Examination of Witnesses (Questions 100
MONDAY 22 OCTOBER 2001
MONTAGU KCB, MR
100. So you have introduced a massive new system
and you have no assessment of how it actually affects the people
who fill them in?
(Sir Nicholas Montagu) We have all sorts of assessments
but what we do not have is the figure for which you asked. There
are a number of ways in which we do continuously monitor the progress
of the system.
101. But not a figure of how many people have
had to employ an accountant who previously did not employ an accountant?
(Sir Nicholas Montagu) Stephen is telling me that
he thinks that it has stayed steady. This is something that I
can check on and if it turns out that we are wrong and it did
not stay steady we will include a footnote in the transcript to
that effect. I gather that there is some difference of view here
so I think perhaps the best answer is this is not a figure we
have. As Mr Tarrant says, that is my final answer. Basically we
are clearly not sure so, as I say, final answer is we do not know
and, yes, I will take the money rather than answer the next question.
Mr Osborne: Sadly my time is up.
102. Sir Nick, do you know the answer or the
punch line to that joke about why the shark will not eat the lawyer
who has had his limbs severed in the water?
(Sir Nicholas Montagu) I know a lot of jokes of that
sort, Mr Gardiner. If you key in on the internet, because being
a thoroughly modern mandarin this is something I sometimes do,
"tax man" and "jokes" you will get similar
103. The one I am referring to about the lawyer,
the reason the shark will not eat the lawyer in the water is supposed
to be professional etiquette. I have to say that on reading this
report I did get the sense that there was a bit too much professional
etiquette between the NAO and yourselves in this. I think my colleague,
Mr Osborne, has brought out some of it, perhaps not all. What
strikes me is that here if you look at the three central chapters,
the thing that sticks out most to me is if you look at sections
2.14, 3.13 and 4.12. I am thinking of the lines that say ".
. . the Department set up specialist risk, intelligence and analysis
teams in April 2001" and in 3.13 "The Inland Revenue
established a separate Directorate of Receivables Management in
June 2000 and in March 2001 transferred new return cases and certain
debt management work to an outbound call centre", and in
4.12 ". . . and in April 2001 established 60 specialist Area
risk, intelligence and analysis teams to improve the focus of
compliance work". When Mr Osborne pushed you on whether this
review and change of process was underway beforehand you said
"Yes, I have to say it must have been" but clearly it
was not, was it?
(Sir Nicholas Montagu) Mr Gardiner, that is a long
and complex question. Perhaps I might
104. Sorry, with respect, it is not, it is a
very simple question. The question really is
(Sir Nicholas Montagu) Would you like me to answer
it, Mr Gardiner?
105. Yes. Let me state it in a simple formula
so you can answer it simply without bamboozling the Committee.
The question is this: all of the measures which you took to redress
the flaws that were seen and noted in this report were taken in
April or June of this year, that was when they were set up, was
(Sir Nicholas Montagu) No.
106. Why was it so late?
(Sir Nicholas Montagu) It is not so and I will explain.
The reason I said it was a complex question was your opening remarkI
know that Sir John is well capable of defending himselfthat
I have to take issue with. It was a report conducted with the
utmost professionalism, it was a report that challenged us.
107. It is not Sir John I am challenging, Sir
Nick, it is you. I understand that this is an agreed report, I
am well aware of the way in which reports are negotiated for their
wording. The question I asked you is not about the way in which
the report came about and the professional way it was done but
I am asking why it was that the specific measures taken to redress
the three major failings shown in this report were taken so late
on in this year, one month or two months before this report was
(Sir Nicholas Montagu) I will answer that question
in a moment, Mr Gardiner. I must be allowed to challenge your
implication that there was a cosy relationship between the National
Audit Office and us. It was a report carried out with utmost professionalism
following the methodology set out in the report and with a good
deal of challenge on both sides. There was no cosiness.
108. We accept that. Let us pass on to the main
part of the question.
(Sir Nicholas Montagu) I am grateful that you accept
that. Thank you, Chairman. So far as the changes are concerned,
it is not true that all the changes to improve the way in which
we administer self assessment were carried out this year. I have
referred to the iterative and constant attempts to improve the
statements of account, to improve our systems, to improve the
literature, the improvements to the tax calculation guide that
were carried out last year. It is certainly true that the structural
changes were carried out this year. As the Comptroller and Auditor
General's Report makes clear, the full data, on the basis of which
we took these decisions, was not available for some time. The
first year of self assessment was 1997-98 and our priority was
to get it in as well as we could. It is a tribute both to my people
and to the tax agents that we did so as well as we did. Once it
was settled in at that point it made sense as part of a look at
our wider business, as part of our refocusing the business in
the way that I have described, to look at our structure, to look
at the way we handled risk. I frequently discussed with the predecessor
to this Committee other improvements which we put in place well
before this year. We cannot do everything at once, we order our
priorities within the resources available and I am unapologetic
about those priorities.
109. What you are telling the Committee is that
all of the changes that were set up that I referred to in the
paragraphs initially would have been set up, those changes would
have happened, had this report not taken place?
