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Sir John Bourn, head of the NAO, today published a report on the Inland Revenue’s Resource Account and Trust Statement account of tax and national insurance collected, for the year 2002-2003. Sir John confirmed that overall the Inland Revenue continued to secure an effective check over the assessment, collection and allocation of tax during the year. However, the high level of overpayment of Working Families’ and Disabled Person’s tax credit had led to his qualifying his audit opinion on the Trust Statement.

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Qualified Audit Opinion

The Inland Revenue distributed some £17.8 billion since 1999 on the Working Families’ and Disabled Person’s Tax Credit schemes (which ended on 6 April 2003). The Revenue carried out an exercise to estimate the degree of non-compliance by applicants for these tax credits during the year 2000-2001; but the Department were able to provide Sir John with the results of the exercise only in August 2003.

According to the estimates, between 10 and 14 per cent of Working Families’ and Disabled Person’s tax credit payments by value may have been overpayments as a result of non-compliance by applicants. This represented overpayments of between £510 million and £710 million for a full year. The main reasons for the errors were understated or undeclared income or capital (16 per cent of applicants) and failure to declare a partner (3 per cent).

The levels of error in 2002-2003 would not necessarily be as high as those estimated for 2000-2001, given that some changes had been made to the compliance regime. But, on the grounds that he had seen no evidence to demonstrate that the changes would have reduced error significantly, Sir John concluded that the probable rate of error in 2002-2003 remained unacceptably high and therefore would qualify his opinion on the Trust Statement for that year.

Problems with the start of New Tax Credits in April 2003

In April 2003 the Inland Revenue introduced the New Tax Credits (Child Tax Credit and Working Tax Credit), but the systems did not work as intended, causing problems for claimants, employers and the Department.

Today’s report notes that there were serious problems with system performance from April which affected stability (staff could not complete the processing of claims and had to start again); speed (staff had to wait too long to access information and records); and availability (significant time in the working day was lost when the system was closed down to clear internal queues). According to the Revenue and EDS, their IT service provider, the nature of the regime for testing the system meant that underlying technical faults could not have been discovered and corrected in testing although more testing might have reduced the effects of some of the problems. They were considering what lessons could be learned about technical system design and testing strategy, including the effects of a compressed testing timetable.

The Department consider that they will have recovered much of the lost ground by March 2004 but will not be fully back on track until the end of 2004-2005.

Today’s report concludes that, in addition to the significant challenges of maintaining day to day running of the system and catching up on backlogs, there are many major issues for the Department in controlling tax credits for 2003-04.

"The significant level of overpayment of Working Families’ and Disabled Person’s Tax Credit - potentially some 10 to 14 percent – is cause for serious concern and I have qualified my audit opinion.

"The level of problems caused to tax credit claimants and employers as the new tax credit systems went live in April 2003 demonstrated that there were undetected gaps in the design of the testing regime for the systems.

"The Inland Revenue must pay particular attention to ensuring that recovery from the problems with new tax credits does not undermine the Department’s reputation for integrity and accuracy when dealing with taxpayers’ affairs. This reputation is essential to the effective assessment and collection of tax."

Sir John Bourn

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