First Report - Department for Business, Energy & Industrial Strategy Annual Report and Accounts 2020–21

The Department does not have a good enough assessment of the levels of fraud and error in local authority administered business support grants. During 2020– 21 and 2021–22 the Department has provided funds to local authorities to distribute to local businesses in their areas through nine grant schemes. The Department has so far only attempted to assess the extent of fraud and error in the initial three grant schemes administered in Spring 2020: the Small Business Grant Fund; Retail, Hospitality and Leisure Grant Fund; and the Local Authority Discretionary Grant Fund. The Department’s sample examined only 476 grants, representing 0.05% of grants paid out by number. The Department asserts that it is refining its estimate of fraud and error in this group by expanding its sample to nearly 5,000 grants, and that the second group of local authority administered grants would be an even larger sample of 12,000 grants. However, the Department has not yet started work on the second group and success with these larger samples relies on the capacity and willingness of local authorities to cooperate. We are concerned that local authorities have few incentives to do so given that all recovered funds are to be passed to the Department, and the limitations to the estimates of fraud and error make it challenging for the Department and local authorities to assess the time and resources required to recover these funds. Recommendation: The Department should write to the Committee by September 2022 setting out how it will obtain full cooperation from local authorities to allow it to calculate robust fraud and error estimates for all COVID-19 business support grants, milestones for achieving these calculations, and how this information is being used to focus recovery efforts. 6 Department for Business, Energy & Industrial Strategy Annual Report and Accounts 2020–21

The Department does not know whether grants distributed by local authorities on its behalf have benefited businesses, including those most in need of that funding. Although the Department set the eligibility criteria for grant schemes administered by local authorities, it delegated most grant decisions to them. The Department told us that pre-payment checks did not apply to all these schemes, and that ministers prioritised delivery of grants over faster post-payment assurance sampling work. However, with only 476 grants tested, the Department does not know where the vast majority of this £21.8 billion grant funding has gone, nor the eligibility of those in receipt of it. In the absence of more granular information, the assessment it has done is already indicative of ineligible businesses receiving grant funding, eligible businesses receiving a value of grant funding they were ineligible for, or most likely a combination of both. Fraud and error in these grant payments reduces the effectiveness of these schemes to achieve their objective of providing funds to support those businesses most in need. Recommendation: The Department should, alongside its Treasury Minute response, explain to the Committee how it is going to obtain greater assurance over the regularity and value for money of grant payments made on its behalf.

The Department was aware of heightened fraud risks within its COVID-19 business support schemes from the outset but did not make full use of all the tools at its disposal to prevent and detect fraud. The Department expected that some potential recipients of funding for its COVID-19 business support schemes would attempt to defraud the exchequer. It sought ministerial directions on these schemes highlighting some of the risks posed by fraud, but did not attempt to quantify the potential fraud exposure. These requests for ministerial directions also did not sufficiently identify or reflect the potential risks from organised economic crime. The number of new companies being registered in 2020–21 rose by more than 20% compared to any of the previous five years. Although the Department indicated that disruption can also present opportunity, we feel around 170,000 new companies would certainly appear to be a warning sign warranting closer scrutiny. However, the Department could not tell us whether it sought or received information from Companies House on company formation trends, and so this is unlikely to have featured in the Department’s understanding of evolving fraud risks. Each new company could potentially apply for COVID-19 business support. Lord Agnew suggested more than 1,000 companies received emergency business support despite not trading at the start of the pandemic, referring to this as a “schoolboy error”. Recommendation: The Department should ensure that the expected scale and sources of fraud risk should be clearly communicated to ministers when ministerial directions are sought, including mitigating actions such as, for example, how the Department and Companies House would work together sharing information to prevent fraud. The Department should, as part of its Treasury Minute response, clearly explain how it is planning to recover funds it identifies as claimed fraudulently or paid out in error.

