Examination of Witnesses (Questions 1
WEDNESDAY 25 APRIL 2001
MONTAGU CB, MISS
CB, MR JOHN
YARD CBE, MR
1. This afternoon the Committee is taking evidence
on the Comptroller and Auditor General's Report on the Inland
Revenue Appropriation Account 1999-2000. We have a cast of thousands:
Mr Nick Montagu, Chairman of the Board of the Inland Revenue,
Bill Thomas, Managing Director (UK and Ireland) at EDS, and Elisabeth
Astall, Partner at Accenture. Who have I missed?
(Mr Montagu) You have missed Ann Chant, Chairman,
who is Deputy Chairman and Director General in charge of Strategic
Service Delivery, and John Yard, whom again the Committee will
know, who is Director of Business Services.
2. Thank you for that. Let me go straight in.
You are used to our style so I will start straight off with Part
3 of the C&AG's Report which outlines the difficulties, which
led you to clear one million PAYE taxpayer records for 1997-98
without checking that the individuals had paid the right amount
of tax. When do you propose to alert the taxpayers affected to
the risk that they may have overpaid tax?
(Mr Montagu) Around June.
3. After the election?
(Mr Montagu) You would know that better than I, Chairman.
4. I was only teasing, as you well know. Let
me move on to Ms Astall and Mr Thomas on paragraph 3.12 of the
report which suggests that there may have been a communications
gap between Accenture and EDS during the development of NIRS2,
and this Committee is well aware of previous development problems
on that project. How do you now ensure that there is effective
liaison on developments which affect your respective systems?
(Mr Thomas) We have a number of operating mechanisms.
The communications problems that are referred to in the report
come from a time when EDS were working to the Inland Revenue and
Accenture were working to the Contributions Agency. Now we have
a single client in the Inland Revenue for our work and we have
at least three operating mechanisms that serve to bring us together.
We have operating mechanisms where we work under the direction
of Mr Yard on joint projects. We also have six weekly strategic
meetings between Accenture and EDS to make sure that our operating
procedures and our methods dovetail together and we have fortnightly
meetings to do the same thing.
5. Ms Astall, do you have anything to add to
(Ms Astall) I think the only thing I would add is
in addition to that we have a series of actual meetings around
specific subjects which deal with any day to day difficulties.
6. So we can look forward to a smooth, sleek
and on time development from now on, can we? You are both nodding,
good. Mr Montagu, let us come back to you. Paragraph 4.5 is the
point in the report I want to pick up on the tax credits. That
paragraph notes that the new schemes increased the number of applicants
entitled to support, and at the end of February 2000 you were
paying tax credits to just over one million applicants. There
have been some concerns about take up, so can you tell us what
you have been doing to encourage take up and what the latest position
(Mr Montagu) By all means, Chairman. I can update
the Committee on the latest number claiming tax credits. The present
figure is around 1.2 million recipients. The Government have always
spoken of a figure around the 1.4/1.5 million mark. We have had
extensive awareness campaigns. Members of the Committee may have
seen advertisements on television and so on. We have made sure
that local authorities, benefits offices, citizens advice bureaux,
anywhere that potential claimants might go, have the necessary
packs. We have a very active helpline. In addition, anybody getting
Child Benefit will get a reminder at the beginning of the year
that they might be able to claim Working Families or Disabled
Person's Tax Credits.
7. Is there any other way of targeting the ones
you are missing, identifying the ones you are missing?
(Mr Montagu) We have probably identified the main
sources. I think particularly that the reminder to people claiming
Child Benefit is effective, but also that we do consciously join
up with the other Government Departments who may be dealing with
them, local and central.
8. Thank you for that. I would like to move
on to Part 5 of the report which shows that the construction industry
scheme has been successful in identifying new subcontractors and
increasing tax by about £280 million in 1999-00. But there
were some teething troubles. What lessons have you learned from
(Mr Montagu) I think quite a few. As the Comptroller
and Auditor General notes, there are, as you have pointed out,
Chairman, successes in terms of 100,000 people coming onto our
books and in terms of the £280 million extra tax revenue.
But, as Sir John also recognises, the construction industry has
certain peculiar characteristics. It is a very volatile industry,
it is an industry with whom there have in the past been compliance
problems. I think we, possibly being over-neat and tidy bureaucrats
in our mind, sometimes expect our customers all to be similarly
so. What I am saying is I do not think we fully understood the
nature of customers we were dealing with. I think we could have
done more to test forms and guidance on them at an early stage.
