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HMRC accounts qualified for Covid and R&D fraud

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HMRC racked up its 17th consecutive audit qualification in the 2020-21 financial year. Alongside the impact of Covid, the department faces new problems containing R&D tax credit fraud, according to the National Audit Office (NAO).

9th Nov 2021
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The Covid-19 pandemic had a profound impact on HMRC during 2020-21, cutting the annual tax take by 4.4% to £608.8bn.

The £30.4bn compliance yield measure was also down by 18% on the previous year as unprecedented economic circumstances and pandemic restrictions forced the department to scale back its compliance activity, according to the NAO’s report on the HMRC accounts for 2020-21.

Elsewhere within the department, HMRC switched had roughly 15% of its staff into delivering Covid support in May 2020, when this workload peaked. During the year, Covid-related activity cost £318m including money spent on new IT systems and temporary contractors and staff.

In his performance review of the year, HMRC chief executive Jim Harra commented that the pandemic “showed HMRC values at their best” with 60,000 staff pulling together to support the economy, taxpayers and each other.

“Throughout this exceptionally challenging year, we kept all our core services running and ensured customers could access the right help when they needed it,” wrote Harra. With staff switched to Covid-work, the response times for dealing with calls and letters dropped, but satisfaction ratings for its digital services climbed to 88.5% as HMRC rolled out alternatives such as webchats to deal with queries.

While it was coping with the Covid response, of course, HMRC also had its hands full bedding in alternative VAT and other systems as a result of Brexit.

New reasons for qualification

HMRC’s accounts website accentuates many of the positives of the department’s activity during a very difficult year, but if you dig into the accounts – as an auditor must – the lingering effects of the pandemic are more worrying.

For the past 20 years or so, HMRC’s accounts have been qualified due to uncertainties around the amount of fraud and error within the tax credits system, which are not quantified until five years after the annual accounts are finalised. This year, however, there were two new sources of material uncertainty: more than £5bn in potential Covid support fraud and another £336m arising from error and fraud in R&D tax credits.

The Covid leakage was an accepted risk of rolling out last year’s Covid support schemes so quickly, which limited the department’s ability to mitigate error and fraud. As a result, HMRC estimated a fraud and error rate of 8.7% for the furlough scheme (equivalent to £5.3bn), 2.5% for SEISS (£492m) and 8.5% for Eat Out To Help Out (£71.4m).

“HMRC’s estimates are subject to considerable uncertainty and the actual levels of error and fraud in the schemes could differ significantly from the estimated rates and values currently reported,” the NAO noted in relation to its qualification.

The same uncertainties surrounded HMRC’s £336m estimate for error and fraud in R&D tax credits, which was up £25m on 2019-20 and the perpetual uncertainties about tax credits.

Even with the end of the main Covid support schemes, addressing those uncertainties and regaining financial and organisational equilibrium will be tough, the NAO report noted.

“HMRC now needs to identify, measure and recover payments made as a result of erroneous or fraudulent claims, at the same time as returning its compliance activity as a whole to more normal levels. Achieving this will be particularly challenging, and will require careful prioritisation, against the backdrop of dealing with the post-EU Exit transition period and modernising the tax system.”

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Replies (13)

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Tornado
By Tornado
09th Nov 2021 17:35

Jim Harra definitely lives in a different world to me.

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By memyself-eye
09th Nov 2021 17:44

This will never change.
To be fair, the furlough scheme was set up quickly and became easy to use. The fraud and error implications are a result of our bonkers tax system - which politicians will never reform. Like Topsy, the complexity just grows and grows.

HMRC has (or will become) just a penalty generating organisation, like the police. Dodge the fines, stay in the middle of the shoal, keep your head down, appear 'compliant' and fiddle your taxes away......
Sad, but true?

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By Hugo Fair
09th Nov 2021 18:43

It's only the NAO quote at the end that has a whiff of truth about it ... whereas Jimboy's statistics are a whole new branch of (undiscovered) mathematics.