The Department has yet to set out how it is learning lessons from managing its COVID-19 business support schemes to better protect taxpayers’ money Department for Business, Energy & Industrial Strategy Annual Report and Accounts 2020–21 7 in future. The Department now has two years’ worth of experience designing, implementing, and managing COVID-19 business support schemes, and some experience of recovery activities where fraud and error has been identified. It has identified some learning that, for example, has allowed it to refine its approach to identifying fraud and error in COVID-19 business support grants. However, this is to reduce shortcomings in existing schemes, and we would expect to see the Department demonstrating that it is learning wider lessons from these schemes which it could then apply to improve its stewardship of public funds in the future. Several of the Department’s major areas of expenditure in the coming years, such as supporting public sector decarbonisation and achieving net zero, will again require routing taxpayer funds through third parties as it did with COVID-19 business support schemes. We would expect lessons the Department has learned during the pandemic to support the design and delivery of these future schemes. Recommendation: The Department should continue to refine its estimates of the levels of fraud and error across its COVID-19 business support schemes, recovering monies to reduce losses to the public purse and apply any lessons learned from these to future support schemes. It should write to the Committee before the end of the year to set out how it is applying lessons learned in its ongoing activities.

The Post Office’s mismanagement of its Horizon programme has had devastating consequences for individuals wrongly accused of fraud. The financial cost of compensating these individuals will largely fall to the public purse. The Horizon accounting system erroneously recorded shortfalls of cash in local Post Office branches over its more than 20-year lifetime. The Post Office considered some of these shortfalls to be caused by subpostmasters and subpostmistresses, resulting in those staff being dismissed and the Post Office taking action to attempt to recover the ‘losses’ and in some cases leading to prosecutions and people being wrongly convicted. The Department estimates that the ‘Historical Shortfall Scheme’, set up by the Post Office to compensate those who may have experienced and repaid shortfalls (for example from their own funds), is likely to cost £153 million, of which it has set aside £65 million. The Secretary of State for the Department is the sole shareholder of the Post Office, and the Department will provide sufficient financial support to Post Office to cover the scheme. The government has also committed to paying compensation for overturned criminal convictions and estimates that this may cost the taxpayer up to £780 million. The government has also committed to covering the cost of this compensation. Recommendation: The Department should write to the Committee alongside its Treasury Minute response to set out what actions are being taken to ensure Post Office Ltd remains a viable company. Where the Department (or HM Government) provides assurances to Post Office Ltd over the funding of its liabilities, it should inform the Committee at the earliest opportunity. 8 Department for Business, Energy & Industrial Strategy Annual Report and Accounts 2020–21 1 COVID-19 business support schemes

On the basis of a report by the Comptroller and Auditor General we took evidence from the Department for Business, Energy & Industrial Strategy (the Department) on its performance in 2020–21.1

In addition to its guaranteed loan schemes, the Department provided £21.8 billion in grant funding to local authorities to distribute to businesses in their areas. The Department set the eligibility criteria and provided guidance on grant making to local authorities.20 In the first three grant schemes, which account for £11.5 billion21 of this funding, the 11 Qq 10, 13, 67, 72–77, 99–101; C&AG’s Report, page 134 12 Q 67; C&AG’s Report, page 130 13 Q 24 14 Qq 9, 17 15 C&AG’s Report, Introduction, page 130 16 C&AG’s Report, pages 130–133 17 Department for Business, Energy & Industrial Strategy, Annual report and accounts 2020–21, 25 November 2021, Accountability report, page 121 and Note 19, page 215; C&AG’s Report, page 133 18 Q 10; C&AG’s Report, page 132 19 If 11.15% implies a fraud loss of £4.9 billion, 7.5% would equate to approximately £3.3 billion 20 Q 67; C&AG’s Report, pages 130, 133–134 21 Department for Business, Energy & Industrial Strategy, Annual report and accounts 2020–21, 25 November 2021, Note 4.4, page 167: £10,824 million in 2019–20 plus £683 million in 2020–21 = £11,507 million or £11.5 billion 10 Department for Business, Energy & Industrial Strategy Annual Report and Accounts 2020–21 Department estimates 8.9%, or just over £1 billion, is lost to fraud and error.22 Again, this figure represents a central estimate in a range between £514 million (4.4%) and nearly £1.6 billion (13.4%).23 The Department told us that this was an estimate that it has low confidence in.24 In written evidence, the Institute of Chartered Accountants in England and Wales (ICAEW), a regulator of the accountancy and audit profession, believes there is a significant chance that this underestimates the level of fraud and error; however, it also considers that the Department has had sufficient time to collect the information it needs from local authorities and perform adequate checks to calculate a more accurate estimate.25 As a result of these material levels of fraud and erro

