House of Commons - Treasury

Select Committee on Treasury Ninth Report

Introduction

1. The Treasury Committee established a Sub-committee in July 2001 to scrutinise the work of the various bodies for which Treasury Ministers are accountable. As part of this work we examine the activities of HM Customs and Excise and the Inland Revenue on a regular basis. On 2 July 2003 the Paymaster General told the Committee that the Chancellor was announcing a major review of the revenue departments to examine the "best organisational arrangements for delivering the Government's tax objectives both now and into the future …"[1]. The review, chaired by Mr Gus O'Donnell, Permanent Secretary to the Treasury, subsumed an earlier review—announced in response to the Committee's report on the handling of the joint Inland Revenue/Customs and Excise STEPS PFI Project into the relationship between Treasury Ministers and the revenue departments—which had not reported.[2]

2. In March 2004, the report Financing Britain's Future—Review of the Revenue Departments (the O'Donnell Report) was published.[3] In his foreword to the report the Chancellor accepted the changes recommended in the report in full and announced the creation of a new department integrating the work of Customs and the Revenue.[4] Subsequently, the Chancellor announced that, following the decision to merge Customs and Excise and the Inland Revenue, the new department would be called Her Majesty's Revenue and Customs and that Mr David Varney would become the Executive Chairman of the new department.[5]

3. The Sub-committee announced, on 31 March 2004, an inquiry into the proposals to merge Customs and Excise and the Inland Revenue. We heard oral evidence from Mr O'Donnell and officials from the Treasury, Customs and Excise and the Inland Revenue on 28 April, from the Association of Chartered Certified Accountants, the Institute of Chartered Accountants in England and Wales, the Law Society, PricewaterhouseCoopers and the Chartered Institute of Taxation on 12 May, and from Mr David Varney, the Executive Chairman designate (and Chairman of both Customs and Excise and the Inland Revenue), and officials of both departments on 13 October 2004. We also received a number of written submissions, most of which we have published with this volume. We are grateful for all the evidence we have received, written and oral.

The case for merger

4. The O'Donnell report notes that the case for organisational change rests "on potential improvements in customer service, effectiveness and efficiency."[6] The report adds "It results from an analysis of:

international experience, which has shown that the current separation of direct and indirect taxes in the UK, as opposed to organising around functions and customers, is behind best practice;
the functions of the revenue departments, which shows that there are benefits from bringing them together;
the experience of closer working between the departments since 1994, which has produced promising but limited results; and
the success of the creation of the Department for Work and Pensions, with the formation of several customer-oriented agencies, including the integration of benefits and employment advice in Jobcentre Plus, which has helped more people into work, and provided a better service for customers."[7]

5. Merging the revenue departments has been proposed several times before. Prior to 1833 the national revenue of the United Kingdom was collected by four boards: the Boards of Customs, Excise, Stamps and Taxes. In 1834 the Board of Stamps was merged with that of Taxes. In 1849 the Board of Stamps and Taxes was in turn amalgamated with the Board of Excise to form the Board of Inland Revenue. The present Customs and Excise Department was established in 1909, when Excise was removed from the aegis of the Board of Inland Revenue and amalgamated with the Customs under one Board.[8]

6. The amalgamation of the Inland Revenue and Customs was first considered in 1862 by a Select Committee appointed to "inquire whether it would be practical and advantageous to consolidate any of the establishments now governed by the Boards of Inland Revenue and Customs respectively."[9] The Inland Revenue Department, supported by Mr Gladstone, argued against amalgamation. Mr Gladstone is reported to have stated that "in the case of the Board of Inland Revenue, consolidation had been carried out to the very furthest point to which it was possible to carry it without great mischief to the Public Service."[10]

7. More recently, our predecessors examined this subject. In a report on the Inland Revenue in May 1999 the Treasury Committee recommended that "the Government commission a study to assess the feasibility of merging the two departments, the potential for savings in public expenditure and in compliance costs as a result of merger, and an outline of how the merger might be planned."[11] The Government response noted that "…as the Paymaster General made clear in evidence to the Committee, the merger of the two departments is not something which has been ruled out indefinitely. However, the Government's clear view is that it is preferable to proceed with the programme of closer working which we have in hand. We would not therefore see any advantage in the study which the Committee have recommended."[12]

8. The Committee returned to this subject in a report on Customs and Excise in April 2000, concluding "we believe that the merger of the Inland Revenue and Customs and Excise would improve compliance with taxation, reduce businesses' compliance costs and reduce the Government's revenue collection costs and we recommend that such a merger should proceed and that the Government should bring forward a plan for the merger in accordance with our conclusions and recommendations in this Report."[13] The Government rejected this recommendation on the grounds that the benefits of merger could be achieved through the closer working programme "without the risks, upfront and opportunity costs and structural upheaval which merger would inevitably entail."[14]

9. We asked Mr O'Donnell what had led the Government to change its mind on the benefits of merging the two departments since our report in 2000. He told us that:

"[…]The experience of having closer working, particularly things like Joint Shadow Economy Teams […] was they produced good benefits but they were in very limited areas. The closer working was because we were taking people from Revenue and Customs and getting them involved in joint projects. That was fine but the departments still had their own priorities and their own objectives. In order to make this bigger across the board it was quite clear to all of us in Treasury, Revenue and Customs that closer working whilst producing good results was not going to produce the really big benefits which you could get from a more radical change. At the same time we were having other machinery of Government changes, like DWP coming into existence, which taught us about a lot about merging organisations in the public sector. In general with the increasing strategic focus on delivery and efficiency that has led us to a situation where we have thought again."[15]

10. Our predecessors concluded in April 2000 that the merger of the Inland Revenue and Customs and Excise would "improve compliance with taxation, reduce businesses' compliance costs and reduce the Government's revenue collection costs" and recommended that such a merger should proceed. We are pleased to note that the Government have now accepted that recommendation.

