Fraud and error in public funds cost the taxpayer up to £81bn last year – but most of the potential loss goes undetected, new figures from the National Audit Office (NAO) reveal.

The independent public spending watchdog estimates that fraud and error cost the taxpayer between £55bn and £81bn in 2023-24. But only a fraction of this is detected, enabling authorities to investigate and recover the funds, the NAO said.

The watchdog said that “significantly more fraud and error is estimated based on robust measurement, such as sample testing of benefit spending by the DWP” (Department for Work and Pensions).

Since the start of the COVID-19 pandemic, the government has reported substantially higher levels of fraud and error in its annual reports and accounts. At least £11bn of fraud and error was estimated in government accounts for 2022-23 alone. 

Exact amounts of fraud and error unknown

Based on the Public Sector Fraud Authority’s (PSFA) methodology, there was 0.5% to 5% of fraud and error in unexamined areas of spend and income, but the exact amount was unknown, the NAO said. It calculated implied fraud and error totalled between £3bn and £28bn in unexamined areas.

When it came to “estimated but not detected” fraud, the NAO estimated that £30bn was lost in tax revenue to HMRC, plus £1bn of overpaid reliefs and benefits; £7bn of overpaid benefits to the Department for Work and Pensions; and £2bn to other public bodies.

HMRC estimated that in 2022-23 that it was owed a tax gap of £39.8bn, which the NAO admitted would never be eliminated, but could be reduced through improving targeted activities, digital services and removing complexity in the tax system.

Tax evasion and non compliance

The NAO said the rise in fraud was partly due to better measurement and reporting in more areas of government. But it said there were also billions lost from tax evasion and other forms of non‑compliance.

Most government departments were exposed to several types of fraud risk in their major areas of spending, but few produced “regular, reliable, and comprehensive measurement of the level of fraud (or error) in those areas”, the report found.

Grant fraud, service-user fraud, procurement and commercial fraud, income evasion, internal fraud and regulatory fraud were considered the six main areas of risk for public bodies, the watchdog found.

Social and economic challenges affect fraud levels, too. Data commissioned by fraud prevention service Cifas showed that 12% of people in the UK admitted to committing fraudulent conduct against a business or public body in 2023, up from 8% in 2021.

Vital public services

Jack Bower, Public Sector Audit and Assurance Manager, ICAEW, says: “The NAO report provides a stark reminder as to the level of fraud and error that is costing the taxpayer billions of pounds every year, money that could be spent on delivering vital public services and revitalising creaking infrastructure across the UK.” 

The Public Sector Fraud Authority (PSFA) was set up in August 2022 in response to mounting concerns about fraud during the COVID-19 pandemic and the lack of a coordinated response. It aims to understand and reduce the impact of fraud against the government and has built on existing guidance, such as the Government Functional Standard GovS 013: Counter Fraud around fraud and guidance on fraud risk assessments.

Recommendations to government

In March 2023, the NAO made nine recommendations to the government to improve how it is tackling fraud and corruption. They included harnessing data to prevent fraud, developing robust assessments and a focus on prevention. This March, the Government Counter Fraud Function set out its five strategic objectives in its 2024–2027 Functional Strategy, drawing on the watchdog’s previous recommendations.

The NAO said the government could cut fraud by better use of data matching and analytics and shared intelligence about cyber-attacks across government.

Holistic response needed

Bower says there is not one single solution to address fraud risks and organisations must develop a holistic response to tackling fraud, incorporating robust risk assessments, the effective design and implementation of appropriate controls, monitoring and reporting processes, and ongoing evaluation of fraud risks and their internal processes. 

“It must be based around a preventative approach, as this is the most effective way to address fraud and corruption,” he says. “Organisations must also ensure that they remain adaptive to the ever-changing nature of fraud risks and change their approach as risks evolve.”