National Insurance Contributions

Transcription

1 3 - -_ B bx!i( I([ I,KXs E Es z q/,,,,,,,,,,,,,,, s e E & q,,,,,,,,, jl& J NATIONAL AUDI~Z?!&ICE Report by the Comptroller and Auditor General National Insurance Contributions Ordered by the House of Commons to be printed 18 October 1991 London: HMSO E6.15 net 665

2 This report has been prepared under Section 6 of the National Audit Act, 1983 for presentation to the House of Commons in accordance with Section 9 of the Act. John Bourn Comptroller and Auditor General National Audit Office 16 October 1991 The Comptroller and Auditor General is the head of the National Audit Office employing some 900 staff. He, and the NAO, are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies: and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies use their resources.

3 Contents Pages Summary and conclusions 1 Part 1: Introduction 7 Part 2: Control over the collection and recording of national insurance contributions by the Department s Central Office at Newcastle-upon-Tyne 9 Part 3: Control over the collection and recording of national insurance contributions by staff in the Department s local offices 16 Part 4: Management of contributions work 23 Appendices I. Main computer checks: statistics Department of Social Security local offices visited by the National Audit Office 27

4 Summary and conclusions 1. National insurance contributions for are estimated to total E35,617 million, of which an estimated z&4,588 million will be paid to the National Health Service and E31,029 million to the National Insurance Fund. Contributions are paid by employers, employees, the self-employed and voluntary contributors. In return, contributors, other than employers, may be entitled to social security benefits paid from the National Insurance Fund. Contributors spouses may also receive benefits. 2. The Department of Social Security collect some contributions direct from contributors, but most are collected on their behalf by the Inland Revenue using the income tax collection system. The Inland Revenue transfer the majority of such receipts to the Department at daily intervals. 3. The Department check the accuracy and completeness of information provided by employers, the self-employed and voluntary contributors about the contributions paid. They then credit relevant contributions to a permanent record maintained for each individual contributor, so that entitlement to benefits payable from the National Insurance Fund can be safeguarded. They also undertake visits, called surveys, to a selection of businesses to check compliance with the national insurance legislation. 4. In May 1989 the Secretary of State announced that, from April 1990, responsibility for the collection and recording of contributions would be placed on a separate unit of the Department of Social Security, known as the Contributions Unit. The Unit was established to improve the management of contributions work within the Department by introducing a single, dedicated management structure. The Unit became an executive agency in April National Audit Office examination 5. Section 133(2) of the Social Security Act 1975 requires me to examine, certify and report on the accounts of the National Insurance Fund. My examination of both the and accounts led me to qualify my audit opinion because I considered that significant doubts existed about the effectiveness of the Department s controls to ensure that contributions received were calculated correctly (HC 246 of and HC 617 of ). 6. This Report sets out the results of a National Audit Office examination carried out in 1990 of the Department s procedures, firstly for seeking to ensure that the correct amounts of contributions are received from all those required to contribute, and secondly, for crediting the amounts received to each individual s contribution record. The examination also covered the arrangements being established for the overall management of national insurance contributions work. The 1

5 main findings are set out below, together with suggestions for further action by the Department. Controls operated 7. The Department, in the course of the year, record some 50 million by the transactions against the records held for individual contributors on the Newcastle-upon-Tyne basis of information provided by employers, the self-employed and Central Office voluntary contributors. They identify many apparent errors or queries in the information provided-a total of some 8 million in Computer programs have been devised to deal with many errors and the Department consider that some are too trivial to pursue. The remainder, some 2 million in , are referred for clerical investigation. In general, these investigations are not urgent because the Department can credit reported contributions to individuals records on a provisional basis. If the individual claims benefit in the meantime, the Department can give priority to completing the investigations. Awards of benefit can be delayed, however, if the investigations are not completed promptly. And if insufficient information has been provided for the Department to identify the individual, the contributor may lose entitlement to benefit if the investigations have not been completed satisfactorily. 8. The National Audit Office found that: (a) Before the establishment of the Contributions Agency, the Department did not monitor centrally whether investigations of the apparent errors or queries identified by their checks were undertaken promptly and completely by their local offices or, where necessary, by the Inland Revenue. The Contributions Agency have introduced central monitoring of all apparent errors and queries referred to the Inland Revenue. Cases referred to local offices remain under the control of local management (paragraphs X]. (b) A total of 1.13 million cases were referred for clerical investigation in because the contributor could not be identified from the information provided to the Department. In 314,000 of these cases, involving contributions of El10 million, the investigations had not been completed at least six months after the query was raised (paragraphs ). (c) The Department do not investigate all the apparent errors and queries they identify. Instead, they concentrate their resources on those cases above certain financial limits as these cases are more likely to have a~ significant effect on contributors entitlement to benefit or on contribution receipts. It is not always possible, however, to predict the effect of not investigating an error. But the Department have agreed that they need to see whether a more systematic approach is possible for setting the financial limits (paragraphs ). (d) The Department have investigated some of the underlying causes of the apparent errors and queries identified by their computer checks, but they have not reviewed the causes systematically. It is not clear, therefore, that proposed measures to

