British Tax Authority Criticized On Data HandlingBritish Tax Authority Criticized On Data Handling

The U.K.'s tax collectors need to overhaul the way they deal with citizen data -- or continue to see billions of the cash-strapped country's welfare budget lost to fraud or error.

That's the tough conclusion of a new House of Commons' Public Accounts Committee's report on the HMRC's (the British equivalent to the IRS) progress on plugging the leaks in a key British social security system, Tax Credits.

The British state already knew this system, set up to aid 6 million low-paid families, was inefficient: In 2010-11, it estimated as many as one in five awards contained errors or were fraudulent in some fashion leading to overpayments. In 2010, HMRC was targeted with making sure by 2015 it would stop losing £8 billion ($12 billion) a year of Tax Credit money out of an annual disbursement of £30 billion ($45 billion).

But the cross-party Public Accounts Committee said this could slip by as much as £5 billion ($7.5 billion) -- quite a miss, you might say. Commentators such as the Low Incomes Tax Reform Group claim that about two-thirds of the losses are caused by error (mostly on the side of the bureaucrats) and one-third by fraud.

[ Corporate tax collections are also in the hot seat. Read Debate Grows Over Big Tech Taxes. ]

The Committee was told some £2.3 billion ($3.5 billion) of overpayments was directly lost to fraud and error in 2010-11, a massive £850 million ($1.3 billion) more than HMRC managers had budgeted.

Margaret Hodge, the Committee's chair, and the same British pol who last week told a Google staffer that his company "does do evil", warned, "HMRC's performance in cutting the level of fraud and error in the tax credits system has been hugely disappointing and extremely poor. ... In these strained times the government cannot afford these failures."

To fix the problem, the Members of Parliament (MPs) say HMRC should be given a more realistic fraud and error reduction target, but it must also get a lot smarter at handling applicant information.

Using data to identify patterns and trends in claimant behavior, as well as checking claimant information against other data sources to identify discrepancies, is crucial to tackling error and fraud, its report says.

And while it praises HMRC for making "some progress" in its analysis of data, it chides the British taxman for not scrupulously checking applicant details in Tax Credit claims against other claims, such as child benefit, it holds.

The agency should also explore how it can use a "wider range of data sources" to build up more accurate profiles of what claimants are really up to, it advises.

Responding to the report, HMRC countered that it has started making links with private-sector data sources to make sure claimants' information is accurate.

It also pointed to the new real time-tax system the U.K. is rolling out, which should improve from 2014 the quality of data it needs to make more accurate payments.