardian, more than one million families have not renewed their tax credits claim by the deadline of 30 September. There is also anecdotal evidence of many claimants deciding not to renew because they no longer wish to receive tax credits after being badly treated by the system'. If true, this must be a terrible indictment of a system that is designed to help the poorer members of society. And I would suspect that it would be the poorer claimants who will drop out of the system, rather than the people who had incomes in excess of £50,000 for 2003-04 and who received in excess of £70 million in tax credits for that year. As an aside, I still fail to see how people who are on twice the average salary require state assistance for their children.
But is there not the additional danger that the same 'hardworking families' the tax credit system is supposed to benefit will tire of seeing a proportion of their tax that funds the system — 'money with their name on it' in the words of some promotional material — going down the drain? One of my concerns is that some taxpayers will decide that they are more competent in spending that money than the Government is.
Success or nightmare?
The Paymaster General said some time ago that the introduction of Tax Credits was 'a huge success'. In the Fifth Report of the Committee of Public Accounts in September 2005 (tax credits and deleted tax cases), the chairman, Mr Edward Leigh MP, stated that 'the introduction and operation of the Inland Revenue's tax credits system has been a nightmare'.
The CAG's report, which has led to the recent flurry of press attention, uses more moderate language; for example, 'the Department [HMRC] has fresh challenges which it has yet to meet'. This sounds a little like the thought that 'there are no such things as strangers, only friends that you haven't met' and we hope that HMRC will meet the challenge in the near future. However, the bottom line is that 'the 2004-05 Trust Statement account shows that the Department wrote off £123 million and made provision of £961 million for future write-offs. Further write-offs may be recorded in the accounts for 2005-06'. If it is any consolation to HMRC, one month after the Committee of Public Accounts reported on tax credits and deleted tax cases in September 2005, it reported on 'fraud and error in benefit expenditure' which showed — with fraud and error estimated at £3 billion and including 'the astonishing fact that the figures are rounded to the nearest half a billion pounds' — that the Department of Work and Pensions also had 'challenges which it has yet to meet'.
Nothing new?
Of course nothing is really new and the NAO report, Tackling Benefit Fraud, February 2003, makes interesting reading especially as it was issued when the Inland Revenue was at the start of the new tax credit system.
The report concluded that the underlying causes of fraud and error were:
- the security of claims was not at the heart of the benefit system;
- incentives focused on finding fraud, but not on stopping it happening;
- information on claims was not used intelligently to help prevent fraud; and
- safeguarding payments was considered as an afterthought, once the payment had been made.
These points are matched by interesting comments from the CAG's report.
- 'The Department have evidence that tax credits have been targeted by organised criminals, particularly where they can make claims over the Internet without proving identity.'
- 'In 2004-05 the Department started around 107,500 risk-based investigations, of which 17,000 were pre-award and 90,500 post-award.' The report states that of the 85,600 cases settled by July 2005, the payment of £130 million was prevented.
- 'Inaccuracy was mainly due to inputting of income from wrong financial year; inputting of incorrect income; and/or omission of partner's income …'. This seems to have been compounded by 'poor information on — and multiple versions of — award notices, which make it difficult if not impossible for claimants to work out their entitlement; poor communication with claimants; continuing problems faced by claimants in contacting the Department …; and delays in dealing with appeals and complaints'.
- 'The department also had difficulty in reconciling its own record of payments issued with those cleared through the banks' and '£481 million [became] irrecoverable because claimants successfully contended that they could not repay because of hardship'.
Of course, whilst we are looking at it from a policy or technical point of view, and it is interesting to see the same issues cropping up yet again, the reality is that these 'challenges' are challenging the real people that the system is designed to benefit, not just the Treasury policy makers and HMRC managers.
Robin Williamson, Technical Director of the Low Incomes Tax Reform Group states:
'Underlying the accounting problems highlighted by the NAO is the human misery caused by the way tax credits, particularly overpayments, have been administered. Overpayments are a nightmare for those low-income families who receive no warning of the sudden curtailing, or even withdrawal, of their benefit, through no fault of their own, and yet who have to continue to feed and clothe their families. Major changes are needed before the system can rid itself of its tendency to exacerbate, rather than relieve, poverty. More than anything, claimants need one-to-one help to manage their way through so complex a system. This at a time when HMRC are expected to reduce, not increase, their resources. Unless the system is properly resourced, the future for tax credits claimants looks bleak.'
Conclusion
While the press bangs on about whether an MP has or has not taken drugs, a considerable amount of 'money with your name on it' (as the Treasury press release encouraging claims in 2002 said) is going down the drain. In fact, if we could solve these types of problem, we would not need to worry about a possible tax increase in the next Budget. If someone in the Treasury is reading this, perhaps the following information might be useful.
- £2.2 billion tax credits overpayment at HMRC.
- £3 billion in benefit fraud and error at DWP (Committee of Public Accounts, 13 October 2005).
- £4.8 billion soaring costs of projects at the MOD (Committee of Public Accounts, 13 October 2005).
Total £10 billion and the taxes 'black hole' is solved.
If Mr Fiasco trades through Fiasco Productions Limited, I suspect that he would have a hard time persuading HMRC that the IR35 rules did not apply to him; he seems to have one employer and just turns up on a regular basis. And from the way things have been going lately, it seems that he cannot provide anyone else to come along in his place. If I could see his desk diary, I would guess that, following the MOD, his next appointment may well be something to do with identity cards and if I was his adviser I would be suggesting that his earnings from that 'gig' should be treated as remuneration if he is not already doing so.
