§ The Parliamentary Under-Secretary of State for Defence (Dr. Lewis Moonie)On 25 April 2002Official Report, columns 426—27W, I informed the House that the problem of mistaken taxation of some Service invalidity pensions was more extensive than previously understood. I reported that we had set up an internal review, independent of the staffs involved, to establish the extent of the taxation errors and expose any related problems. This review is now complete.
The review has established that the taxation problem is more extensive than I indicated in April. It is now clear that some RAF pensions are affected, and that the RN pensions affected are not limited to the period 1973–99. In addition, the review has found that further work is needed on Army pensions; this is required both to re-examine more thoroughly certain cases adjudged when first reviewed as correctly taxed, and to examine for the first time some other cases previously not thought to be at risk.
71WSThe findings of the review mean that the number of files needing examination has proved considerably larger than I stated previously. I now expect it will not be possible to complete a comprehensive check for all three Services before next summer. I regret that this work cannot be done faster, but it is vital that it be done accurately, by suitably cleared staff who are also familiar with the relevant documents. The pace of the work is also affected by the lack of comprehensive computerised information distinguishing invalidity pensions from others. This has made it necessary to handle many tens of thousands of files which are not at risk in order to identify those that are. This difficulty continues to affect progress.
We are very much aware of the importance of giving as much priority as possible to examining the cases of our oldest pensioners. Although over 70 per cent, of errors identified so far affect younger pensioners, discharged in or after 1990, we anticipate that errors still to be found will include some affecting the oldest age-group. I much regret that in several of the cases recently re-examined a pensioner, previously misadvised that his pension was correctly taxed, has died before an error was recognised. In such cases the tax refund is to be paid, with due apology, to the pensioner's widow or estate.
A further problem brought to light by the review is that some of the pensions taxed in error were also affected by an underpayment of Armed Forces Pension Scheme benefits. Over 350 pensioners have so far been identified in this category, most of whom were discharged in the 1990s. The average underpayment in these cases was around £4,500. The cost to date of rectifying tax errors has been some £5M, which happens also to be an average of some £4,500 per pensioner.
The review includes a full analysis of the causes of errors and the necessary rem—edial action; the latter is already in hand. The procedures used in the conduct of the review have been validated by the National Audit Office. The NAO's letter of validation and the report of the review have been placed in the library of the House.