Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses(Questions 1-19)


MONDAY 20 MAY 2002


  1. Order, order. Welcome to the Committee of Public Accounts and welcome once again Sir Nicholas. It is always a delight to have you with us.
  (Sir Nicholas Montagu) It is always our pleasure to be here.

  2. Today we are examining the Comptroller and Auditor General's report attached to the Inland Revenue's Appropriation Accounts for 2000-01. You have been kind enough to send us a supplementary note. Thank you very much. Would you please introduce your colleagues?
  (Sir Nicholas Montagu) To my left is Dave Hartnett, who is a member of my Board and Director General (Policy and Technical). On my right is Stephen Banyard, who is Director of Local Services.

  3. You have been kind enough to give us this supplementary note and you have told us that you have had to learn a lot in a very short time and you have been very honest with us in saying that perhaps you have not made as much progress as you might have hoped for and perhaps my first question can refer to that. If you turn to page R16, paragraph 3.28 and read that you will see that "... when end of year returns are analysed the Department will be unable to reconcile payments made by employers to those authorised". When you answer this question you might just fill members in a bit on what this actually means. I had this explained to me kindly by the Comptroller and Auditor General but that clearly is a bit of a problem. As well as explaining this to me, can you also tell me why you have tolerated such a major weakness in your systems and when the situation will be resolved?
  (Sir Nicholas Montagu) I am not sure that the situation will as such be resolved, nor is it a weakness in our systems. The point is this. The structure of the tax credit system is such that we authorise employers to pay tax credits at a daily rate from a certain date. Depending on whether employers pay salaries weekly or monthly, on that also will depend when the first payment occurs. What this means effectively is that payments which were authorised for a particular tax year may actually be paid with salaries in the following year. If that happens, then that payment will appear on the employer's return, which we call the P35, for the following year. So a direct year on year reconciliation is not possible. What we have been trying to do is to arrive at a system, working with the National Audit Office, which gives us a sound basis for an estimate and the Comptroller and Auditor General has said in his report that he is satisfied that this gives us a satisfactory way of reconciling and of estimating.

  4. Could you explain for the benefit of members the difference between P11 and P35?
  (Sir Nicholas Montagu) The P11 is an individual tax document relating to an individual employee. The P35 is the schedule that the employer submits to us at the end of the year listing all the employees with the tax and national insurance deducted, and also tax credit payments. The sum of the individual documents is actually more the P14s, which are the individual end of year documents for each employee which accompany this.

  5. Is it right that you have difficulty in tying up P35s with what the Revenue have authorised? Is that the problem?
  (Sir Nicholas Montagu) A direct tie-up; yes.

  6. You claim this is not a real problem. You can live with this.
  (Sir Nicholas Montagu) We can live with it provided that we keep a tight control on ways in which we do check up on authorisation and provided that we can work with the Comptroller and Auditor General so as still to have a system which gives us what Sir John regards as a sound estimate. There are certain circumstances in which we would always be able to check directly, as for example where we put the employer in funds in order to enable him to pay out tax credits.

  7. You say you are quite relaxed about it, but does this really tie in with the assurances you were giving to the Committee or are you denying that you did assure the Committee that you could reconcile these two factors?
  (Sir Nicholas Montagu) I think what I am saying is that I am not relaxed about it, but given what is essentially an issue of periodicity, in other words the way in which tax credits are administered according to legislation and the way in which the end of year documentation works, there is an intrinsic difficulty in getting that straight tie-up. What I am not relaxed about at all, as I said in my letter to you, is the state of the checks that we made on levels of error. Our checks after the National Audit Office report and Sir John's conclusions did not reveal any serious systemic problem.