6 reduce the incidence of errors are the most appropriate (paragraphs ). (e) The Department have been unable to monitor, or control effectively, the costs incurred in investigating apparent errors or queries, or to set meaningful targets for cost improvements. They plan to have an integrated financial and management information system in place by January 1992, but some information on costs may not be available until 1993 (paragraphs ). (f) Many of the Department s contribution records do not contain up-to-date addresses. The Department were therefore unable to notify about 770,000 people in , of whom some 120,000 were classed as self-employed, that their contribution records were insufficient for the latest year examined by the Department to count for the calculation of entitlement to retirement pension. The National Audit Office could not establish the extent to which this failure resulted in lost contributions or reduced entitlement to benefit (paragraphs ). (g) Under current legislation, individuals are responsible for claiming their national insurance retirement pension. Nevertheless, the Department aim to write to all eligible people inviting them to claim. The National Audit Office found, however, that the Department were unable to write to all eligible people because their records of some contributors addresses were out of date. A small number of these contributors have not claimed the pension to which they may be entitled (paragraphs ). Action required 9. In the National Audit Office s view, the Department should press ahead with action to: ensure that the work undertaken by local offices in investigating apparent errors and queries is subject to an effective system of monitoring; ensure that investigations are completed promptly in those cases where initially the contributor cannot be identified; analyse the causes of the apparent errors or queries identified their checks by carrying out a systematic review; evaluate, and in turn implement, revised procedures for maintaining up to date records of contributors addresses. in Controls operated by local offices 10. National insurance inspectors visit businesses to check the accuracy of contributions, to protect individual contributors entitlement to benefits and to encourage general compliance with national insurance legislation. Since 1986, visits to employers have also included checks on income tax. National insurance inspectors are required to concentrate their surveys on those businesses representing the greatest risk. And to facilitate this, staff in each local office are required to maintain a record of local businesses. 11. The time spent on surveys by national insurance inspectors, and the number of surveys undertaken, fell below the planned level in each of the years from to To reverse this trend, the 3

7 Department have increased the number of inspectors and the proportion of inspectors time spent on surveys. The Department also introduced targets for and for the number of surveys to be carried out. 12. The National Audit Office found that: [a) The annual number of surveys carried out by the Department fell by 26 per cent in the four years to But as a result of the measures taken by the Department, the number increased by five per cent in X (paragraphs and 3.29). (b) Formal plans for concentrating surveys on those businesses representing the greatest risk, based on detailed analysis, had not been drawn up at the 16 offices visited by the National Audit Office. From April 1991, the Agency have required managers to introduce a system for targeting employers, and to monitor the effectiveness of the targeting methods used (paragraphs ). (c) Before April 1991, the Department did not record the full cost of surveys or monitor the extent to which underpayments identified had been collected. They were, unable, therefore, to appraise fully the cost-effectiveness of survey work (paragraphs and 3.29). (d) The Department set a target for the identification by survey visits of an additional El.2 million in underpayments in , but in the event an extra E7 million was identified. The target for is to increase the outturn by a further E4.8 million (paragraphs 3.28 and 3.29). [e) In many of the 16 offices visited no specific time had been set aside for maintaining a record of local businesses. A special exercise by staff in one local office revealed that 32 per cent of the self-employed traders and other businesses in one town had been previously unknown to them. If the records at other offices are also incomplete and out of date, then it is possible that the National Insurance Fund may be losing substantial amounts of contributions (paragraphs ). (f) The Department are transferring to Newcastle all investigation work previously undertaken in local offices which does not involve external visits or services to callers. The Department estimated in June 1990 that the transfer will lead to approximately 40 per cent fewer staff being needed to process the work, the achievement of other savings, and improvements in the quality of the work done (paragraphs ). Action required 13. In the National Audit Office s view, the Department should press ahead with action to: 4. monitor closely how well survey visits succeed in meeting the new targets, and consider whether there are ways of monitoring how well they are achieving the other objectives of survey work;

