HMRC accounts qualified for Covid and R&D fraudby
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).
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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