Top officials say they are trying to get a grip on fraud

Witness in this session were:

• Jim Harra, First Permanent Secretary and Chief Executive, HMRC,
• Peter Schofield, Permanent Secretary, DWP,
• Sarah Munby, Permanent Secretary, DBIES
• Cat Little, Director General Public Spending and Head of the Government Finance Function, the Treasury
• Mark Cheeseman, Cabinet Office, Counter-fraud function (he is the professional responsible overall for watching how the Government deals with fraud)

IR35

Lib Dem Sarah Olney led on questions about the Kaye Adams case. (The case basically revolved around whether she was an employee of the BBC and therefore subject to IR35, or whether she was a contractor and owning a business on her account.) Adams won the case because she was able to demonstrate that, although she has a contract with the BBC, she also undertakes a number of other contracts through her business.)  Olney asked HMRC’s Harra why individual taxpayers must put up their own money to get clarification on how the law applies to their tax affairs. Harra replied that there are ‘always cases at the edge’, or there may be cases where people wish to dispute it. If someone wishes to pursue a dispute with HMRC, that person has to bear the costs of that, but if HMRC lose at tribunal or in court then costs can be awarded, said Harra. He agreed to check whether HMRC refused to pay Adams’ full costs despite the award against HMRC.

Northern Ireland

Sir Geoffrey Clifton-Brown, Conservative, asked about the Northern Ireland (NI) Protocol and his concern about the risk to the Government’s revenues of new easements made to enable NI-GB trade to continue despite Brexit. Harra said it is going to take businesses some time to fully change their contractual arrangements and their procedures to comply with it. In relation to the UK’s exit from the EU, HMRC are gradually implementing procedures over time and that does mean that there is some ‘fiscal risk’ attached. The OBR estimated that there might be £200 million-worth of customs duties lost because of the time we are taking to implement full import controls in general because of Brexit, he said, but on the NI Protocol, there is no ‘material fiscal risk’ to worry about.

Harra also told Clifton-Brown that HMRC has approved more than 1,000 applications for the Brexit support fund which opened for applications in March.

Fraud across government

Cheeseman has responsibility for overseeing fraud and risk management across government. He told Chair Meg Hillier, Labour, that fraud is a large problem across the UK. He said the diversity of risks is ‘very, very large’ across government. But over the last couple of years, government has gone from 21 per cent of departments having a formal fraud risk assessment to 71 per cent. The Treasury’s Little said that ‘everything we have seen to date shows that there is a very good understanding of the inherent increase in fraud risk and, through our ongoing work with departments, we can see that good progress has been made across the board’.

COVID-19 has put us into a different threat fraud landscape, said Cheeseman, but he added ‘I think we were in a better position than we would have been if this [pandemic] had happened three years ago, because this Government is one of the first to have a single standard for how to do fraud risk assessment. That was launched in 2018’.

He said, in general, 91 per cent of people who deal with counterfraud across government are in HMRC and DWP.

SNP’s Peter Grant asked how Cheeseman can explain or justify the very different responses of different government departments to what is effectively the same kind of fraudulent behaviour? Cheeseman replied that, traditionally, we have dealt with fraud in the individual departments, but that the new central fraud department will begin to rectify this. He added that ‘we have already started making moves towards increasing that commonality’. Harra explained that while HMRC reserve the right to use criminal investigations in any fraud case, they have a policy of using that in the most serious cases only. DWP’s Peter Schofield said, in 2017, DWP increased the threshold for fraud that it would pursue through the criminal process as opposed to the civil process. We increasingly use administrative penalties, rather than full-scale prosecution, because we want to focus on serious organised fraud, he said.

Labour’s Dan Carden observed that tax fraud cost the Treasury an estimated £20 billion in 2018-19 – nine times more than benefit fraud at £2.2 billion. The DWP employs three and a half times more staff in compliance than HMRC, adjusted for size in relation to tax and benefits gaps. Over the last 11 years, there have been 85,745 criminal prosecutions for benefits crimes. That is 23 times more prosecutions than for tax crimes of all types. We have eight and a half times more suspended or immediate custodial sentences handed down for benefit crimes versus tax crimes over the last 11 years, and the number of criminal prosecutions relating to tax crime of all kinds has decreased by 39 per cent since 2015.  Shouldn’t HMRC have the same resources as DWP? he asked. Harra contested the figure given by Carden, saying HMRC estimate that the fraud that is included in that tax gap is about £10 billion, not £20 billion. But otherwise Harra said HMRC adopts a selective approach to criminal investigation and seeking prosecution and usually use civil procedures against them, and that includes recovering a financial penalty. He said there are some areas of tax fraud where HMRC have been concerned that the sentences that the courts sometimes give are not sufficient to have a deterrent effect.

