ICAEW.com works better with JavaScript enabled.

NAO examines massive pandemic financial support programmes

26 October 2020: The National Audit Office has published reviews of the cost of employment support schemes and the financial exposure to Bounce Back Loans implemented in response to the pandemic.

Two recent reports from the National Audit Office (NAO) on the government’s huge financial interventions in response to the pandemic have highlighted concerns about fraud and error, exacerbated by the rush to get these programmes up and running as quickly as possible.

Employment support

As of 20 September 2020, the cost of the Coronavirus Job Retention Scheme (CJRS) and the Self-Employment Income Support Scheme (SEISS) was estimated to have reached £52.7bn and is forecast to rise to £69.7bn. This is approaching 10% of the total pre-interest current expenditure incurred by the whole of the UK public sector in 2019/20.

The NAO has estimated that the cost of fraud and error in respect of these payments could amount to £3.9bn.

As with the other schemes implemented to keep people in employment and maintain business cashflows, the main aim was to get the cash out quickly to provide much-needed financial support. The NAO is clear these schemes were implemented quickly and ahead of schedule, a significant achievement, given the lack of contingency planning for such schemes. However, the speed with which the schemes were implemented meant that standard processes were not wholly followed, with fewer financial controls than would be expected in normal circumstances. What was wanted was simplicity for the claimant.

In normal times, HMRC’s IT department takes on average 18 months to develop and deliver IT projects. In this instance, the time taken was four weeks. This was still not as fast as Germany and France, but both of those countries had the advantage of being able to build on existing short-time work schemes for supporting companies with salary costs in times of economic crisis.

Approximately 12.2 million people have benefitted from the schemes in the UK. However, many were not eligible for the schemes because of how they were targeted or where there was insufficient data for HMRC to properly check for fraud.

As of mid-September, about two million workers remain on the furlough scheme, with the retail, accommodation and food services, manufacturing and construction sectors claiming the most financial support to date. Extensions to existing schemes and new job support schemes are intended to provide support from November 2020 till April 2021.

Fraud is a major concern for the support schemes. There is evidence that some employers committed fraud by claiming support payments whilst keeping employees working for them. This type of fraud is being tackled via the use of whistle-blowers and through retrospective compliance work. HMRC intends to publish the names of employers claiming the JSS scheme and notify employees through their personal tax accounts where an employer has claimed JSS.

HMRC will not be able to assess the full extent of the fraud that has taken place until the end of 2021 at the earliest. A programme of compliance work is being developed to understand the full extent of the fraud and error in respect of these schemes. However, this work programme will require existing resources to be diverted from other HMRC compliance work, which in turn may have a detrimental impact on tax collections. HMRC may use private contractors to supplement its compliance capacity where necessary.

Bounce Back Loans

The NAO also looked at Bounce Back Loans aimed at smaller businesses, with a limit of £50,000 for each enterprise affected by the pandemic that applies. The loans are paid out via commercial lenders and the business are expected to pay back the loans in full on extended credit terms. As of 6 September, more than 1.2 million loans had been made totalling £36.9bn. 

This is an eye-watering amount, given that the Treasury is guaranteeing the loans and also covering the interest of 2.5% payable for the first year. 

Jim Harra, the Chief Executive of HMRC, sought a ministerial direction before the Bounce Back scheme was launched, indicating his concern about the significant risks around value for money.

As the first loan repayments won’t start till May 2021, the NAO is not yet in a position to assess the value for money of the scheme and so has instead considered the scheme’s performance in distributing loans to eligible businesses and the risks of fraud and error. 

Given the speed with which the scheme was launched, there was no business case in place and the only objective of the scheme appears to be getting fast financial support for smaller SMEs. Measuring the success of the scheme may prove to be a challenge.

The NAO does report that the take-up of the scheme is on track to be almost double the amount expected (£48bn), with the majority of loans going to microbusinesses. On that basis, the scheme may be considered to have outperformed its original aims.

There is an increased risk of fraud due to the lack of detailed eligibility criteria, although this has been mitigated to a certain extent by the establishment of fraud-prevention forums and other measures taken by banks before issuing loans. Despite this, there will likely have been a significant level of fraud and error from ineligible and duplicate applications or fictitious applicants. Before a duplicate-applicant prevention check was launched it is estimated that 2.3% of applications were made by the same applicant to different lenders.

Administration of the scheme is expected to cost lenders up to £75m by the end of 2024/25, not including central government costs. This amount is expected to be dwarfed by the estimated cost of the associated risks of fraud and error, said to be greater than general public sector fraud risk levels normally 0.5 to 5% - with the Bounce Back Loan Scheme potentially at risk of losing a whopping £26bn over its lifetime.

Alison Ring, director for public sector at ICAEW, commented: “There are several lessons to be learned from the speedy implementation of these schemes, which come with the benefit of hindsight, especially in how better contingency planning could have helped prepare government for extreme events such as a pandemic or an economic crisis. 

“What is clear is that HM Treasury and HMRC moved very quickly to provide support for individuals and businesses, protecting millions of jobs and providing much-needed cashflow. Despite this, the pandemic has highlighted limitations and flaws in the way the tax system works, with many people falling through the cracks; improvements should follow.

“The NAO estimates of the potentially immense cost of potential fraud of £26bn from lending to business is an expensive lesson for government on how easy it is for public money to go astray. While it was vitally important that money went to businesses in need as quickly as possible, without proper checks and balances it was inevitable that a proportion of the money would go to fraudsters and uncreditworthy entities. HM Treasury and HMRC must invest in the resources necessary to reduce the risk of fraud from ongoing lending activities as well as in investigating and reclaiming funds paid out to fraudsters or in error to the greatest extent possible.”

NAO: Investigation into the Bounce Back Loan Scheme

NAO: Employment Support Schemes