Personal Tax Credits overpayments have increased to 5.7% of tax credits spending (£1.46 billion), exceeding the HM Revenue & Customs’ (HMRC’s) target of 5%, while underpayments stood at 0.6% of expenditure (£170 million), based on estimates for 2017-18.1 HMRC expects levels of error and fraud in tax credits to rise further when estimated for 2018-19.

Due to this material level of error and fraud in tax credits, the Comptroller & Auditor General (C&AG) of the National Audit Office, Gareth Davies, has qualified his opinion on the regularity of HMRC’s 2018-19 Resource Accounts.

In its report on HMRC’s performance during 2018-19, the NAO states that HMRC has not made changes to tax credits and compliance activity that could have reduced error and fraud. This was because of competing demands such as prioritising preparations for EU Exit and claimants’ anticipated transfer to Universal Credit.

The roll-out of Universal Credit means that very few new claims for tax credits are being made, reducing the level of error and fraud entering the system. HMRC and the Department for Work & Pensions (DWP) are still developing plans to transfer existing tax credits claimants and £6.8 billion of tax credits debt to Universal Credit, including arrangements for debt relating to past tax credits claims.

HMRC reported total tax revenue of £627.9 billion in 2018-19, an increase of £22.1 billion on 2017-18. The reported total tax revenue includes £145.7 billion (2017-18: £141.9 billion) in relation to tax liabilities2 which had not been paid by 31 March 2019, though the majority of this amount was not overdue for payment at that date. This comprised £28.8 billion of tax which had been assessed and was due for payment, and a further £116.9 billion in respect of estimated liabilities which were not due for payment by 31 March.3  HMRC estimates that its tax compliance activities in 2018-19 brought in £34.1 billion, against a target of £30.0 billion.

The number of Self Assessment tax returns received by HMRC has been steadily increasing, from 9.8 million in 2010-11 to 11.5 million in 2017-18.  HMRC believes this is due to a number of factors including a growth in number of people who are self-employed, a higher number of individuals with property income, and an increase in the number of individuals with income over £100,000, together with certain changes to tax policy, such as the introduction of the Higher Income Child Benefit Charge. HMRC estimates that, on average, the cost of collecting £1 of income tax through Self Assessment is over four times higher than through the PAYE system.

HMRC is responsible for delivering key customs and border-related programmes for EU Exit, which has required significant recruitment and redeployment of staff from other business areas. This has resulted in planned improvements to some of its compliance systems and digital services being delayed or stopped.

“No tax collection system can ensure that everyone meets their obligations, but HMRC can do more to get a clearer picture of the causes of fraud and error in tax credits, the increase in Self Assessment tax returns and what these mean to its costs and plans going forward. HMRC will need to do this against a challenging backdrop of preparing for the UK’s exit from the EU.”   

Gareth Davies, the Comptroller and Auditor General

Read the full report

Her Majesty’s Revenue & Customs annual accounts 2018-19

Notes for editors

  1. HMRC estimates the level of error and fraud overpayments and underpayments in tax credits by reviewing a sample of claimants’ cases. Due to the normal annual cycle of tax credits awards, the most recent estimates of error and fraud relate to 2017-18.
  2. A tax liability is the total amount of tax owed by a taxpayer to HMRC.
  3. Due to the timing of the annual tax cycle, which allows certain taxpayers a set amount of time after the end of the tax year to assess and pay their liabilities, HMRC is required to estimate the amount of tax it will receive in respect of these taxpayers.
  4. Press notices and reports are available from the date of publication on the NAO website. Hard copies can be obtained by using the relevant links on our website.
  5. The National Audit Office (NAO) helps Parliament hold government to account for the way it spends public money. It is independent of government and the civil service. The Comptroller and Auditor General (C&AG), Gareth Davies, is an Officer of the House of Commons and leads the NAO. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether government is delivering value for money on behalf of the public, concluding on whether resources have been used efficiently, effectively and with economy. The NAO identifies ways that government can make better use of public money to improve people's lives. It measures this impact annually. In 2018 the NAO's work led to a positive financial impact through reduced costs, improved service delivery, or other benefits to citizens, of £539 million.

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