8 review periodically the results of surveys across the country, so as to improve the guidance provided to local offices about the types of businesses on which emphasis should be placed; use the information now being collected on the cost of surveys and the underpayments actually collected to establish the costeffectiveness of this work, and consider whether lessons can be learned from the comparable work undertaken by the Inland Revenue; require local managers to consider the need for a special review to identify all businesses in their area: monitor the centralisation of work from local offices to ensure that the envisaged improvements in efficiency and quality are achieved. Management of 14. The Department recognised in the late 1980s that it was no longer contributions work appropriate for responsibility for collecting and recording contributions to be fragmented within the Department. They also recognised that they were failing to ensure that contributors paid all that was due. The National Audit Office examined the changes made by the Department to address these problems, and found that: [a) The establishment of the Contributions Agency is focusing much needed management attention on the collection and recording of contributions, and this should help to prevent the recurrence of past problems caused by the diversion of national insurance staff to other duties (paragraphs ). (b) The wider range of performance targets set for and significantly improved the management of national insurance work. However, some new targets were set in the absence of information on past performance because the Department did not wish to wait until full performance information was available. The Agency are now establishing more reliable information systems and intend to refine the targets when better information becomes available. Some targets for have already been revised in the light of performance in the previous year to provide a more effective spur to better performance (paragraphs ). (c) Two departmental reports in the late 1980s pointed to the possibility of significant undercollection of contributions from those employers and self-employed persons operating outside the known economy. But the Department do not have reliable estimates of the amount of contributions which might be lost (paragraph 4.18). (d) The Department have recently commissioned research to determine the scale of undercollection of contributions in different parts of the country. They intend to review their targets for identifying undercollections of contributions in the light of both experience and the research (paragraph 4.19). 5

9 NATIONAL INSURANCE CONTRlBUTIONS Action required IS. In the National Audit Office s view, the Department should press ahead with establishing:. reliable information systems so that they can monitor performance accurately and refine their performance targets where necessary;. challenging targets for the level of undercollection to be identified;. a clear strategy for tackling non-compliance in a cost-effective way. General conclusions 16. The National Audit Office examination revealed that, prior to the establishment of the Contributions Unit and Agency, work on the collection and recording of national insurance contributions lacked clear purpose and direction. The Department credited promptly to individuals records the majority of contributions they received. But they lacked information to ensure that the work they carried out in investigating the substantial number of apparent errors or queries was managed effectively. And visits to employers and the self-employed for the purpose of checking compliance with national insurance legislation lacked resources and direction. There has been, therefore, a risk that significant undercollection of contributions has gone undetected and that some contributors entitlement to benefits has not been safeguarded. 17. The Department have recognised these problems and have established the Contributions Agency to provide a clear management focus for addressing them. Further positive action is required and the success of this will depend on concentrated attention by management. 6

10 Part 1: Introduction 1.1 Under the provisions of the National Insurance Act 1946, the National Insurance Fund was set up to r&ceive contributions payable by employers, persons insured under the Act and the Exchequer to meet the costs of benefits payable, of certain other payments, and of administering the Act. 1.2 The bases on which contributions have been payable have varied over the years. Under the provisions of the Social Security Acts , the contributions to be collected in are divided into four classes. Class 1 contributions are payable by employees and employers at specified percentages of the employees earnings. These percentages are lower when the employee is contracted out of the State Earnings Related Pension Scheme and for certain married women and widows. The earnings in all cases are subject to a lower limit for the calculation of both employees and employers contributions and to an upper limit for calculation of the employees contributions only. The limits are set at weekly amounts, with monthly and annual equivalents. In the lower and upper weekly limits are f52 and E390 respectively, and employees weekly contributions range from a minimum of El.04 to a maximum of E Total receipts of Class 1 contributions for the year are estimated at f34,189 million. Class 2 contributions are payable by the selfemployed at a flat rate. In this is E5.15 a week. Total recei@s for the year are estimated at GO8 million. Class 3 contributions are paid voluntarily at a flat rate by those not liable to pay contributions of another class, for example, by people no longer in work or seeking work. In the flat rate is f5.05 a week. Total receipts for the year are estimated at f39 million. Class 4 contributions are payable by the selfemployed in addition to the flat rate Class 2 contributions. They are payable at a specified percentage of annual profits between lower and upper limits. In , the lower and upper limits are E5,900 and f20,280 respectively. The maximum Class 4 contributions payable by a self-employed person in will be f Total receipts for the year are estimated at f781 million. 1.3 In return for having paid contributions, employees and Class 2 and Class 3 contributors may be entitled to social security benefits paid from the National Insurance Fund. And in some cases, their spouses may also receive benefits. To safeguard individual contributors entitlement to benefits, the Department compile and maintain a permanent record for each insured person of any employee s Class 1 contributions, or Class 2 or Class 3 contributions paid. Employers Class 1 contributions and Class 4 contributions do not earn entitlement to benefit and are not recorded on individual contributors records. 1.4 The Department of Social Security have implemented the following arrangements for the collection and recording of national insurance contributions. (a) Employers are required to calculate the amounts of Class 1 contributions due from themselves and their employees. The majority pay these contributions, less any recoveries they are entitled to make in respect of statutory sick pay and statutory maternity pay, to the Inland Revenue. These payments are made in conjunction with the Pay As You Earn income tax system. The Inland Revenue transfer the majority of such receipts of contributions to the Department of Social Security at daily intervals with the balance being transferred at intervals of no more than seven days. They also supply the Department annually with individual records provided by employers showing earnings, tax deductions and national insurance contributions where such records are not submitted by employers direct to the Department of Social Security. Certain employers, mainly government departments, are allowed to pay the Class 1 contributions, less recoveries for statutory sick pay and statutory maternity pay, direct to the Department. (b) Self-employed persons pay weekly flatrate Class 2 contributions either by stamps purchased at post offices or direct to the Department. Contributors paying by stamp affix the stamps to a national insurance card, which they surrender to the Department at the / 7 I,