Of the £21.8 billion grant funding the Department provided to local authorities to distribute in their areas in 2020–21, the Department has so far attempted to assess the extent of fraud and error in only £11.5 billion of this funding, and through a sample of only 476 grants. This very small sample represents only 0.05% by number out of a total population of circa one million grants.28 The Department now considers this insufficient to gain an accurate picture of the true level of fraud and error in these payments and has initiated a tenfold increase in its sampling of these grants to inform its 2021–22 accounts.29 The Department also told us it has committed to an even larger sample of 12,000 for its second group of grants, which it also distributed to local authorities in 2020–21.30 It has not yet started assessing fraud and error in this group and considers it unlikely that it will be able to report on these until its 2022–23 accounts.31 In addition, the Department continued to provide grant funding to local authorities in 2021–22 as part of a third group of schemes, but also considers it unlikely that it will have reliable fraud and error estimates for this group until its 2022–23 accounts.32 The ICAEW told us that non-complex fraud and error in these latter schemes could total between £318 million and £968 million if levels are comparable to those in the schemes the Department has assessed so far.33 22 Qq 10, 13, 33–36; Department for Business, Energy & Industrial Strategy, Annual report and accounts 2020–21, 25 November 2021, Accountability report, page 122 23 Department for Business, Energy & Industrial Strategy, Annual report and accounts 2020–21, 25 November 2021, Accountability report, page 122 24 Q 10 25 ICAEW, pages 4–5, paras 12–13 26 C&AG’s Report, pages 130–134 27 Q 68; Committee of Public Accounts, HMRC Performance in 2020–21, Thirty-Seventh Report of Session 2021–22, HC 641, 11 February 2022; Committee of Public Accounts, The Department for Work and

The success of these larger samples relies on the capacity and cooperation of local authorities to respond to the Department’s requests for information.34 The Department considers that it has not yet given local authorities the opportunity to do the necessary reconciliations, as it has been asking so much of them to deliver grant schemes.35 However, the ICAEW also noted that when government places additional responsibilities on local government, it is vital that it provides sufficient additional resources to enable it to administer these additional responsibilities. It indicated that the Department did not appear to have provided additional resource to enable local authorities to do so and it was therefore not surprising that some have struggled to meet the reporting and assurance requirements. It highlighted that the business support grants represented significant additional activity for some smaller local authorities, such as East Lindsey District Council, which distributed £46.5 million of payments under these schemes compared to total expenditure of £99.6 million reported in its 2020–21 accounts.36 A local authority is also responsible for any recovery actions where it has made ineligible payments.37 Local authorities would appear to have limited incentives to do so given they must cover the costs of debt recovery and prosecutions, and any recovered funds return to the Department.38 The limitations to the estimates of fraud and error also make it challenging for the Department and local authorities to assess the time and resources required to recover these funds.39

Despite recognising these limitations and uncertainty in its current estimates, the Department does not believe that its grant funding has been subject to significant fraud.40 It suggests that fraud will ultimately range between 1% and 2%, which it would consider as ‘normal’ and consistent with its expectations.41 Conversely, it suggests that it has been more surprised by grant schemes impacted by error where local authorities have made payments to ineligible businesses or have overpaid to eligible businesses.42 Whether local authority administered grants reached the right businesses

