VAT missing trader fraud is a large-scale criminal attack on the EU VAT system, which costs the UK exchequer approximately £1 billion a year. Although the Department has been trying to tackle this fraud for six years, they still have not stemmed the flow of tax losses. Recently they obtained authority to introduce the special measure of "reverse charge" for mobile phones and computer chips but this can only be a provisional solution. The problem can only be tackled at EU level and ultimately the European Union will have to agree a new legislative framework for administering VAT.

In 2004-05 HM Revenue and Customs paid £15.8 billion of Tax Credits. The Department recalculates each award annually and has identified that for 2003-04 it overpaid some £2.2 billion to 1.9 million families. It believes that 2004-05 will see a similar level of overpayment. This is partly due to the nature of the scheme where awards are provisionally based on previous income whilst the final award is based on actual income. However the level of overpayment has been higher than was initial estimated and repayments have caused distress to some families. This report looks at measures being taken to reduce overpayments; claimant error and fraud; and the settlement with EDS over problems with the computer system. The Committee attaches great importance to this subject and wish to return to it in the future.

In this report the Committee of Public Accounts examines HM Revenue and Customs' (the Department) administration of tax credits and also examines the Department on its collection of income tax through PAYE and Self Assessment. The Department overpaid £7.3 billion in the first four years of the tax credits scheme and underpaid more than £2.0 billion. By the end of March 2008, it had collected £2.7 billion (37 per cent) of this debt and written off £1 billion (14 per cent). £3.6 billion of the total of overpayments are outstanding and the Department is unlikely to recover £1.8 billion. Overpayments continue to affect many people, including some of the most vulnerable in society. Claimants are not given the support they need in making claims and too much is assumed on the part of claimants in their understanding the complex tax credits system. Tax credits suffer from high rates of error and fraud: in 2006-07 claimant error and fraud is estimated to have led to incorrect payments of between £1.31 billion and £1.54 billion. In 2007-08, the Department collected £225 billion in income tax and national insurance contributions through the Pay As You Earn (PAYE) system. The planned transfer of the administration of PAYE to its National Insurance Recording System has been delayed, adding to the backlog of tax cases - currently 16 million - that must be checked manually. In 2007-08, the Department collected £30.2 billion (net) through the Self Assessment system. A total of 46 per cent of Self Assessment returns were filed online, significantly exceeding the 35 per cent target, though some 34 per cent of filed returns may be inaccurate, putting between £2.9 billion to £3.7 billion tax at risk.

Although most tax payments are made on time, around one-third are not. The level of debt in HM Revenue and Customs fluctuates on a daily basis. The difference is mainly because these systems exclude some debt that is due but is paid almost immediately and there are timing differences in when debt is downloaded from the main tax systems. This report analyses trends in debt levels using figures from the debt management systems. It examines: The Department's performance in managing debt; how the Department manages and prioritises debts; the Department's methods for collecting debt and how it encourages taxpayers to pay on time. It finds that though the Department has improved its management of tax debt, over the last year debt as a proportion of net receipts and the age of debt has increased on some taxes.

Dated May 2007. On cover: Integrating and growing stronger. Spring 2007

HM Customs and Excise (now part of HM Revenue and Customs) collected £162 billion of gross receipts in 2003-04 in value added tax (VAT) and excise and customs duties from over 1.8 million business traders. The Committee's report examines the NAO standard report on the work of the Department during 2003-04 (contained within the 95th report of the Commissioners of Her Majestys Customs and Excise for 2003-04, published as HCP 119, session 2004-05, ISBN 0102931593 in December 2004). It makes a number of recommendations focusing on work related to the two key revenue streams of VAT (which generates £63.6 billion net) and hydrocarbon oils, mainly on petron and diesel fuel (which provides £12.7 billion and £9.8 billion respectively).

The flawed implementation of the National Insurance and PAYE Service (NPS) in 2009-10 has resulted in lasting and costly losses for the Department and caused unacceptable uncertainty and inconvenience to the taxpayer. Software problems delayed the processing of 2008-09 PAYE returns by a year - and data quality issues have further disrupted the issue of tax codes for 2010-11. The Department has failed to tackle a backlog of 18 million PAYE cases from 2007-08 and earlier, affecting an estimated 15 million taxpayers. The exact amounts of tax involved are not known, but estimates suggest £1.4 billion of tax was underpaid and there is £3.0 billion of overpaid tax to be refunded. The Department has launched a programme to stabilise the NPS by 2012. It is vital that it demonstrates the ability of the system to process PAYE promptly, accurately and efficiently and restores customer confidence. In future, it should process everyone's PAYE within twelve months of the end of the tax year. It must also make sure it maximises the net revenue it collects before the deadline expires for 2007-08 underpayments of tax, and that it achieves its aim of processing 2008-09 and 2009-10 PAYE by the end of January 2011. In other areas, the Department has increased its focus on preventing fraud and error in the tax credits system and is aiming to prevent £1.4 billion of error and fraud in awards for 2010-11. It is measuring its progress against a series of targets, which it is currently meeting.