I think we could have improved our internal and external communications
strategy. I had heard that one office, admittedly an office with
relatively few number of subcontractors, our Kirkcaldy office,
had been particularly successful, so I went up and talked to the
two young men there who had actually spearheaded the publicity
for the scheme. They had adopted a saturation approach, they did
not wait for people to come into the office, they had built on
their local contacts that they had built up through Chartermark,
they had gone out and talked to the subbies, they had gone out
at weekends to places which suited them. There are lessons for
us there in a more active understanding of an approach to our
9. I think others will be interested in that.
I will press on for the moment to Part 6 of the report which notes
the steps you have taken to improve your employer compliance reviews
following our hearing in 1997. Yet figure 14 on page R39 and figure
15 on R40 show increased variations between detection rates across
local offices and a significant drop in yield from compliance
activity. What are the reasons behind these trends and what are
you doing to address them?
(Mr Montagu) The variation is a worry, and I will
come back to that if I may. The straight answer on yield is that
we were committed to delivering really major changes, like tax
credits, and in particular where employer compliance is concerned
the successful merger a couple of years ago of the Contributions
Agency in the Inland Revenue. In addition, that was the year in
which we were bringing in our new IT infrastructure, rolling out
50,000 new desktops, which was the biggest roll-out of its kind
in Europe. We had, I think rightly, to concentrate management
time on these priorities and so, inevitably, other areas of work,
which included employer compliance, took a lower priority. Our
yield from employer compliance work did increase in 1999-00 and
again in 2000-01. I think these are significant achievements,
particularly as the pressures continue. Variation between offices
has always been a worry, and this may be something that Ann will
want to add to. We are doing a number of things. We have got,
I think, our employer compliance effort well integrated and working
together. In other words, the merger with the Contributions Agency
has bedded in successfully. Also, each office now has, as part
of its compliance unit, people who are specialists in looking
at risk, risk research essentially, to improve our targeting.
Also, from this year we have introduced other risk specialists
who are able to look at compliance across the piece. My answer
to "what can you do to reduce the variations" is, one,
monitor pretty ruthlessly and make sure that you bring up the
worst to the best, if I can use that rather crude term. Part of
that is sharing best practice, and I think we are getting better
at that and having research specialists and risk specialists helps
with that. The third is always going to be improve our targeting.
Again, the risk and research and bringing together the expertise
of the Contributions Agency and the Revenue all point to that
end. Ann, do you want to add to that?
(Miss Chant) A little but not
10. Before you do, Ann, the last time we raised
this with you the nub of your reply was that the variation was
to a very large extent driven by the different populations of
customers, if that is the right word, that you had, large numbers
of PAYE in one area, large numbers of self-employed in others,
and that created a different perspective. Are you not likely to
face problems of measurement, problems of actually assessing what
a unit ought to be able to achieve against that variation?
(Mr Montagu) I am sorry, Chairman, we may have been
at cross purposes. I had not realised that you were talking about
variation in yield. I was talking about variation in quality,
which is one of the things which worries me. Again, since I last
appeared, we have refined our quality monitoring. We have kept
our compliance quality initiative, which I discussed with the
Committee before. We have refined our quality monitoring techniques
and it was that that I was speaking to in talking about reducing
the gaps. Where yield is concerned, yes, you are absolutely right.
If you have got different tax districts dealing with different
populations one needs to have, and again risk and research helps
in this, a better understanding of what one might reasonably expect
to bring in. I phrase it in that rather careful way deliberately
because the Committee knows from our previous discussions I am
against the idea of yield targets. I am strongly in favour of
the idea of having a good understanding of what you ought to expect
and a rigorous examination of any failure to meet those expectations.
11. Have you anything to add to that, Miss Chant?
(Miss Chant) A little. To begin with, trying to cover
both points, whether it is yield or whether it is quality, we
now have our local office network organised into 64 areas covering
the UK. Each of those has a standardised set-up on employer compliance
work and, therefore, we have 64 points only to start bringing
together to make comparisons, to spread best practice. We do have,
as Mr Montagu said, our risk and research teams much more centralised
and expertly led from the centre on the risk and research basis
method of selection. We are helping our staff become more expert
at using our employer compliance system and there is, indeed,
now already some indication that the variation is narrowing. There
always will bethe point that you madethat a different
area is likely to have a different clientele but I am not convinced
yet that we have got that to the irreducible minimum, although
we are certainly getting there.