11 end of the year. Self-employed persons Class 4 contributions are collected by the Inland Revenue under arrangements linked with Schedule D income tax. The Inland Revenue pay the amounts collected to the Department but, since Class 4 contributions do not affect entitlement to benefits, they do not supply the Department with details of each individual s contribution. (c) Non-employed persons, or persons with very low earnings, may pay the voluntary Class 3 contributions either by the purchase of stamps from post offices or direct to the Department. Where stamps are purchased, they are affixed to a national insurance card, which is surrendered to the Department. 1.5 The above arrangements for collecting and recording contributions also allow the Department to compute the total contributions due to the Fund. Under the Social Security Acts , the total amount of contributions received by the Department is paid into the Fund after deduction of the appropriate allocation to the National Health Service. On the basis of the estimated total contributions receipts in of f35,617 million, f4,588 million will be allocated to the National Health Service and f31,029 million to the National Insurance Fund. 1.6 The Inland Revenue monitor the receipt of national insurance contributions from employers and pursue those employers who fail to pay the sums they have declared to be due. The Department of Social Security have the prime responsibility for ensuring that the correct amounts of contributions are paid and recorded. They do this by: (a] carrying out a series of computer checks on the accuracy and completeness of information about contributions paid provided by employers, the self-employed and voluntary contributors; and (b) undertaking visits to employers and the self-employed by locally based national insurance inspectors, to check compliance with national insurance legislation: Inland Revenue Pay As You Earn Audit staff carry out similar checks on national insurance matters during the visits they make to employers for the purpose of checking compliance with Pay As You Earn income tax legislation. Establishment of the Contributions Agency 1.7 The Department recognised in the late 1980s that it was no longer appropriate for responsibility for collecting and recording national insurance contributions to be fragmented within the Department. They also recognised that they were failing to ensure that contributors paid all that was due. To address the problems, the Secretary of State announced plans in May 1989 for a new management structure for collecting and recording individuals contributions. A separate unit, operating within the Department and known as the Contributions Unit, was set up on 2 April 1990 and became an executive agency in April National Audit Office examination 1.8 Section 133(Z) of the Social Security Act 1975 requires me to examine and certify the accounts of the National Insurance Fund and to lay copies, together with my report thereon, before Parliament. My examination of both the and accounts led me to qualify my audit opinion because I considered that significant doubts existed about the effectiveness of the Department s controls to ensure that contributions received were calculated correctly (HC 246 of and HC 617 of The National Audit Office have now carried out, under section 6 of the National Audit Act 1983, an examination of: (a) the Department s procedures (i) for seeking to ensure that the correct amounts of national insurance contributions are received from all those required to contribute, and (ii] for crediting the amounts received to each individual s contribution record; and (b) the arrangements being established by the Department for the overall management of national insurance contributions work. The National Audit Office s examination was undertaken during It concentrated on the Department s achievements in and earlier years, and the procedures and systems being established in The examination did not cover the operations of the Inland Revenue in undertaking national insurance collection and compliance work on the Department s behalf The remainder of this Report is in three parts. Part 2 examines the controls over the collection and recording of contributions operated by the Department s Central Office at Newcastle-upon- Tyne and Part 3 examines the controls operated by staff in the Department s local offices. Part 4 considers the arrangements being established by the Department for their overall management of this work. 8