  8. We can always come back to that later if we need to. Could you look at paragraph 3.27? It says there that you do not have detailed data about compliance visits to employers, which I find somewhat surprising. Perhaps you could explain that. You cannot therefore estimate the extent of errors in tax credits made by employers. How can you satisfy yourself therefore about the accuracy of tax credits in general?
  (Sir Nicholas Montagu) When we visit employers, if we find something wrong, then there are 74 different possible errors against which we will record what is wrong. I think I am right in saying that incorrectly paid tax credits would be one of those.
  (Mr Banyard) Indeed.
  (Sir Nicholas Montagu) What Sir John was concerned about was more the detailed routine reporting of employer compliance visits. In line with the National Audit Office recommendations we have expanded our manual records so that we can enable more detailed analysis in the year and at the year end; and we shall now analyse annually details from all reviews so that we get a better feeling for trends and for behaviours. Of course the fact that an employer is paying tax credits is itself one of the indicators which our compliance teams would use in deciding to make a visit. Also, in the case of the 6,800 employer compliance visits made to employers who paid tax credits, payments in excess of what should have been made were found only in 18 cases. What I am saying is that I take, as I think Sir John takes, some comfort from what we have found. I absolutely accept his recommendation that we need more in the way of routine data and we are moving to give effect to his recommendation.

  9. Do I understand your answer correctly? Are you saying that despite the deficiencies in the information you are getting from these visits you can still measure whether you are targeting your compliance teams to the best effect? That is what you are saying to us, is it?
  (Sir Nicholas Montagu) What I am saying to you is this. Where something is wrong on a visit, we record it already; that includes tax credit payments. That, along with a whole raft of other things, will give us a feel for whether we are targeting the right employers.

  10. I am still rather worried about this. Have you seen a letter which was written by Dawn Primarolo to my predecessor, David Davis, dated 23 July 1999?
  (Sir Nicholas Montagu) I am sorry, if I have seen it, I certainly do not have it with me.

  11. We will let you have a look at that letter. Basically what my predecessor was asking for was direct access on behalf of the National Audit Office. What the Minister was saying was, "I would have thought it reasonable for you to audit tax credit arrangements by looking at the Inland Revenue's records. If this causes you major difficulty in practice we can clearly reconsider, but I am certainly not at present disposed to impose further burdens on employers". I hope I am not taking the National Audit Office in vain, but in view of what I have been asking you, they might well be worried that you are not entirely living up to the assurances you made to the Committee and that we may ask you to look at this again and give the National Audit Office direct access.
  (Sir Nicholas Montagu) Of course if the Committee asks me to do that I shall be happy to do it. If I may say so, the position that the Minister set out is still relevant. It remains a major concern of the Government and the Inland Revenue to keep burdens on employers, particularly small employers, to a minimum. I am afraid that it is true that such employers would regard any additional government visitors—and I fear they would not be sufficiently sophisticated to distinguish the majesty of the National Audit Office from the mundane of the Inland Revenue—as a burden. What I should like to do, in the light of what I have said about accepting Sir John's recommendation and in the light of what Sir John has said about accepting the basis of our estimate, is to talk further with him about how best to provide the Comptroller and Auditor General with the assurance that he requires but without imposing a further burden on small employers.

  12. We are very concerned about burdens on small businesses but our primary duty is to insist that Parliament has proper oversight of what is a very important area. Am I right in saying, to sum this up, that tax credits are another way of delivering social security benefits? Sir John and his team have full oversight of the Department for Work and Pensions in their work, but because of the way the Minister has replied to my predecessor, there is a lacuna in the way that Parliament can see tax credits.
  (Sir Nicholas Montagu) I am not sure I would actually agree with that.

  13. I did not think you would.
  (Sir Nicholas Montagu) It was a complex question. You asked whether I would accept that tax credits are social security benefits. The answer has to be no. If you listen to the Chancellor's dicta on the subject, it is true that the working families' tax credit replaced family credit, but what Mr Brown is saying is that this is something very different, this is part of a system linked closely to the tax system and linked to work to further his employment incentives again. I think I must qualify your assumption on that. So far as the assurances are concerned, I would hope to be able to satisfy you that we either have or are going to have the necessary arrangements in place. If I might make one further point—and forgive a long answer, but I think it is very important for context—the transferred responsibility for tax credits to the Inland Revenue is probably the biggest change ever to hit us. We have, I think rightly, devoted our attention to making sure that the credits reach the people at whom they are aimed. At the same time we have been seeking to refine our compliance regime, and this includes applying the kind of risk analysis that the Department for Work and Pensions—then the Department for Social Security—did not. I hope that I can satisfy the Committee that the Inland Revenue is taking extremely seriously its duty to ensure compliance, alongside its duty to ensure maximum take-up by people entitled to the credit.

