Fraud’n’error: tax avoidance and evasion. Part 2 of 'Reports from the Poverty Line'

Deborah Padfield, a citizen’s advice bureau adviser, returns to report from the poverty line – a part of Britain that is outside David Cameron’s ‘Big Society’. In the second of a series of five posts, she describes how politicians and the media would much rather focus on benefit fraud than the far bigger problem of tax avoidance and evasion .
Deborah Padfield
20 July 2011

Deborah Padfield, a citizen’s advice bureau adviser, returns to report from the poverty line – a part of Britain that is outside David Cameron’s ‘Big Society’. In the second of a series of five posts, she describes how politicians and the media would much rather focus on benefit fraud than the far bigger problem of tax avoidance and evasion. Her first post, on the benefits regime, can be read here.

Benefit fraud is a constant media refrain while tax avoidance and evasion, for all the efforts that UK Uncut make to highlight the latter, largely escape media attention.  The government encourages the media emphasis by the way it releases its headline figures for benefit fraud and errors - Fraud’n’Error, almost always a compound noun which elements in the media are only too happy to continue to conflate.

Yet even though the media play up benefit fraud, official errors in the calculation of benefits significantly outnumber customer errors or fraud  in all cases of over-payments. This emphasis encourages a punitive response. The Welfare Reform Bill – to the consternation of Iain Duncan-Smith, its chief architect – proposes administrative penalties for customer errors on the grounds that this will enforce a state beneficiary’s sense of responsibility for public funds.

A beneficiary who is overpaid as a result of her or his own error must repay the money, generally by deduction out of subsequent benefits. Repayment rates for state benefits are at the discretion of job centre officials, and for housing and council tax benefits, are set by the local authority. Often they are set at levels causing genuine hardship, which can be negotiated down by beneficiaries or advisers with the savvy to do so. Where it is an official error, it is not repayable but in practice the onus is usually on the claimant to prove that it’s not her or his fault. Housing benefit claims are administered separately from state benefits, so the beneficiary is responsible for sorting out stoppages of HB even when they originate from official error at a job centre.

Headline figures on Fraud’nError – almost always a compound noun when it comes to welfare benefits – bear an interesting relationship to their breakdown. Error is significantly more common than fraud, save for Job Seekers Allowance (JSA). Intriguingly, last year the proportion of both JSA fraud and official underpayments error shot up. I have no idea whether that signifies anything, but it does mean that the headline figure of £270 million for JSA Fraud’nError contains £100 million of error, of which £80 million is down to official error. Meanwhile, underpayments by official error were twice as large as those for customer error: £20 million against £10 million.

Statistics for Employment &Support Allowance, the successor to Incapacity Benefits, are not yet being released.  I’ve a particular interest in benefits for people with disabilities, so I looked at the figures for Incapacity Benefit and Disability Living Allowance (which is available to disabled people whether or not they are gainfully employed). Since their mental health problems are generally invisible, people I see often feel a heavy sense of stigma as suspected  fraudsters or ‘benefit scroungers’. Of all the state benefits for working-age people, Incapacity Benefits has had easily the lowest proportion of fraud (0.5%) and the highest proportion of under-payment by official error.  These for some of the most vulnerable people in our society. DLA shared the same low proportion of fraudulent claims.  I must add that Income Support figures, which include incapacitated people not eligible for Incapacity Benefit, have higher rates of fraud.

Nevertheless, the headline Fraud’n’Error figures conceal the fact that error is larger than fraud for Income Support, Incapacity Benefit, Housing Benefit and DLA, this being reversed only for Job Seekers Allowance. Customer error is larger than official error only for Income Support and housing benefit.   Overall, of the over-payments of these five benefits in 2009-10, fraud accounted for £720 million, customer error  £820 million (of which a staggering £560 million was for housing benefit) and official error £530 million.

Across all benefits, the DWP tells us that ‘For 2009/10, it is estimated that 2.2 per cent, or £3.3bn, of total benefit expenditure was overpaid due to fraud and error. This is the same level as the estimate for 2008/09’.

The obvious comparison is with figures for tax avoidance and evasion. Citing HMRC’s March 2010 ‘Measuring Tax Gaps 2009’, Richard Murphy reported in the Guardian on10 Sept 2010 that ‘HMRC claims the gap [between what it should and what it does collect] is £40 billion a year with well over £30 billion of that being [illegal] tax evasion and a much smaller part – less than £5 billion – being tax avoidance… The trouble is HMRC has these estimates wrong. I estimate that tax evasion – the issue I'm concerned about here – costs about £70 billion a year. My estimate is based on the rate of VAT evasion that HMRC admits to – which I calculate to be an average of about 13.7% over the past seven years.’

I can’t comment on Richard Murphy’s sums. My point is partly the obvious one of the sheer difference in scale between tax evasion and benefit fraud, and the imbalance between that and the energy put into government (Tory, Labour and Lib-Con) and media policies that embed suspicion of benefit fraudsters in the popular imagination. It’s been a successful campaign. Fear of being thought a benefit scrounger is a powerful deterrent to claiming benefits, particularly amongst older and disabled people (I rely here on my own personal experience). Others, as a price of receiving benefits, have to live with the abiding discomfort – even distress – of that social stigma; they often also have to live with self-judgment, condemning themselves as benefit scroungers or dependents. Those upon whom life has bestowed little self-confidence may judge themselves at least as harshly as does the society around them.

I am also concerned about the misleading effect of the composite Fraud’n’Error. They are not the same thing. Carelessness by the claimant may often be culpable where public money is involved, but I question whether it is axiomatically so, as the proposed penalty for error in the Welfare Reform Bill suggests. Given the complexity of the benefits system – only partially open to improvement by the proposed universal credit scheme, such is the unavoidable variety of individual circumstances – it is virtually impossible for claimants to avoid errors. Even specialist advisers get tangled. Add to that the complexities of the lives of many beneficiaries and errors multiply.

One of my clients made an ‘error’ in not reporting a change in her circumstances to the HMRC.  She was sectioned in psychiatric hospital and fed anti-psychotics, her children were being taken into care. She failed to ring HMRC from hospital to tell them that she should no longer be receiving child tax credit, and had to repay the money out of her Income Support (currently £67.50pw for over 25 year-olds, £53.45 for under-25s). The anti-psychotics add drama to her tale, but the same dreadful story repeats itself with minor variations every day.

Fraud and error are not the same and should not be confounded. They are significantly more different than tax avoidance and evasion, both of which are deliberate attempts not to contribute to the public purse – and both of which cost us all a great deal more.

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