12 Part 2: Control over the collection and recording of national insurance contributions by the Department s Central Office at Newcastle-upon-Tyne 2.1 Staff at the Department s Central Office at Newcastle-upon-Tyne exercise control over the collection and recording of national insurance contributions in two ways. Firstly, they undertake a series of checks to determine the validity and acceptability of the information which they receive and maintain about contributions paid. Secondly, they provide guidance to contributors and the public in general about the legislation governing the payment of contributions and give instructions on how payment should be made. Checks on information received and maintained about contributions paid 2.2 Shortly after the end of each tax year employers are required to submit a return for each person they have employed during the year showing the earnings they have paid, tax deductions and the employee s and the employer s payments of Class 1 national insurance contributions. They must submit at the same time a summary of the individual returns. The returns may be submitted on magnetic tape or disc or on paper. 2.3 The Inland Revenue reconcile the summaries of the returns with their own records of the tax and national insurance contributions actually remitted by employers throughout the year. They also monitor the receipt of the returns and are responsible for taking action against employers who fail to submit returns by the due date. 2.4 The returns are also examined at the Department s Newcastle Central Office. Computer programs check, so far as is practicable, the accuracy and completeness of the information provided. These programs can deal with some simple errors brought to light and can correct information where appropriate. The remaining apparent errors or queries are considered for clerical investigation. But they are not investigated if either the value of the reported contribution or the value of the apparent error falls below one of a number of financial limits. 2.5 The checks made by the programs fall into two categories (Appendix 1). Those in the first category examine employers returns as a whole. The checks are designed to determine whether there are any obvious gaps in the information provided, whether the information on the individual returns can be reconciled with that on the summary, and whether the number of apparent errors or queries on individual returns is unacceptably high. In these checks identified apparent errors or queries in 448,000 of the 1.1 million employers summarised returns received by the Department. The apparent errors or queries in 273,000 of these returns were corrected or cleared by computer programs, 50,000 returns contained apparent errors which were below the pre-set financial limits and were ignored, and the apparent errors or queries in the remaining 125,000 returns were submitted for clerical investigation. 2.6 The second category of checks made by the computer programs examine the details contained in the returns submitted by employers relating to each individual employee. (a) They check that the employee can be properly identified from the information provided. (b) They check that the employee s and employer s contributions are consistent both with each other and with the earnings on which the employee was reported to have paid contributions. However, the national insurance legislation lays down that the amount of contributions due is to be calculated each week or month, whereas employers are required to report only the total earnings they have paid to employees in the year. As a result, the checks cannot always, and were never intended to, determine precisely whether there are deficiencies or surpluses in contributions. 9

13 (c) When contributions are posted to the individual s permanent record, the computer programs: 61 (ii) (iii) (iv1 check that the contributions shown on the employers returns were paid in accordance with the liability shown on the individual s record; for example, at the married woman s or widow s reduced rate if the employee is a woman authorised to pay at that rate; seek to identify, where there is more than one posting to an individual s record for a year, any contributions in excess of the maximum that could be payable in the year; look for any apparent anomalies in the contributions records such as duplicate postings; and check that a valid employer s contractedout number has been quoted in those cases where payment of the Class 1 contributions has been at the reduced rate appropriate for those employees contracted-out of the State Earnings Related Pension Scheme. 2.7 Computer checks, with similar aims to those mentioned in paragraph 2.6, are undertaken in respect of Class 2 contributions paid by the selfemployed and Class 3 contributions paid by voluntary contributors. These checks are made on information held by the Department in the form of surrendered stamped national insurance cards and details of directly paid contributions. 2.8 In , the Department subjected 46 million statements of individuals contributions paid in Classes 1, 2 and 3 to the checks described in paragraphs 2.6 and 2.7. Of thej 7.6 million apparent errors or queries found, 3.0 million were corrected or cleared by computer programs, 2.7 million were not pursued because they fell below one of the financial limits and 1.9 million were referred for clerical investigation. 2.9 Each year, the Department review the permanent records for all individual contributors to identify people whose contributions in the preceding year were apparently insufficient for that year to count for calculating entitlement to the basic national insurance retirement pension. The review identified approximately 5 million such people, although many of these may not have been working, or may have earned too little to have been required to pay contributions. 2JO The National Audit Office examined the Department s operation of the various control arrangements under the following headings: (a) how quickly they process the information they receive on contributions and investigate apparent errors; (b) their criteria for determining whether to investigate the apparent errors or queries detected: (c) their monitoring of the underlying causes of apparent errors; (d) their monitoring of the cost of investigations: and (e) their procedures for keeping up-to-date records of addresses so that they can advise people when their contribution record shows a deficiency and when they become entitled to retirement pension. (al Processing the information on contributions and investigating apparent errors 2.11 It is important that the Department credit contributions to individual contributors permament records by 31 December following the end of the tax year in which they were paid. Otherwise, claims for certain benefits, such as for unemployment or sickness, may be rejected because contributions were insufficient. In some instances details of contributions paid are received by the Department very late, after claims for benefit have been made. To allow for this the Department have procedures to recalculate benefit entitlement automatically if contributions are credited to the claimant s record at a later date. But in such cases the award of benefit could be delayed To ensure that contributions received are credited to individuals records on a timely basis, the Department have set the following targets since for completion of the computer checks referred to in paragraphs 2.5 to 2.8. They aim to complete the checks: (a) by 31 August each year for 80 per cent of the returns on magnetic tape or disc expected to be received from employers in respect of Class 1 contributions; (b) by 30 November each year for 95 per cent of returns on paper actually received from employers by that date; and (c) by a variable date in August each year for all information received by that date in respect of Classes 2 and 3 contributions. 10

