The Inland Revenue says there is 'no evidence whatsoever of an increase in tax credits fraud' - a claim which is baffling many childcare providers, not least because the Inland Revenue is increasingly asking them to check whether parents are sending children to their setting and are therefore entitled to state support.
In some cases providers have found that half of these parents either have never placed children at their setting, or have done so for a few days or weeks and then left, having made a fraudulent claim for the childcare tax credit.
Linda Mills, who runs the Laurels Day Nursery and the Kids Come First out-of-school club in Barnsley, Yorkshire, reckons that fraud and misuse of the tax credit system have threatened the viability of her business in the past year and that it has become easier to cheat since the application process was changed in April 2003.
Until that date, providers had to sign the parents' application for tax credits.But with the introduction of the working tax credit and the child tax credit, parents simply need the setting's unique registration number to make a claim. The number is not difficult to find, as it is often on the internet and has to be displayed on a setting's publicity material.
The Inland Revenue says that a total of 13.5bn was paid out in tax credits to around 6 million families in 2003/04, with 700 million of that for childcare costs. Philip Blackburn, an economist at Laing & Buisson, says that in the 3.2bn day nursery market, less than 10 per cent - 290m - is represented by indirect funding through childcare tax credits. Direct funding for subsidised places for three- and four-year-olds - the nursery education grant - amounts to 240m.
An Inland Revenue spokesman says it has a range of options 'where we can prove that there has been deliberate error or abuse', including recovery of tax credits wrongly paid, financial penalties and criminal prosecution.
Jail sentence
Recent cases have included a 32-year-old Tyneside hairdresser, who was jailed for five months after admitting she had falsely claimed nearly 26,000 in tax credits, including childcare costs over three years.
In November 2003 a 34-year-old registered childminder in Manchester was ordered to do 240 hours community service and fined 1,200 after admitting she helped three others make false applications for childcare tax credits.
The Government argues that the new application system is 'more responsive', catering for changes in childcare circumstances and so less susceptible to fraud. Claimants have to notify the tax credit office within three months if their average weekly childcare costs fall by 10 or more for at least four weeks in a row. Failure to do this can result in a 300 penalty, while anyone making a fraudulent claim can be fined up to 3,000.
Justifying the changes, the Inland Revenue spokesman said it consulted 'provider representatives' and they were 'very much in favour of not having to sign tax credit application forms because they saw it as burdensome'.
However, Rosemary Murphy, former chief executive of the National Day Nurseries Association, says it is unfair to expect providers, who are no longer part of the application process, to wade through lists of names and become involved in tracking down those who may be abusing the system.
The National Childminding Association hears of cases of fraud from its members but says it is difficult to gauge how prevalent the abuse is.
Acting chair Sue Johnson says, 'Our members know that if they suspect fraud they should contact the Inland Revenue helpline (0845 300 3941) and, as they keep detailed records on child attendance, proving that there is a problem is usually straightforward. But the challenge remains that not all parents disclose to their childminder that they are claiming the childcare element of the working tax credit.'
Gill Smith, who runs the Gooseberry Bush neighbourhood nursery in Camborne, says she has had many requests from the Inland Revenue for information. In an effort to stop fraud under the old system, she says, she refused to sign parents' tax credit application forms until their children had been in the nursery for a week.
'Now, when someone rings up and just wants our registration number I tell staff to be very wary but, of course, we can't refuse to give it to them. I know of people who have received their tax credit and then don't use it to pay for childcare, but say they have had to spend it on clothes for their children,' she adds.
Jackie Nunns of the Trojans out-of-school clubs in south London says the Government could remove the temptation for fraud by introducing vouchers or receipts which parents would have to get from their provider and submit to the Inland Revenue.
Concerns over fraud and the sustainability of childcare businesses have refocused attention on the call from providers for more supply-side funding made direct to them. However, a Treasury spokeswoman says the Government is striking the right balance between demand-side and supply-side funding.
Children's minister Margaret Hodge was recently challenged by a group of private nursery owners to explain why the Government would not channel more funds through them. Ms Hodge wrote in reply: 'The childcare element provides a maximum of 70 per cent of eligible childcare costs up to certain limits. However, a tax credit award might be much less than the eligible proportion of a claimant's childcare costs. Tax credits are calculated by adding together the various elements that a family is entitled to but tapered away as family income rises above a threshold. Paying a portion of the parents' overall award to the childcare providers would not be feasible.'
Funding debate
But Stephen Burke, outgoing director of the Daycare Trust, believes the Government's ten-year childcare strategy has left the door open for a wide-ranging debate on the way funding is delivered in the lead-up to the 2006 spending review. He points to the substantial supply-side funding already in place, recently enhanced with an expansion of support for three- and four-year-olds, coupled with the 125m a year Transformation Fund geared to improving quality and sustainability.
Ministers are understood to be looking at ways to 'incentivise'
improvements in quality, following the New Zealand government's decision to link additional funding to providers based on the quality of their service and the training they give their workforce.
Phil Rhodes, chief executive of the Asquith Court nursery chain, says that the sector has shown through its administration of the nursery education grant that it is 'perfectly capable of handling the Government's money in a responsible way'. He believes an extension of supply-side funding could aid efficiency and quality.
The debate over supply-side funding is also being stimulated by the London childcare affordability programme, which will see money passported through the London boroughs direct to providers. Final details of the joint initiative by the DfES and the London Development Agency (LDA) were due to be released this week, but it is understood that it will involve a form of 'London weighting' for childcare with money to help bridge the gap between the cost of childcare places and the maximum parents are allowed in tax credits.
Denise Freeland, senior childcare manager at the LDA, says, 'It will certainly involve supply-side funding and it will go straight to the providers, so that obviously cuts out any possibility of fraudulent claims.'
So, despite apparently setting its face against a substantial increase in supply-side funding, there are enough indications in the ten-year strategy and the London scheme to suggest that the Government could be swayed. This could be good news for providers, and bad news for anyone trying to defraud the tax credit system.