Tax credits - The £3.9 billion black hole

Losses from the government's tax credit system are "unacceptably high", the National Audit Office NAO has said - the spending watchdog confirming in a report that the system was losing up to £1 billion a year through fraud and errors.

During 2006-07 HMRC paid a net £18.7 billion in tax credits and an average of 5.5 million families received 2006-07 awards. In the first three years since the scheme was introduced in 2003, overpayments arising from adjustments to awards, and other small changes to entitlement after the finalisation of awards, have led to a debt of £6 billion.

The Department has also identified £600 million in year adjustments to 2006-07 awards. At the end of March 2007 it had collected £2 billion of this debt and written off £0.7 billion. At the end of March 2007, £3.9 billion of this remained to be collected by HMRC. It has also provided for £1.6 billion for those debts where recovery is doubtful.

As a consequence of attacks by organised criminals, HMRC closed its tax credits internet site in December 2005. This has reduced levels of incorrect payments, but HMRC still found it made incorrect payments of £40 million in cases of suspected organised fraud. But it also prevented incorrect payments of £212 million where organised fraud was suspected during 2006-07.

HMRC, which measures overall levels of claimant error and fraud, found that between £1 billion and £1.3 billion was paid to claimants to which they were not entitled in 2004-05.

The NAO has described these levels as unacceptably high and, whilst the Department has made changes to its compliance procedures since 2004-05, says there is no evidence to demonstrate a lower estimate for 2006-07.

So now you know where your taxes have gone. Or haven't as the case may be.

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2007-07-13 09:24:31 © Moneyextra.com