Although the Department set eligibility criteria for grant schemes administered by local authorities, it delegated most grant decisions to them. The Department told us that it provided clear guidance to local authorities on recordkeeping requirements and the need to be able to reconcile payments for the purposes of audit.43 However, it also told us that administering these grants had put real pressure on local authorities, despite the Department not always requiring them to conduct pre-payment eligibility checks before making grant payments to businesses. As with other schemes set up during the pandemic that we have reported on, the Department told us that it launched schemes with ‘consciously insufficient levels of upfront control’, and with ministers prioritising delivery of grants to businesses over doing (post-payment assurance) sampling faster.44 34 Q 67 35 Q 69 36 ICAEW, paras 24–25 37 68–70 38 Qq 12, 68–71, 77, 97, 103 39 Qq 63, 97–99, 103 40 Department for Business, Energy & Industrial Strategy, Annual report and accounts 2020–21, 25 November 2021, Accountability report, page 122 41 Qq 9–10, 13 42 Q 17 43 Q 67 44 Qq 15, 63 12 Department for Business, Energy & Industrial Strategy Annual Report and Accounts 2020–21

Having sampled only 476 grants distributed by local authorities out of circa one million grants made, the Department therefore has very little visibility of which businesses have benefited from these schemes.45 It cannot say whether many businesses in receipt of grants were eligible, and whether those that were both eligible and received grant funding received the right amount. The very limited assessment it has already done suggests ineligible businesses receiving grant funding, and some eligible businesses received a value of grant funding they were ineligible for. Neither furthers the policy objectives of these schemes, to support those businesses most in need, and the taxpayer also loses value for money. Using tools to prevent and detect fraud

The Department was responsible for a substantial component of government’s overall financial response to the pandemic, resulting in the third-largest estimated lifetime costs of any department, as reported by the National Audit Office’s COVID-19 cost tracker.46 We have previously reported that government prioritised speed when designing and implementing measures to limit the damage to the economy and people’s livelihoods from the impact of the coronavirus pandemic, launching schemes in a matter of weeks.47 This approach presented its own risks, and the Department acknowledged that it expected some potential recipients of funding for COVID-19 business support schemes would attempt to defraud the exchequer, and that it chose consciously to tolerate this following ministerial directions48 to proceed.49 However, there are high levels of fraud in some of these schemes, and the request for the Bounce Back Loans Scheme ministerial direction, for example, did not attempt to quantify the potential fraud exposure, or identify who the perpetrators of fraud might be, despite flagging the risk as ‘very high’.50

Registrations of new companies on Companies House increased sharply during 2020–21. During the period 2015–16 to 2019–20, annual new company registrations averaged 640,000. By comparison, in 2020–21 there were more than 810,000, making new company registrations in that year more than 20% higher than in any of the preceding five.51 Companies House does not validate information provided to them when a new company is registered, or do checks to confirm a person with a role in a company exists.52 The Department told us that disruption can create legitimate business opportunities and the increase in and of itself is not an indicator of anything adverse; however, the Department did not evidence this assertion, and we are sceptical that creative disruption accounts for the 170,000 new companies and feel that this should have been a warning warranting closer scrutiny.53 The Department did not know whether it sought or received information from Companies House for company formation trends, and as such these ‘unusual patterns’ 45 Qq 33–36; Department for Business, Energy & Industrial Strategy, Annual report and accounts 2020–21, 25 November 2021, Accountability report, page 122 46 The COVID-19 cost tracker, available at: COVID-19 cost tracker – National Audit Office (NAO) 47 Q 41 48 Ministerial directions are formal instructions from ministers telling their department to proceed with a spending proposal, despite an objection from their permanent secretary (on grounds of risks to regularity, propriety, value for money or feasibility: the parliamentary expectations of the stewardship of public funds) 49 Qq 9, 17 50 Correspondence from Department for Business, Energy & Industrial Strategy Accounting Officer to Secretary of State for Business, Energy & Industrial Strategy seeking ministerial direction on the introduction of the Bounce Back Loan Scheme, 1 May 2020 51 Q 19 52 Q 84 53 Qq 18–21 Department for Business, Energy & Industrial Strategy Annual Report and Accounts 2020–21 1