14 2.13 The National Audit Office found that the Department have exceeded these targets each year. For example, by 30 November 1990 they had processed 99.9 per cent of the paper returns received from employers and this had entailed processing details of contributions paid by some 22.2 million individuals Clerical investigations generated by the computer checks referred to in paragraphs 2.5 to 2.8 are not always undertaken at the Newcastle Central Office. III 196%go 750,000 cases were referred to the Department s local offices and 260,000 were submitted to the Inland Revenue Whereas the Department set targets for completing computer checks (paragraphs 2.11~2.13), they did not set specific targets for the clerical investigation of many of the apparent errors or queries identified by the computer. For investigations undertaken in the Newcastle Central Office, target clearance times were set and performance monitored, and a record was held of outstanding cases so that appropriate action could be taken. But the Newcastle Central Office did not keep records of each apparent error or query sent for investigation to the Department s local offices. These cases were subject instead to local target setting and monitoring of clearance times, but not in a way that distinguished this work from other contributions clerical work. The Newcastle Central Office did not issue reminders and did not have any other way of ensuring that investigations were ever completed as such matters were left to the responsibility of local office managers. Nor did they monitor progress in the investigation of cases referred to the Inland Revenue. The Newcastle Central Office, therefore, did not know how many investigations were still to be completed or how long particular investigations had been outstanding In April 1990 the Department began to transfer to the Newcastle Central Office much of the work previously undertaken by the Inland Revenue and the Department s local offices in investigating apparent errors or queries. But the Department envisaged that when this transfer is complete in April 1992 some 40,000 cases will still need to be referred to the Inland Revenue for investigation each year, and in the initial years some 44,000 cases a year will be referred to the Department s local offices. Since April 1990, the Department have maintained a record of all cases referred to the Inland Revenue. They have used this record to monitor whether these cases have been returned within six weeks, and to issue reminders when appropriate. However, the Newcastle Central Office do not operate the same control over those cases referred to the Department s local offices; these continue to be subject to control and checking by local management The National Audit Office considered whether individual contributors may be at risk of losing their entitlement to benefit as a result of the deficiencies in the Department s procedures for ensuring that all apparent errors or queries are investigated promptly (described in paragraphs 2.15 and 2.16). They found that in general, the Department do not consider their investigations to be urgent. The Department safeguard each individual s entitlement to benefit by crediting that person s permanent record with the reported contributions on a provisional basis while the investigations are undertaken. If a claim for benefit is received in the meantime, the Department can then take urgent action to complete the investigation. Provided that the investigations are completed successfully, there is little risk of individual contributors losing their entitlement to benefit. But awards of benefit may be delayed if the investigations are not completed promptly However, in many cases (1.13 million in ), the information provided to the Department does not properly identify the individual contributor. In these cases, the individual cannot be credited with the relevant contributions until after the Department have completed their clerical investigations. And if, following the investigation, the contributor still cannot be identified, or if the investigations are not concluded satisfactorily, then there is a risk that the contributor could lose entitlement to benefit if he did not complain The National Audit Office noted that details of cases in which the reported contributions cannot be credited to individuals records are held on a separate series of computer files. The outcome of any clerical investigations is also recorded on these files. The files are not routinely used by the Department s managers to monitor the progress of investigations. But the National Audit Office, with the assistance of the Department, interrogated this information in October 1990 to find out how many clerical investigations were outstanding The interrogation showed that of 1.13 million cases referred for clerical investigation during , the contributor had been identified in 696,000 cases at the time the interrogation was undertaken. But in 124,000 cases, involving contributions totalling 2234 million, the individual contributor had not been identified. In the 11

