The real cost of benefit fraud in Britain

Honest mistakes, personal fraud, organised crime. Where does one end and the next begin?

Deborah Padfield
21 January 2013

Welfare benefits have been hitting the headlines: child benefit capped, three-year 1% cap on working-age benefits, discussions of pensioners’ winter fuel allowances, of council tax support and of disability benefits…  Anxieties are rising, but government has done a good softening-up job, nurturing suspicion of the ‘undeserving poor’. Suspicions that have, constantly, to be challenged.

A couple of weeks back, Iain Duncan Smith filled the headlines with his revelations of £171bn spent on tax credits under Labour, and of £10bn lost to fraud. It’s the scale of the figures that hits home – the dizzying notion of hundreds of billions. Their accuracy and meaning become irrelevant. Rhetoric depends on the audience’s willingness unquestioningly to absorb an impression. The tragedy of democracy is that it tends to work.

Three questions. Does IDS’ presentation create an accurate picture? Is he justified in suggesting that his welfare reforms can improve the situation? And is his focus on social security fraudsters (those companions of ‘shirkers’ and ‘skivers’) the only, or the most constructive, one?

And a fourth question: can an advanced democracy cope with, and demand of its politicians, complicated truths rather than simplistic sound-bites? While we fall for the soundbites, we will be trapped in them by the laws of immediate electoral advantage. At the expense of our long-term future. 

The cost of fraud

So what do tax credit fraud and error cost? Most of the hyperbole, like HMRC’s figures, combines the two, ‘fraud-and-error’, though they are very different both morally and in terms of appropriate responses. The latest figures on fraud-and-error favouring the claimant rather than HMRC give a central estimate of £2,270m for 2010-11. This represents some 8.1% of tax credit entitlements for that year.

HMRC subdivides that figure of 8.1% into 5.7% claimant error, 2.4% claimant fraud. The estimate for losses to HMRC of fraudulent claims comes to £670m. Insofar as IDS’ purpose was to smear tax credit claimants as cheats, his presentation was – to be polite – disingenuous. These losses will not break the economy.

Nevertheless, they matter, for fraud represents theft. Labour’s legacy, we learn, is an unfit-for-purpose tax credit system replete with scope for fraud; Universal Credit (UC) will open up a bright new dawn. That is the message. Can it work?

Can Universal Credit help?

Amongst HMRC’s 2011 Error and Fraud Statistics is a table breaking down the kinds of frauds and errors submitted. That is crucial, since different systemic weaknesses need to be differently addressed.

The most frequent, though not the most costly, error or fraud benefiting the claimant rather than HMRC is the faulty statement of income. The costliest is the ‘undeclared partner’, where a couple claim to be two singles, the sum of their claims adding up to more than a joint claim. That is closely followed by false statements about numbers of children, then by misstatements concerning hours of work. Lagging some way behind comes faulty information on childcare costs (partly supported by working tax credits). Despite media hype about healthy people posing as disabled, false claims to disability elements come far below that, at the bottom of the league.

The motive to falsify numbers of hours worked will dwindle under UC. Claimants will no longer need to work 16 or 30 hours per week to be eligible, as they do under tax credits. 

Integrating wages into the system through monthly inputs of ‘real-time information’ from employers should ease the problem of inaccurate income figures – provided the computer system works and employers, even technologically challenged ones – deliver the goods. However, no such system can touch the problem of the ‘informal’ economy, where cash changes hands without reference to PAYE, national insurance or pay slips. That area of fraud is neither created nor soluble by the benefits system.

Tackling false childcare claims would seem to be the same task under both tax credits and UC, depending on proper documentation. Already the flexibility of childcare has been limited by requiring that it be registered by OFSTED or an equivalent authorising body. Doubtless the paperwork will further expand under UC.

Nor is Universal Credit a panacea for the undeclared partner problem, the most significant area of social security fraud. As the DWP says, “Most commonly, fraudulent customer statements relate to the customer’s living arrangements where the customer has a partner, but is claiming and receiving benefit as a single person, or falsely stating the level of their earnings, whether those are legitimate earnings or from the grey economy” [DWP 2011/12 Accounts: report by the Comptroller and Auditor General]. IDS had the opportunity of eliminating it: arguments were made for calculating UC entitlements on an individual rather than household basis. He decided against, though the increased costs of such a system would have been partly offset by reducing what’s spent on policing, adjudication and successful fraud. 

