£10bn lost to fraud in tax credits system ‘not fit for purpose’ says IDS

IAIN Duncan Smith yesterday claimed that £10 billion has been lost to fraud in the tax credit system set up by former prime minister Gordon Brown.

=Mr Duncan Smith’s assault on one of the proudest parts of Labour’s legacy came on the eve of the introduction of the new Universal Credit, which will see many benefits and all tax credits replaced by a single payment.

Mr Duncan Smith said tax credits were “not fit for purpose” but had been extended ahead of the 2005 and 2010 general elections in a pitch for votes.

The system was “wide open to abuse” and “haemorrhaging money”, he wrote in a newspaper article published yesterday.

But Labour accused the work and pensions secretary of a “cheap political attack” on tax credits to mask problems with his new Universal Credit.

In a scathing attack on the system developed by the last government, Mr Duncan Smith said: “In the years between 2003 and 2010, Labour spent a staggering £171bn on tax credits, contributing to a 60 per cent rise in the welfare bill. Far too much of that money was wasted, with fraud and error under Labour costing over £10bn.”

He said HM Revenue and Customs checks far fewer tax credit claims than suspected benefit fraudsters, despite about one in 12 tax credit claims being incorrect or fraudulent, compared with fewer than one in 25 benefit claims.

Payments are based on estimates of income for the coming year, and after 2008 HMRC did not attempt to reclaim overpayments of less than £25,000. That is set to be reduced to £5,000, alongside moves to require proof of payments from those claiming for childcare, and proof that children aged between 16 and 19 are in full-time education.

The government hopes to save more than £300 million in the next three years by reducing fraud and error, and wants to recover more than £400m in unpaid debts.

Mr Duncan Smith is overseeing an overhaul of welfare which will see tax credits rolled into a new Universal Credit, which is meant to simplify the system and give claimants more incentive to find work.

“Even for those in genuine need of support, tax credits were not fit for purpose,” he said. “The system was haemorrhaging money while at the same time trapping people in a system where those trying hard to increase the amount of hours they worked weren’t necessarily better off.”

Mr Duncan Smith said tax credit payments had risen by 
58 per cent in 2005 and by more than 20 per cent in the two years before the 2010 election.

“Labour used spending on tax credits as an attempt to gain short-term popularity. They knew what they were doing – it was a calculated attempt to win votes,” he said.

The basis of his own reform comes from the Centre for Social Justice, a think-tank Mr Duncan Smith set up while in opposition after a visit to Easterhouse in Glasgow which changed his perspective on the welfare system.

But his new Universal Credit has come under fire even before it is fully introduced, amid concerns that it is a cost-cutting exercise to help reduce the deficit.

Labour’s Catherine McKinnell, the shadow Treasury minister, said: “This cheap political attack on the whole tax credits system will not succeed in acting as cover for the government’s cuts to tax credits which will hit millions of families next year.

“Iain Duncan Smith should start focusing on sorting out his new Universal Credit, which even his own Cabinet ministers are warning is ‘a disaster in the making’.”