15 remaining 314,000 cases, involving total contributions of fll0 million, the investigations had not been completed at least six months after the query was raised The way in which the records are maintained at Newcastle did not allow the National Audit Office to determine the position for earlier years. (b) Determining whether to investigate the apparent errors or queries detected 2.22 As noted in paragraph 2.4, the Department do not investigate all apparent errors o* queries detected by the computer checks. Clerical investigations are not undertaken where the individual contributor cannot be readily identified and the value of the reported contribution falls below a financial limit. In all other cases clerical investigations are not underaken if the value of the apparent error in the reported contribution falls below one of several financial limits. The financial limits applied depend on the nature of the apparent error or query. In general they are upmted annually in line with the Retail Prices Index In adopting this approach, the Department aim to concentrate their resources on apparent errors or queries which they consider most likely to have a significant effect in terms either of lost contributions to the National Insurance Fund, or of reduced entitlement of contributors to benefit. Although large errors are more likely to have a significant effect than small ones, it is not always possible to predict in advance the effect on a contributor s entitlement if an error is not investigated. In some cases, not investigating a small error could mean that a whole year would not count for the calculation of benefit. But in other instances, the correction of a large error may have little or no effect on any benefit The Department s review of their permanent records of contributions, described at paragraph 2.9 above, is in part designed to alleviate the possible consequences for individual contributors if apparent errors are not investigated. The review identifies individual contributors for whom insufficient contributions have been recorded for the relevant year to count for the calculation of basic national insurance retirement pension. The Department then aim to send deficiency notices to these contributors to tell them that they may make good the deficiency in contributions by paying voluntary Class 3 contributions. But the exercise also provides an opportunity for contributors to complain if the apparent deficiency has arisen because their contributions record is in error However, this review will not be fully effective in all cases. It is doubtful, for example, given the underlying complexity of the national insurance system, that all individual contributors would fully understand the meaning of the deficiency notice or be concerned enough to seek advice. Also, the Department are unable to issue deficiency notices in all cases because their records of current addresses are not up to date. Moreover, the review can identify only those apparent deficiencies in contributions which might affect entitlement to the basic retirement pension and does not, therefore, identify deficiencies affecting the earnings-related addition to that pension The National Audit Office recognise the validity of the Department s policy of concentrating available resources on investigating apparent errors or queries most likely to have significant effects. And they noted that the Department were considering ways of making their review of records more cost-effective. But in the light of the above findings (paragraphs 2.22 to 2.25) the National Audit Office consider that the Department s policy can only be implemented effectively if they adopt a more systematic approach to setting the financial limits used in their computer checks Such an approach should entail the setting of standards for what the Department consider acceptable in terms of contribution receipts foregone and likely reductions in claimants entitlement to benefits as a result of not investigating apparent errors or queries. It should also entail a satisfactory system for monitoring, as far as is practicable. the actual effect of using the current financial limits. In setting the standards the Department would have to take account of the costs of undertaking investigations. The Department now accept that a more systematic approach is needed and have instigated a review of the financial limits, (c) Monitoring the underlying causes of apparent COTO~S 2.28 The Department have investigated some of the underlying causes of the apparent errom and queries identified by their computer checks. They identified in 1988 that a large number of errors in employers returns for arose because employers were not adequately meeting a new requirement for recording details of their employees earnings. The Department took measures both centrally and at local offices to overcome the problem The Department have also established that the information submitted by employers on paper 12

16 returns is more likely to contain errors than that submitted in a computer readable form. For this reason, and to reduce costs, the Department have encouraged employers to submit returns on magnetic tape or disc Although some investigations have been undertaken, the Department do not yet have a full picture of the underlying causes of the mistakes made by employers. Such mistakes could occur for a variety of reasons, including inattention to detail by employers, poor form design, lack of clarity in the Department s guidance or failure by employees to provide employers with correct information The Department are now considering a variety of measures to reduce the incidence of errors in information provided by employers, including the provision of training for employers and further promotion of the use of magnetic media. If successful, these measures could significantly reduce the Department s workload. But the National Audit Office noted that in the absence of a systematic review of the causes of the errors the Department are unable to demonstrate that their proposed measures are the most appropriate. (d) Monitoring the cost of investigations 2.32 The Newcastle Central Office routinely maintain information on the costs incurred by their staff in investigating apparent errors and queries. But the information available on the cost of work in local offices does not identify the cost of particular types of investigations, or distinguish between the cost of investigations and that of other contributions work. And there is no information on the costs incurred when apparent errors or queries are referred to the Inland Revenue Accordingly, the Department do not know enough about the costs of investigating each of the several types of error or query, as described in Appendix 1, or the total cost of investigating errors. But they have estimated that their staff spent between 2,000 and 2,500 man years on this activity during The National Audit Office concluded, therefore, that the Department have been unable to: l control total costs:. set meaningful targets for cost improvements;. undertake cost benefit analyses of investigating each type of error to enable resources to be redirected when appropriate; and l balance the cost of investigations against the loss of contributions or the reduction in individual contributors entitlement to benefit when determining whether or not to investigate apparent errors (paragraphs 2.26 and 2.27) The Contributions Agency are required to produce annual accounts from showing the total cost of their operations. The Agency also plan to introduce an integrated financial and management information system in two phases, in November 1991 and January However, some information, in particular on the cost of investigating particular types of error, may not be available until (e) The Department s procedures for keeping up-to-date addresses of contributors 2.35 As mentioned in paragraph 2.24, the Department write to those individual contributors whose permanent contribution records show insufficient contributions for the year in question to count for the calculation of entitlement to the basic national insurance retirement pension. This action is taken so that the contributor can complain if he considers the record to be incorrect or pay voluntary contributions to enable that year to count. The effectiveness of the action depends on whether the Department can maintain an up-to-date address for each individual contributor. The National Audit Office, therefore, examined the procedures for maintaining those records, and the consequence of failures in their procedures. Procedures for maintaining records of addresses 2.36 With the abolition in 1975 of stamped national insurance cards for employees, the Department lost their principal source of information for updating their records of addresses for Class 1 contributors. The arrangements applying to Class 2 contributions also became less effective in recent years because the number of such contributors submitting stamped national insurance cards declined in line with a growth in payments by direct debit A departmental efficiency study undertaken in 1981 found that 25 per cent of national insurance contribution records for live people under retirement age did not contain an up-to-date address. From 1983, therefore, the Department provided for employers to record the addresses of their employees on the annual returns they submitted, where these returns were made on paper. However, no such provision was made for returns submitted on magnetic tape or disc. Nonetheless, by 1986, the latest date for which 13