Checks and automation

Some of these problems are inherent to any tax and benefit system. To the extent that any system depends on self-reporting, it will be open to both fraud and error. Multiply the checks and the automation, and the evasions will become more expert and the errors more mindless.

The mindlessness of automated errors is likely to be a real problem for innocent claimants. Since living with the changes and chances of poverty is always complicated, they will have no less trouble with the intensity of the checks to be instituted before a claim to UC can be activated.

But what about those expert fraudsters? The political rhetoric focuses on individual frauds and skivers who, greedy and/or lazy, fail ‘to do the right thing’. The world of organised crime lies below that surface, altogether more intractable and less easily spun.

Big-time fraud

Social security fraud is a thriving industry. To quote an undated but post-2007 HMRC document, “there is a small minority who are determined not to pay tax or who set out to defraud the tax and credit system. At the extreme end organised criminal gangs make sophisticated attacks on the system itself by making false claims to repayments or tax credits on a massive scale.”

Thinking of this and looking at the HMRC Statistics, I am intrigued by the breakdown of fraud-and-error into the numbers of false claims at each level of monetary value.

Not all fraud-and-error benefits the claimant. Where the gain is less than £100, more people make mistakes favouring HMRC than favouring themselves. Even when we come to errors worth up to £499, more than half the total number benefits the Revenue rather than the claimant. This seems to be the realm of the clueless, the confused and the care-for-nothing. By far the most errors or frauds benefiting the claimant are found where the value of the misstatement is £1,000 or more.

If you want to defraud the system, it’s worth doing it big-time. Where the value of the fraud or error is under £1,000, the average gain for each claimant is £365. Where the gain is £1,000 or more, individual claimants are bringing in an average of £3,078. The number of frauds-and-errors rises sharply for claims worth £7,000 and over.

Shifting the focus

Inferences drawn from such minimal data are not worth much. But they encourage questions about how far discussion of fraud should focus on the benefit and tax credit system and its individual claimants, and how far it should shift to organised crime.

This is not an area that LibCon ministers seem eager to discuss. That may be partly because it would distract from the politically useful – because cost-cutting – rhetoric of shirkers and scroungers. Partly because there’s nothing sexy about financial crime, while to raise such questions might come uncomfortably close to issues of tax evasion and avoidance which, when practiced by companies, financial institutions and rich individuals, cost the country immeasurably more than the welfare system will ever do. The overall tax gap for 2009/2010 – the gap between what should have been and what was collected – was some £35bn, or 7.9% of total tax liability [HMRC Compliance & Enforcement Programme report 2010-2012].

This is proportionally far greater than the 2.4% of the tax credit take lost to the Revenue by fraud. Yet we hear much less about it.

Assumptions of guilt

I partly dread ministers publicly doing more to link organised crime and tax credit claims, for that could swiftly involve the race card. There is a statistical link between houses in multiple occupancy (HMOs), women and children from eastern countries of the European Economic Area and child tax credit fraud. Some of the women and children involved have been trafficked and coerced into fraud; trafficking is a vibrant area of crime in much of the UK, including Peterborough, where I work as a welfare rights adviser at a Citizens’ Advice Bureau.

I know of HMRC’s fraud investigations from my work:  Eastern European mothers in HMOs are liable to find their claims vanishing into an administrative black hole from which it is extraordinarily difficult to extract them. As so often with fraud, the innocent face suspicions that are resistant to any counter-evidence. How do you prove that you are who and what you say you are, when all the evidence you can produce is regarded as suspect? By definition these are among the poorest among us; they would not otherwise be living with their children in single rooms in HMOs.

Some of my clients may not be innocent. But while the evidence before me suggests that they are, that will remain my assumption: guilt by association (Eastern European; single parent; poor) is an ugly stain on any society and judicial system, the more so when it feeds on racially based distrust.

Demanding truth

It is dishonest and damaging to merge figures for fraud and error as if they were synonymous: wilfully stirring up distrust may have short-term political advantages, but the long-term damage is incalculable.

Likewise, it is dishonest and damaging to merge the sources of fraud (let alone fraud-and-error) as if individual claimants carried responsibility for it all. Professional fraud is different from individual dishonesty. Neither is acceptable, but they raise very different questions and demand different kinds of response.

Moral courage is desperately needed in politics. Truths may not fit into soundbites, but we have to demand that politicians explore them with us. Passive acceptance of half-truths and distortions, however immediately comforting, is a path from democracy to oligarchy, the rule of the few for the few. That’s the road we’re on if we don’t change direction, fast. 

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