(Sir Nicholas Montagu) Yes, that is absolutely right.
Of course there are particular points that we have taken from
the report that I have indicated already. It is a valuable report.
The obvious example is the point that Sir John highlights about
we were making inadequate use of daily penalties. The risk, intelligence
and analysis teams resulted from Lord Grabiner's recommendations
which were not available early in self assessment.
110. Are you aware of the percentage collection
rate that is applied in local authorities to local taxation?
(Sir Nicholas Montagu) No, I am not.
111. Standard good practice would have that
in local authorities at about 98 per cent. Now the figure that
you have accepted here in this report, between 1.8 billion and
three billion potentially at risk out of a tax take at 55 billion,
would you acceptif my figures are correctmeans that
your collection rate is somewhere between 96.75 and 93 per cent?
(Sir Nicholas Montagu) I think the analogy is not
fair, Mr Gardiner. Local authorities are collecting fixed amounts
from known people living in the area but we, in the way that Sir
John recognises, are handling a largeand we do not know
how largehidden economy.
112. Okay. The decline in the percentage of
self assessment tax returns filed by 31 Januaryyou may
be interested to know I am on your side herethat has taken
place since 1996-97 to 1999-2000, do you believe that any part
of that decline is due to the transfer in the tax system going
over to a current basis of assessment and, if so, how much?
(Sir Nicholas Montagu) I am sorry, do I believe that
it is due to?
113. What I am saying is because the tax system
has changed to go for a current year basis of assessment, do you
believe that has had an impact on the number of returns that are
(Sir Nicholas Montagu) No reason to believe that actually,
Mr Gardiner. The percentage of returns coming in are, as I indicated,
far higher, as Sir John notes, than under the previous system.
We do not know why the figures are dropping and that is why things
like the leverage trial that I mentioned are important. It may
simply be that people are getting a bit comfy and a bit complacent
and a bit thinking it does not matter. It may be that a large
number of returnsand this again is something we have been
looking intoare ones where either a payment on account
has been made or where the tax due is less than the penalty and,
therefore, the penalty will not be the £100, but that is
why the kind of specialisation that our receivables management
providesthe chase up with the automatically generated letters
and the predictive telephone diallingare so important.
Dave, do you want to add to this?
(Mr Hartnett) Just to add, Mr Gardiner, that when
self assessment was being devised there were a great number of
representations to say that the current year basis would make
it much easier for people to get their returns in quicker.
114. I agree with you entirely and ultimately
that is the case. What I was trying to point out was that having
moved from a system in which you are doing part current and part
previous years, as we were during this period, to catch up sometimes
people were having to do effectively two tax year returns in one
12 month period to try and get up to the state of play.
(Mr Banyard) I think they did the catching up in the
transitional year and I think out of that we got a very big increase
in the number of returns compared with the previous system. I
think the 90 per cent we are getting is a quantum leap on where
we were. We have now got a gradual decline. We are trying to understand
how to tackle that. We would like to tackle it through ways that
help the taxpayer through prompts, through advertising. If that
does not work then we will have to look at the other end, at our
deterrent powers and our penalties.
115. If I can refer you to paragraphs 4.9 and
4.10 ". . . the quantitative and qualitative targets for
compliance work, at national, regional and local level".
4.10 about the ". . . initial local office compliance plans
and targets were based on the resources and abilities of their
compliance staff. In the process of agreeing the national targets,
local plans were adjusted to match the overall target; some regions
have fallen behind their plans part way through the year, for
example because of skills and resource shortages." Can you
comment on what has now been put in place to combat those problems?
(Sir Nicholas Montagu) I will ask Stephen to reply
in more detail because this falls fairly and squarely within the
local services directorate. Essentially the difficulty is the
one that the report observes. It will be commonplace to the Committee
that in London and the South East it is more difficult to attract
and retain staff than in other parts of the country. One of the
things that we have been doing is moving more work outside London
where we do not encounter the same difficulty. What 4.10 is talking
about is that we manage our compliance programme nationally in
order to deliver the targets that we have agreed with Ministers,
and that means that we do move work to where we have resources.
We try to keep it flexible but equally, obviously, we are aiming
at a structure where we reflect
116. I am very sorry to interrupt you. I know
the Chairman is about to give me his two minute deadline.
(Sir Nicholas Montagu) Stephen, would you like to
add to that?
(Mr Banyard) We have addressed it. We do it through
recruitment and making sure we have got the right number of people
there who are trained and ready to do the job. If we face wastage
in London or the surrounding area, either we move work out or
we move people in.
117. My question is what specific measures have
you taken to address the problem?
(Mr Banyard) Recruitment, making sure we have the
right number of people and moving work around if we have got local
imbalances. That is what we have done. We are on top of it.
118. That problem is not going to be ongoing?
(Mr Banyard) That problem is not with us at the moment.
I cannot say that we will not suffer problems in London in the
119. Thank you. If I can just refer you to Appendix
3, and the list of measures taken in other jurisdictions, where
it says "There are close links . . .".
(Sir Nicholas Montagu) I am sorry, Mr Gardiner, I
am having difficulty hearing you.