Funding to fight covid related tax and benefits fraud

UK Government has announced an extra £510m boost to DWP to fight benefits fraud following the pandemic. This is in addition to £103m already announced in the spending review

HMRC spending £155m to tackle covid related fraud

TaxWatch estimates the increase in benefits fraud due to covid was £3.39bn in 2020-21

Fraud and Error in HMRC administered Coronavirus Support Schemes is worth an additional £5.8bn

Intro & Summary

Analysis by TaxWatch has found that the DWP is spending more than twice the amount being spent by HMRC on recovering an increase in fraudulent payments arising from the pandemic. This is despite the increase in fraud seen in the benefits system in 2021 over the previous year being significantly lower than HMRC estimate of fraud and error in the Covid-relief programmes.

How much benefits fraud has there been during Covid?

During the pandemic, the amount of fraud in the benefits system more than doubled from 1.4% of total benefits payments to 3% according to the DWP. The reasons for this is the higher levels of Universal Credit payments, a benefit which has a disproportionately high level of fraud, and the fact that the department had to abandon face to face checks.^[1]Fraud and error in the benefit system for financial year ending 2021, Gov.uk, 13 May 2021, … Continue reading

If we just look at the increase in the total rate of fraud in the system, 1.6%, this equates to £3.39bn of fraud that is attributable to Covid related effects.

Overall, the total amount of fraud in the benefits system is estimated by DWP to be £6.35bn. However, this figure is before anything is recovered by DWP. DWP recovered £0.8bn in 2021. Although we don’t know how much of this was fraud recovery versus error recovery, we do know that overpayments on benefits caused by error were 0.9%, or £1.9bn, which equates to 23% of the total figure given for fraud and error (£8.4bn).

Assuming that the DWP recover fraud and error overpayments in proportion to the amount of it that exists, we get a recovery of £616m (the remaining 77% of the compliance yield). With a total fraud of £6.35bn (3% of £211.7bn), if we subtract the £616m recovered, that leaves us with the net figure of losses to benefits fraud in 2021 of £5.73bn.

Covid related tax fraud

HMRC administered three Coronavirus support schemes throughout the pandemic, the Coronavirus Job Retention Scheme (CJRS, or Furlough as its commonly known), the Self Employment Income Support Scheme (SEISS), and Eat Out to Help Out (EOHO). These schemes were subject to widespread abuse, costing the UK government an estimated £5.8bn in fraudulent and erroneous claims.

On top of this, the 2019-20 tax gap revealed that “Criminal Attacks”, “Evasion”, “Hidden Economy” and “Avoidance” equated to £15.2bn in tax losses. These four behaviours are all clearly fraudulent and made up 43% of the entire 2019-20 tax gap.^[2]The tax fraud gap – 2021 edition, TaxWatch, 16 September 2021, http://13.40.187.124/tax_fraud_gap_2021/ However, in addition to this, there are other behaviours identified by HMRC that may contain elements of fraudulent behaviour. HMRC’s TaxGap is presented net of compliance yield.

While we don’t have the figures for 2020-21 yet, there is nothing to indicate that the amount of fraud within the tax gap will have decreased.

How much are HMRC and DWP being given to combat covid related tax and benefit fraud?

An analysis of government announcements over the last year reveals that the amount of effort being put into tackling tax fraud and benefits fraud is wildly disproportionate to their relative tax losses.

In December 2021, the DWP announced that £510m of additional funding had been awarded to the department over the next three years to tackle the increase in benefits fraud seen as a result of Covid. This would allow the recruitment of 2000 new fraud investigators and was in addition to the £103m DWP secured for fraud and error at the Spending Review 2021.^[3]Autumn Budget and Spending Review 2021, Gov.uk, 27 October 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1029973/Budget_AB2021_Print.pdf ^[4]Counter-fraud Funding, Hansard, 13 December 2021, https://hansard.parliament.uk/commons/2021-12-13/debates/21121315000012/Counter-FraudFunding This takes the total amount allocated to the DWP to deal with the problem to £613m over a three year period, starting in April 2022, a little over £200m a year.

The contrast with the amount being spent by HMRC is stark. In the March 2021 Budget Chancellor Rishi Sunak confirmed the creation of a £100m “Taxpayer Protection Taskforce”, to be staffed by 1,265 “HMRC operatives”, seeking to recoup money wrongly claimed from pandemic support schemes.

With HMRC announcing on multiple occasions that it was not intending on hiring new staff to deal with fraud and error in Coronavirus support schemes,^[5]It was reported in City Wire in March of 2020 that HMRC wasn’t planning on increasing its recruitment despite the new workload that had arisen out of the pandemic. HMRC confirmed this again in … Continue reading it is thought that these 1,265 staff are likely to have been moved from other departments.

The PCS Union reported in June 2021 that the Fraud Investigation Service of HMRC had been asked to contribute 37 staff members, which begs the question of how many of the others are fraud investigators.^[6]FIS resourcing for the Covid taxpayer protection taskforce at HMRC, PCS, 23 June 2021, https://www.pcs.org.uk/news-events/news/fis-resourcing-covid-taxpayer-protection-taskforce-hmrc

The Autumn 2021 Budget revealed that the Taxpayer Protection Taskforce would see an additional £55m of funding next year. The Taskforce is a time limited operation believed to be currently funded until 2022-23. This puts the amount spent on recovering Covid related fraud at HMRC at £77.5 a year, less than 50% of the resource allocated to the DWP.

However, none of this appears to be new money. An Office for Budget Responsibility (OBR) analysis produced alongside the Autumn Budget showed is that the amount of tax HMRC is going to collect will fall in the next two years, in part because of the reallocation of staff away from their jobs to the new taxpayer protection task force ^[7]For more information see: Budget 2021 – Four tax takeaways, TaxWatch, 02 November 2021, http://13.40.187.124/budget-2021/.

This lack of funds is leaving money on the table. Jim Harra, the head of HMRC, stated in an interview with the FT in November 2021 that the organisation will struggle to recover more than half of the losses to fraud and error to Coronavirus support schemes, and plans to recoup the money lost may not go beyond 2022-23 ^[8]HMRC expects to recover less than half £5.8bn lost in Covid fraud and errors, Financial Times, 21 November 2021, https://www.ft.com/content/3991505c-8311-401e-aece-55342f2b07df.

TaxWatch has already reported the stark disparity of funding to tackle all forms of tax and benefit fraud, with the result that many fewer people that engage in tax fraud end up with a criminal record than those engaging in benefits fraud. The latest figures show this pattern repeating for covid related tax and benefit fraud.

This research was featured in the Daily Mail.