Recommendation 25

HMRC’s latest estimate of the level of error and fraud in tax credits indicates that overpayments by HMRC decreased from 5.5% (£1.41 billion) of expenditure on tax credits in 2017–18 to 4.9% (£1.11 billion) in 2018–19. The estimated 2018–19 overpayment rate of 4.9% is lower than HMRC’s forecast of 6.2%.71 HMRC told us that fraud and error will continue to be a feature of tax credits and that getting the fraud and error level significantly below 5%, its ministerial target, will be “extremely challenging”.72 We asked the Department whether it is able to provide us with more rigorous estimates of the level of fraud and error in tax reliefs, particularly the Research & Development (R&D) tax relief, which cost £8.8 billion in 2019–20. HMRC told us that for some reliefs, such as the R&D relief, it is able to quantify the level of non-compliance because taxpayers have to claim the relief. In contrast, for tax reliefs that are not claimed but simply granted to those eligible, HMRC needs to make estimates based on indirect data. HMRC estimates the level of fraud and error associated with the R&D tax reliefs to be 3.6% (£311 million in 2019–20) of the tax relief expenditure. However, as highlighted by the Comptroller and Auditor General, HMRC’s current estimate of error and fraud in R&D reliefs is based upon a series of judgements about how likely it is that cases of detected error and fraud are likely to occur within the larger population of unreviewed cases. HMRC does not yet have 66 Qq 75–76 67 HM Treasury, Spending Review 2020, CP 330, November 2020. 68 Q 51 69 Qq 15–17; HM Revenue & Customs Annual Report and Accounts 2019–20, The Resource Accounts: Certificate and Report of the Comptroller and Auditor General to the House of Commons, HC 891, 5 November 2020 70 HM Revenue & Customs Annual Report and Accounts 2019–20, Trust Statement, note 6.3 71 C&AG’s Report, para 16 & 17 72 Qq 83, 85 18 HMRC performance 2019–20 a sufficiently developed understanding of the error and fra