  14. You are certainly forgiven for a long answer. This is a very important area. Tax credits are going to become more and more important: child benefit is going to become a tax credit also. So that is why you will forgive me for taking an interest in this whole area.
  (Sir Nicholas Montagu) Of course. May I just say that as new tax credits come in an awful lot of what Sir John covers in his report here will become automatic, things like risk analysis. They will be built into the new tax credit system, which is something of the order of five times the size of the system required for self-assessment. It is a very, very big project.

  15. Please turn now to page 20 and look at Figure 9. You will see that you still failed to meet your targets for clearing records despite devoting additional resources and that you have been trying to reduce the number of tax cases requiring clerical intervention. Would you like to comment on that. Is that a problem?
  (Sir Nicholas Montagu) Yes. It is a problem in the sense that I cannot report to the Committee the progress which I hoped to when I appeared before you previously. The news is not all bad and it is certainly mitigable. We cleared more open cases—the Committee will be familiar with that term of art—last year than in the previous year. We still do have a very large number outstanding for a variety of reasons. We gave priority last year, and I think rightly, to meeting what I might call day to day customer service targets, and we did so despite some of these—for example the time for post turnaround—being more stringent than in the previous year. At the same time we were undergoing major structural change in Stephen's part of the organisation, moving from 500-plus local offices to 65-plus areas. I think I may say that it is a great tribute to Stephen and his people that they achieved that level of customer service. What it did mean was that we still have more open cases at the moment than I had hoped. We have set up machinery specifically to tackle this and we really do want to get through it.

  16. Lastly I want to refer you to page R19, paragraph 4.5. At the bottom of that paragraph you will see, "On the basis of the responses received to date the Department estimate that underpaid tax totals £2 million and overpaid tax £15.1 million". Obviously this Committee has taken an interest in this subject in the past. You have sent out letters to your clients seeking their advice. What I should like to know is how many individuals actually responded to the letters you sent out?
  (Sir Nicholas Montagu) From recollection, something of the order of 160,000.

  17. Can you break it down at all between underpayments and overpayments or in any other way?
  (Sir Nicholas Montagu) Yes, I can indeed. We received 160,000 responses and we have made over 14,000 repayments and calculated 1,600 underpayments.

  18. Do you think you are treating the public entirely fairly in this matter? Your systems do seem to be deficient in some respects. You are having to write to them again, some respond, some do not respond, indeed why should they have to respond? Should you not try to get things right in the first place?
  (Sir Nicholas Montagu) It is not always a question of us getting it right in the first place. The important point to make here is that open cases are entirely normal. We have a load every year and they arise either when the correct amount of tax has not been paid or where we cannot tell whether it has, for example because the employer has used the wrong national insurance number. We try to correct matters, we try to track down the employees, but there is always a limit to what we can do. The particular problem which I discussed with the Committee previously arose for reasons with which you are familiar in 1997-98, and that has a knock-on effect. It is not fair to say that the number of open cases reflects deficiencies in our records. The other point I should make is this. In 85 per cent of the responses we had, the tax paid was actually right. Most of these open cases have not paid too much or too little. It was simply that, for the kinds of reasons I mentioned, we had no way of knowing. The other point I should make is that these are not closed cases; they remain open. If we get other information, through employers, through the individuals or whatever, which enables us to get the record straight, we do so.

Mr Rendel

  19. I should like to start on income tax self-assessment which is probably the most important part of the collection of income tax nowadays as far as you are concerned; although not as big as what you get through PAYE, undoubtedly more complex. We had a meeting about this on 22 October at which there was a lot of confusion about how the penalties work. But as a result of one of your notes since then, we have now clarified that. Have all those who failed to get their forms in on time at the end of January this year now been sent their penalty notices?
  (Sir Nicholas Montagu) Yes, they should have been.

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