Benefit fraud v tax evasion: Which costs more?

Last year, 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 the 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.

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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 has been placed under the spotlight once more following the Panama Papers revelations, which appear to suggest wealthy people are using the complexity of the global tax system to avoid paying their fair share.

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.

The Guardian this week cited estimates from officials that suggest benefit fraud costs the country around £1.3bn a year.

Tax evasion and avoidance

According to figures published by the government in October, the tax "gap" for 2013/2014 stood at £34bn, or 6.4 per cent. This is the shortfall between what is estimated by HMRC to be due in tax and what is actually collected.

This eye-watering figure includes as much as £14bn in uncollected income tax, national insurance and capital gains tax and £13.1bn in uncollected VAT.

It should be noted, however, that these estimates are based on a lot of assumptions about what was due in the first place and that deliberate and illegal evasion is only a small part of the problem. This was deemed to account for £4.4bn of the lost duties, while legal but dubious avoidance accounted for £2.7bn. The rest is spread across various issues such as duties not paid on smuggled goods, non-payment because of bankruptcy or hardship, or simple errors.

It's also only fair to note that the percentage uncollected each year is one of the lowest in the world, although some argue the HMRC figures underestimate the scale of the problem and the gap is more likely to be in the region of £120bn.

Priorities

In any case, at £1.3bn to £1.6bn, it appears outright benefit fraud accounts for less of a burden on the taxpayer than the £4.4bn officially assumed to be lost by evaders. So why, the government was asked this week, does it devote more resources to the former?

The Guardian says as many as 3,600 people work in the DWP investigating abuses of the benefit system, while 700 work in the two units at HMRC that deal with the richest taxpayers.

It might be argued that more work is required to clamp down on benefit fraud, which involves smaller cash sums and a much broader group of people. The government also rejected the figures. HMRC said it had a total of 26,000 investigators and that it would be “absurd” to regard tax collectors focused on the richest Britons as working in isolation.