Which costs more: benefit fraud or tax avoidance?

Overpayments are often the result of errors on the part of the Government rather than criminal intent

Last month the National Audit Office published a ‘stocktake’ of incorrect payments by Department for Work & Pensions and HM Revenue & Customs to those claiming state benefits, including working tax credits.

It did not make for comfortable reading, especially for Iain Duncan Smith’s DWP, which is likely to miss targets for reducing payment errors. In total the NAO said £4.6bn had been overpaid to claimants in the 2013/2014 tax year, either as a result of mistakes and errors or outright fraud. On the other hand the departments had underpaid claimants by a further £1.6bn, potentially leaving many vulnerable people struggling for money.

At a time when significant savings are being made by the Government that are being felt across the economy, the figures will put pressure on departments over their performance and reignite debates about the effects of fraud on the system.

But many reject the focus on benefit claims and argue the economy is far more affected by the scale of tax avoidance and evasion. This issue was placed under the spotlight earlier this year after leaked documents suggested HSBC’s Swiss banking arm helped wealthy customers dodge taxes.

The documents indicated that hundreds of thousands of people across the world were given help to conceal millions of dollars of assets. HMRC has reportedly been sitting on a list of 1,000 UK tax evaders for five years, yet only one person had been prosecuted.

According to figures quoted in a parliamentary report, there are major misconceptions among the general public about the scale of benefits fraud in particular. It says a 2013 survey found Britons believe almost a quarter, 24 per cent, of all benefits were claimed fraudulently, 34 times greater than the official 0.7 per cent estimate.

So how do the official statistics for benefit fraud and tax evasion compare?

Benefit fraud

The NAO did not break down how much of the £4.6bn was fraud, saying that both DWP and HMRC have differing definitions that make this difficult to assess. It said £3.3bn of the total was overpaid by DWP, representing around 1.9 per cent of its £164bn spend, while £1.3bn was overpaid by HMRC, around 4.4 per cent of its £29bn tax credit bill for the year.

We can extrapolate from previous figures quoted by the NAO for the 2012/2013 financial year, which found around £1.2bn of deliberate fraud on the part of benefit claimants, representing around 34 per cent of the overpayment total that year. If these proportions remained unchanged, benefit fraud would have risen to around £1.6bn. The remaining £3bn would be accounted for by mistakes made by claimants when applying, or errors by department officials.
Tax evasion and avoidance

According to official figures quoted by the BBC last year, in the 2012/2013 tax year the shortfall of tax that should have been collected by HMRC versus what it actually brought in had risen to £34bn. This eye-watering figure includes £14bn in uncollected income tax, national insurance and capital gains tax, and £12.4bn in uncollected VAT.

Personal evasion and avoidance was a significant part of the problem. The Financial Times says tax evasion, which is defined as the illegal act of deliberately hiding information about your finances to reduce your tax bill, amounted to £4.1bn. A smaller £3.1bn was lost to tax avoidance, which is the legal use of tax loopholes, while £5.4bn was lost as a result of criminal activity such as smuggling.