What even the NAO don't seem to realise is that when they say “HMRC now needs to identify, measure and recover payments made as a result of erroneous or fraudulent claims ..” this is not merely because it would be nice to see a return of our money where fraudulently claimed.

It is also the last chance saloon for HMRC to regain a reputation for being the guardians of our money, driven by an almost superhuman degree of probity and competence, as they once were.
Once that reputation is lost (which it is teetering on the edge of so doing), they become just a branch of grasping/avaricious officialdom which much of the population regard as 'the enemy' ... and therefore treat outwitting them as a sport to be taught to children. Then there's no way back.

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Replying to Hugo Fair:
Chris M
By mr. mischief
10th Nov 2021 06:01

They lost that about 12 years ago. HMRC is a penalty farming business, nothing to do with a professional, efficient tax service. Everything else in my career is miles better and faster than in 1990, the UK tax service is miles more slapdash, miles slower, miles more rubbish than in 1990.

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Replying to Hugo Fair:
Tornado
By Tornado
10th Nov 2021 10:23

"It is also the last chance saloon for HMRC to regain a reputation for being the guardians of our money, driven by an almost superhuman degree of probity and competence, as they once were."

In those days, individuals were given responsibility and a real reason to do their jobs properly. The modern way, not just in HMRC, is for there to be a type of Joint Responsibility which in reality means that no one is responsible for anything and thus no incentive for people to have any interest in their work, other than the minimum required to get paid.

There is also the unbelievable complexity of the Tax System, which I don't think any one fully understands, and is becoming as effective as a Heath Robinson mouse trap .... it might eventually work but long after the mouse has scarpered.

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By Open all hours
10th Nov 2021 08:38

If only Mr Harra and his colleagues would spend some time getting to know their customers they would discover how different the real world is from the silos which they inhabit.

Various sincere invitations were extended on here to his head of MTD, the very least we should expect is a reason why these invitations were not accepted.

How long would you expect to stay in business if you displayed the arrogance and ignorance prevalent in HMRC?

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By Duggimon
10th Nov 2021 10:12

Who do the auditors act for? 20 years of qualified audit reports should really result in something.

Why is there not enough data there for the auditors to check HMRC's estimates? There are always estimates in large business's accounts, we will still provide an unqualified unmodified opinion if, on reviewing the data, we come to a conclusion that is not materially different to the directors.

Why have the auditors been unable to do so in this case and what is being done about it? Are we just to accept the revenue of the entire nation is being handled by an organisation producing potentially fictional accounts?

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By Paul Crowley
10th Nov 2021 12:35

17 consequtive audit qualifications
In the real World that would mean insolvency
But the customers have no choice

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By scrasey
11th Nov 2021 08:59

Harra and his chums are on another planet entirely. HMRC were not fit for purpose before the pandemic. Yes they roll out the furlough scheme, but even that smacked of incompetence. upload 100 employees info, but have to key if it's 99. Who on earth came up with that gem? remember the calculator we were going to have within a week or two of it going live? when it arrived it could only calculate in the most basic of situations that you could do in your head. No, for vast swathes of HMRC I suspect like most other .gov organisations working from home has been akin to an 18 month holiday.

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By scrasey
11th Nov 2021 08:59

Harra and his chums are on another planet entirely. HMRC were not fit for purpose before the pandemic. Yes they roll out the furlough scheme, but even that smacked of incompetence. upload 100 employees info, but have to key if it's 99. Who on earth came up with that gem? remember the calculator we were going to have within a week or two of it going live? when it arrived it could only calculate in the most basic of situations that you could do in your head. No, for vast swathes of HMRC I suspect like most other .gov organisations working from home has been akin to an 18 month holiday.

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Tornado
By Tornado
11th Nov 2021 09:50

This is not going to be a very long thread as quite frankly, what more can you say.

The evidence is that HMRC are incompetent but are in denial about that ........ end of story.

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By Catherine Newman
11th Nov 2021 11:25

And they intend to bring in MTD!

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RLI
By lionofludesch
11th Nov 2021 17:48

I give up.

Why can't the Government see how carp HMRC is after 17 audit qualifications ?

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