The Department launched its first COVID-19 business support scheme shortly after the first lockdown was announced on 23 March 2020. Since then, the Department has launched many more, and now has around two years’ worth of experience of designing, implementing, and managing its COVID-19 business support schemes.56 It has taken some actions seeking to apply learning to improve these schemes and reduce fraud and error, including approaching other departments to learn from them, such as the Cabinet Office counter-fraud function. It subsequently increased capability and capacity in its own counter-fraud function, with one of this function’s new duties being to undertake mandatory fraud risk assessments at outline and final business case stages when considering new policy.57 The ICAEW told us that it believes the Department should strengthen its counter-fraud capacity and capability more widely, particularly as grants are likely to play a key role in delivering the government’s Net Zero Strategy.58

As some COVID-19 business support schemes have increasingly become part of business as usual, the Department told us that, for example in relation to grants distributed by local authorities, its systems and methods are now approaching maturity. It considers it has improved its guidance to local authorities and refined its approach to identifying fraud and error in these grant schemes.59 However, lessons learnt seem to have been largely actions in pursuit of reducing shortcomings in existing schemes rather than learning wider lessons that could be applied to limit fraud and error in future schemes. The ICAEW recommends that the government establishes a standard framework for assuring grants delivered through local authorities, providing clarity to the respective reporting roles of central and local government, as well as measures to be used to detect and prevent fraud and error.60

The Department has commissioned evaluation of its business support schemes; however, it cautioned that it is proving challenging to separate the impact of various aspects of government’s overall support package which also included, for example the furlough scheme.61 Several of the Department’s major areas of expenditure in the coming years, such as supporting public sector decarbonisation and achieving net zero, will again require routing taxpayer funds through third parties as it did with COVID-19 business support schemes. 54 Qq 18, 21 55 Q 16 56 Q 64 57 Q 62 58 ICAEW, paras 20, 26, 34 59 Department for Business, Energy & Industrial Strategy, Annual report and accounts 2020–21, 25 November 2021, Accountability report, page 123 60 ICAEW, paras 34–35 61 Q 40 14 Department for Business, Energy & Industrial Strategy Annual Report and Accounts 2020–21 2 Post Office Horizon IT programme compensation

Between 1997 and 2000 the Post Office implemented a new IT system called Horizon. This system is now known to be responsible for accounting discrepancies that suggested, for example, shortfalls of cash in Post Office branches.62 At the time, the Post Office considered some of these shortfalls to be caused by branch staff such as postmasters, resulting in dismissals, attempts to recover apparent losses, and in some cases prosecutions. Such actions had terrible personal and financial consequences for honest, hard-working staff, wrongly accused of misconduct and crime. In May 2020 the Post Office set up the Horizon Historical Shortfall Scheme to compensate staff who may have experienced cash shortfalls reported by the Horizon system through the normal course of their duties, and repaid shortfalls from their own funds.63

In December 2020 the Department wrote to the Post Office, noting that the number of applications to the Scheme was ‘…materially higher than expected resulting in a corresponding increase in possible scheme claims and costs…’ and that the Post Office considered ‘…any amount in excess of the original budget will be unaffordable…’. With the Secretary of State as sole shareholder of the Post Office, the Department determined that it would apply to HM Treasury for future funding so the Post Office could meet its obligations for payments under the scheme (providing so-called ‘comfort’ to the Post Office that it would be able to meet its liabilities as and when they fall due).64

The Department currently estimates that the scheme is likely to cost £153 million, of which £89 million is from the Post Office and £65 million is from the Department.65 The Department noted that its contribution was its current best estimate, and did not represent a hard and fast limit: should the estimate prove to be too low, then it will be increased.66 In addition to the scheme, the government has committed to covering the costs of compensation to those former Post Office employees wrongly convicted of criminal offenses. The Department currently estimates this may cost the taxpayer up to £780 million.67 62 Q 79 63 Qq 79, 80 64 Correspondence from the Department for Business, Energy & Industrial Strategy to the Board of Directors, Post Office Ltd., 14 December 2020 65 Q 78 66 Q 79 67 Qq 78–80 Department for Business, Energy & Industrial Strategy Annual Report and Accounts 2020–21 15