17 figures are available, employers had provided addresses for 27 per cent of all employees The Department use the addresses provided by employers to assist in investigating those cases where contributions cannot be recorded on individuals permanent records because employers have failed to give a correct name or national insurance number for the contributor. The National Audit Office found, however, that the Department do not normally use the addresses provided by employers to update their own records of individual contributors addresses. Nor do they check whether an address has been provided by the employer for those contributors for whom they do not hold an up-to-date address. This is because the Department have concerns about the accuracy of the addresses provided by employers and the cost of entering them on their computer records The Department examined the problem created by out-of-date addresses in two studies-in 1986 and One option considered by the studies was for the Department s records to be updated by reference to data held by the Inland Revenue, but this was not pursued because there was no easy way of telling which Department s information was more up to date. Further investigations of the costs and benefits of various options for securing improvements were recommended by these studies, but the Department have not undertaken these investigations The Department expect there to be no further deterioration in the accuracy of their records of the addresses of Class 2 contributors. This is because from April 1991 they update their records for those Class 2 contributors who pay by direct debit whenever a direct debit arrangement is changed, or a new application to pay by direct debit is received. And for all Classes of contributor the Department consider that the establishment of a computerised Departmental Central Index of benefit claimants should improve the quality of the information they hold. But this index will not be linked into all the various benefit computer systems before And even then, its value will be limited because the address of a contributor will be updated only if, and when, the contributor contacts a social security office in connection with social security benefits or national insurance contribution matters The Department do not have a target for the level of accuracy they wish to achieve in their records of individual contributors addresses. They are now giving consideration to the introduction of such a target, but have yet to determine ways of securing the necessary improvements. Consequences of out-of-date records of addresses 2.42 In the Department issued 4 million deficiency notices to people to inform them that they had apparently paid insufficient contributions for the latest year examined by the Department to count for the calculation of entitlement to the basic national insurance retirement pension. But because their records of addresses were out of date, the Department could not issue deficiency notices to a further 770,000 people, of whom 120,ooo were classed as self-employed The issue of such notices serves to give people an opportunity to safeguard their benefit entitlement and also leads to the receipt of additional contributions by the Department. But the National Audit Office were unable to determine from the Department s records the outcome of this exercise in those cases where the Department held an up-to-date address for the individual, or establish the consequences in those cases where the individual could not be contacted The Department told the National Audit Office that they intended to review the costs and effectiveness of the deficiency notice system, taking account of the increased yield and the value of the improvements achieved in contributors records. A first review was completed in August 1991 and made recommendations for reducing the number of people sent deficiency notices. A second review, examining ways of increasing the effectiveness of the exercise, is planned to start in Another consequence of out-of-date addresses is that the Department are unable to contact everyone who may be entitled to a retirement pension. Under current legislation, the responsibility for claiming a pension is on the individual. Nevertheless, the Department s practice is to write to all such eligible people inviting them to claim. In smne cases, however, the Department cannot do so because they lack current addresses. And some invitations that are sent out do not reach the individual concerned. In , 18 per cent of the 760,000 invitations issued were returned because the individual was not known at the address shown in the Department s records The majority of people will know if they have some entitlement to a retirement pension. And if they fail to receive an invitation from the Department they will claim a pension on their own initiative. But some, particularly those who have not worked for many years or who have worked only intermittently, may be unaware of their entitlement and may not claim. In October 1990, 14