In the March Budget, the Chancellor announced £100 million additional funding for HMRC, which will fund a taxpayer protection taskforce consisting of 1,265 people. It will also fund the department for the opportunity cost involved in redeploying existing resources into that, so that there is no net loss on the tax fraud side over time despite the pandemic.

Olivia Blake, Labour, asked if there any departments a ‘little bit like black holes’ at the moment when it comes to fraud. Cheeseman said the Government publishes the fraud landscape report every year. Little added that the Treasury have quite an ongoing dialogue with departments and expect policy to be developed with fraud risk considered at the development and design stage. She said internal audit and risk management teams across government, which sit in the finance function, have fraud experience and expertise.

Schofield said non-reported earnings in universal credit is a growing source of fraud.

Meg Hillier asked Cheeseman about the next 12 to 14 months. Cheeseman replied that the Government will be doing more training in fraud measurement and bringing more people into the fraud ‘profession’ as well, so will be assessing more people. We will be doing more data pilots this year—more pilots of sharing data between departments, he said.  The risk level in BEIS has increased during COVID-19 and his team are working with BEIS to put more fraud capability into BEIS.

Conservative Shaun Bailey asked why it took a year to establish some sort of funding to tackle fraud as a result of COVID-19? Little replied that we were still trying to assess what resources were necessary. Harra said HMRC did not wait until we got that funding decision in March to deploy resources on this issue. We had already opened about 60,000 one-to-many inquiries and about 10,000 one-to-one inquiries in relation to COVID-19 schemes non-compliance, he said. Harra went on to say the financial return will be for every full-time equivalent person looking into COVID-19 fraud is £375,000.

Sarah Olney asked for witnesses’ lessons learned about tackling fraud and error over the last year. Munby said BEIS are now much more in the space of having some large-scale programmes that require bigger interventions with more difficult measurements of fraud. Schofield emphasised the importance of design in terms of trying to avoid fraud and error coming into the system in the first place, the need to share information across departments and the need for more powers such as data sharing with the banks around capital.

Olney wondered if some of the measures that were designed to prevent fraud in might have created a barrier for people to access various bounce back loans. But Munby said the up-front checks were very limited.

Harra expects to replace HMRC’s current assumption of fraud and error on the COVID-19 schemes with a more up-to-date estimate in time for the departmental accounts, which are published in the late summer or autumn (but he expects his current assumptions to be accurate).

Schofield said investment in tackling fraud is going on in the other benefit lines, but universal credit is where the main pressure is.

Munby spoke about the close partnership between her department and the banking sector to identify fraud in the bounce back loans. But she said the Government should not put public money into something that is contractually the banks’ responsibility.

Shaun Bailey commented that many of the banks are redeploying staff, particularly given the 24-hour and eventually 48-hour required turnaround on these loans. Those staff have now gone back to fulfilling their business as usual functions, so there is a concern about the recovery effort that is needed. Yes, real praise for the sharing of the data and the analytics work and some of the assurance work, but the logistical delivery of some of these recovery operations that the Government requires them to do and follow through is not necessarily going to be possible, he speculated.

Cheeseman told Clifton-Brown that it is at each department’s discretion to consult his central fraud team, not least because they have their own fraud experts.

Olivia Blake asked witnesses’ views on improving transparency over efforts to tackle fraud and error. Little said we are working really hard with the NAO to make sure that annual reports and accounts are brought back into a more regular timetable.

What more do you think could be done to improve the consistency of what is reported across different public sector bodies? asked Blake. Little replied that we go through a really important exercise every year, where the financial leadership group of government sits down with the NAO and we go through all the thematic lessons learned from reporting – the annual reporting accounts in particular. Cheeseman added that there is now an agreement with departments across government on common definitions of fraud and a common typology, and all departments now report centrally against that typology and definition.

Peter Grant asked about the furlough scheme and the way HMRC publish information to allay concerns that a business is receiving furlough payments for staff who are still working, or working almost normally. Harra replied that while HMRC welcome information from the public if they have any evidence of fraud, they are not particularly reliant on it in terms of managing the risk.

Schofield said one of the biggest areas of error is around someone failing to tell the DWP about a change in their circumstance. He said: “One of the big investments we have been making – capital error is one element of this – is in making it easier for people to inform us of a change, with more opportunity to do that online and more prompts to do it.”

Harra said HMRC’s experience is that a lot of the gangs they deal with specialise in the tax system and they are not necessarily involved in other types of criminality. He said: “The nature of it is that it is very hard to arrest your way out of, because of a lot of them are operating extra-judicially and are well hidden. While we obviously want to arrest, prosecute and convict these people if we can, a key part of our strategy is to disrupt their activities and make them unprofitable.”

The full 29 April 2021 session is here.

By Hamant Verma