12. Thank you for that. Let me move on to paragraph
6.5. In addition to PAYE and national insurance, employers now
have to comply with legislation on tax credits, the collection
of student loan repayments and the national minimum wage. The
paragraph notes that the number of employer compliance staff has
reduced. In these circumstances, what assurance can you give us
that you can police all these schemes effectively?
(Mr Montagu) I think that we can give you that assurance.
We have reduced the number of employer compliance staff to reflect
the fact that we have merged with the Contributions Agency and
obviously there were a number of purposes behind that merger.
One was the deregulatory one, so there was only one set of heavy
boots going over the books rather than two. Another was to achieve
genuine efficiencies, and we have done so, which accounts for
the overall reduction in staff. I think it is extremely important,
and it is going to become increasingly so in the context of the
Revenue's aspiration to be an enabling as well as a regulating
department, that one looks at compliance in a very wide sense
as part of a spectrum. I think I have probably said before now
that in the best of all possible worlds our compliance yield would
be zero because everybody would be paying up, voluntarily getting
it right, without enforcement activity. Since I last discussed
employer compliance with this Committee we have expanded enormously
our business support function. We work closely with the Small
Business Service, we have our New Employers Support Initiative,
we have our Business Support Teams, we have a range of helplines.
If I can give an example.
(Mr Montagu) Very briefly. We recently had dealings
with a large employer who came to us and said "look, I want
to do things in this way, what are the implications?", we
helped him, we sorted it. As a result, he complied. That is not,
in the sense of this report, employer compliance but I think it
would be mistaken wholly to divorce it from it.
14. Thank you very much. Your comment on heavy
boots brings me to my last question. You may recall that during
the consideration of the Tax Credits Bill, I raised the question
of the C&AG's access to employers to check tax credit payments
made on behalf of the Department. The Paymaster General thought
that this would be inappropriate and suggested that assurance
could be drawn from the Department's own checks instead. In view
of the concerns about the staffing and quality of employer compliance
work, will you be able to provide the C&AG with sufficient
assurance about the employers' operation of the tax credit scheme
(Mr Montagu) I think we will, Chairman. We have done
a lot, both on employer compliance and also in bringing together
the overall management of the tax credit scheme in a coherent
way. Our local districts work closely with the Tax Credits Office.
Both of them come under Ann's general direction. Our employer
compliance people are familiar with the tax credit rules, they
will be looking at the operation of the tax credit rules and employers
will bring together all their, if I may put it that way, Inland
Revenue duties in single documentation at the end of the year.
My understanding is that the C&AG will be looking closely
at the way in which we operate and police the scheme and obviously
if he takes the view that there are shortcomings, this is something
that I would want as a matter of some importance to discuss with
15. You can be sure the Committee will be looking
(Miss Chant) Could I just add very briefly to that,
Chairman. We have introduced employer compliance for tax credits
on a risk based system into our employer compliance work and,
of course, at the end of every year employers will submit, broadly
speaking, what they have paid which we will compare with what
has been authorised. So there should be a neat bringing together
at the end their annual returns with what we have authorised for
tax credit payment.
16. My problem is that I just wonder whether
the information is good enough for the system to be completely
closed. To give you one example: an argument by Frank Field of
scope for employer/employee collusion over this issue is a serious
issue with this system. I will be looking very hard to see whether
your system covers that.
(Miss Chant) A risk based employer compliance system
should definitely pick that up and we will keep it under review.
Chairman: Thank you. David Rendel?
17. Thank you, Chairman. I want to start, if
I may, with some naive questions about the PAYE system. The report
tells us that 20 million employees are covered only by PAYE and
do not have to send in their own self-assessment forms each year.
How many are taxed under self-assessment?
(Mr Montagu) About 9.5 million people complete self-assessment
18. Can you remind me what the criteria are
for making people fill in self-assessment forms?
(Mr Montagu) Obviously there is a range of criteria,
Mr Rendel. The major ones that are of interest are self-employment,
higher rate taxpayers or significant sources of additional income
not covered by the PAYE system.
19. What is a "significant source"?
(Mr Montagu) It could be almost anything.