The government’s spending watchdog has praised local authorities for the speed of their response to distribute COVID-19 support to business – but says lessons must be learned to prevent wide-scale abuse of any future business support schemes, after it was revealed that early scheme delivery did not meet counter-fraud standards.

A National Audit Office (NAO) report published today criticises the absence of contingency plans between central and local government to support firms during a national emergency. Local authorities were not notified of the new schemes until they were publicly announced by HM Treasury, creating significant practical challenges as councils scrambled to understand scheme requirements and answer questions from businesses.

In total, 4.5 million payments were issued to companies via eight schemes from March 2020 to March 2022. In October 2022, the Department for Business, Energy and Industrial Strategy (BEIS) – which has since been replaced by three new departments – estimated that error and fraud across all the COVID-19 business grant schemes totalled around £1.1bn, just under 5% of the value of grants paid to businesses. 

More recent analysis suggests that around 90% of the losses are attributed to payments made under the initial grant schemes, where BEIS did not require pre-payment checks, even though ministers at both BEIS and HMT were aware that dropping pre-payment checks increased the risk of losses. 

Despite the obvious risk of fraud, particularly with the earliest schemes, provision for counter-fraud capacity was lacking, the NAO says. At the start of the pandemic, the BEIS counter-fraud team consisted of two permanent staff and a fast-stream entrant on rotation. The Department for Levelling Up, Housing and Communities, the government department responsible for working with local authorities, only had a very limited counter-fraud capability.

The government counter-fraud function in the Cabinet Office (now the Public Sector Fraud Authority) assessed the July 2020 fraud risk assessments for the initial cohort 1 schemes against the government counter-fraud profession’s measurement standard. The schemes were rated as ‘not meeting the standard’, for reasons including a lack of clarity and detail. 

BEIS and local authorities have so far made little progress in recovering grants paid out because of error and fraud. By mid-February 2023, the new Department for Business and Trade (DBT) – one of the three new departments to replace BEIS – reported that just £11.4m of the estimated £1.1bn losses had been recovered. 

ICAEW’s submission to a recent Public Accounts Committee (PAC) inquiry into BEIS’ annual report and accounts 2021/22 highlights some of the reasons why the recovery rate has been so low, including delays in assurance exercises, the absence of timely measurement of fraud levels and a lack of capacity in the BEIS counter-fraud team. Earlier this month, the PAC quoted ICAEW evidence amid calls for the business department to change its approach to recovering fraud losses from COVID-19 support schemes.

Gareth Davies, Head of the NAO, says: “BEIS and local government deserve credit for working quickly to set up and distribute grants to businesses. Early schemes lost significant sums to error and fraud, but BEIS addressed this in later iterations. The government does not yet know the impact of these grants, in terms of maintaining jobs or how much support might have been given to businesses that did not need it. Without such an assessment, an overall judgement about the value for money of the schemes remains open.

“The government’s experience of working at speed with local authorities to channel financial support during the pandemic offers important lessons should similar crises occur. The new Department for Business and Trade can now use these lessons to improve contingency planning and to build government resilience for responding to future national emergencies.”

Oliver Simms, ICAEW’s Manager for Public Sector Audit and Assurance, says: “The NAO is right to highlight the variable capacity of local authorities to deliver the COVID-19 business grant schemes at speed while preventing fraud, and that little progress has been made in recovering fraudulent or erroneous grant payments. 

“We agree with the NAO’s conclusion that there are important lessons for the government to learn about working effectively with local authorities to distribute money at speed during a crisis, while minimising losses for the taxpayer.”

BEIS had commissioned Ipsos to undertake an evaluation of the economic impact and value for money of COVID-19 business grants. However, the NAO warns that the project “is more challenging than it would have been had evaluation been built in from the start”. DBT, which is now responsible for these schemes, expects a draft report in late spring 2023 and is also examining the impact of its other COVID-19 interventions, including business loans.

• Related article: ICAEW calls for actions from COVID-19 grant schemes | ICAEW