Expected costs and benefits

11. The O'Donnell review examined a number of options for change but concluded that the creation of a new department offered the greatest net benefits, with improvements to:

customer service and compliance costs, through coherent policy advice and service planning, customer education and advice, processes and systems, and compliance activity;

effectiveness, through alignment of strategies, a coherent approach to information, new approaches to compliance, and flexible resource allocation. By helping to ensure that the right tax is paid by the right people , fairness would also be enhanced; and

efficiency, through economies of scale and the impetus of transformational change, particularly in transactional processes.[16]

12. These potential benefits were recognised by most professionals in the tax field. PricewaterhouseCoopers noted that "in principle, we welcome the forthcoming merger of the Inland Revenue and Customs and Excise […] we believe that there are clear benefits to all parties - taxpayers, advisers and the government - from there being a single tax authority. It is a model that serves most EU and OECD countries well."[17] The Law Society welcomed the conclusions of the review and considered that the merger was "[…] long overdue."[18] The Chartered Institute of Taxation thought that the new revenue body could contribute to a better tax system and welcomed its establishment.[19]

13. The Institute of Chartered Accountants of Scotland had mixed views. It told us:

"[…] the proposal to merge the Inland Revenue and Customs and Excise has met with a very mixed reception from the members of the Institute […]. Many believe that the development is logical and reflects the fact that in 1973 it would have been more sensible to give the responsibility for VAT to the Inland Revenue rather than Customs. This population believes that the merger proposal is logical and that there are obvious benefits in placing the responsibility for fiscal compliance on business taxes within the one organisation.

Others are very concerned that the proposed merger has the potential to cause difficulty to business, reducing the service which taxpayers have a right to expect and adding to costs. From past experience of the merger of the Inland Revenue and Contributions Agency, the proposal to merge the Revenue and Customs does not inspire confidence. As organisations, the Contributions Agency and the Inland Revenue had different computer systems and five years after the merger had been completed, they still have computer systems which cannot exchange information and accordingly duplicate enquiries and impose unnecessary additional costs on taxpayers in general."[20]

14. The O'Donnell review recognised that there were potentially significant human resources costs associated with the creation of a new department, and areas where there would be early priorities for investment before any savings were achieved (such as creating a common intranet for the new department). But the review considered that these costs should be viewed in the context of the potential efficiency savings.[21] The O'Donnell report concluded "that on the basis of existing plans, reforms proposed by the Gershon [efficiency] review,[22] and additional changes from integration, there could be scope for overall efficiency savings equivalent to up to 14,000 jobs across the two departments by the end of 2007-08, the last year of the 2004 Spending Review period."[23]

15. The review noted that "risks are potentially more significant than direct financial costs. They could include risks to 'business as usual' (including tax collection) and the disruption of projects already planned."[24] But it considered that "strong management can mitigate the potential risks, with a focus on priority areas (much of the business would not be directly affected by the creation of a new department), and with a clear focus on delivery as the core business of the department, to ensure existing priorities are met and areas for change are identified."[25] The review concluded that "overall, the risks are outweighed by the potential long-term benefits of integration."[26]

16. In 2003-04 there were some 77,300 staff in the Inland Revenue and some 22,400 in Customs and Excise. The Treasury told us that the planned reduction in staffing of 14,000 was a gross figure, and that the net reduction would be 10,500 posts. The difference in these figures reflected spend to save decisions to increase the number of people working on compliance activities. The planned gross reduction of 14,000 staff comprised:

8,000 staff from the Inland Revenue and 3,000 from Customs and Excise as a result of existing plans and Gershon work (generally from making greater use of e-services, processes and e-filing); and
3,000 staff across both departments directly attributable to integration via the merger.[27]

17. Subsequently, Mr Varney told us that the net reduction in the number of staff had increased from 10,500 to 12,500 "as a result of the Spending Review settlement and a look at […] what was expected out of the merger of the two departments."[28] Asked whether the 12,500 net job losses could be achieved without compulsory redundancies, Mr Varney noted that they could not be ruled out but they would try to avoid them.[29]

18. We asked the Treasury whether they had quantified the expected costs and benefits of the merger. Mr O'Donnell told us:

"Both in terms of cost and benefit if you try to quantify them what you will find very quickly, what we did find, is that it depends very crucially on the sequencing. Precisely what those cost elements are is how quickly do you put these things together. You can go for a 'big bang' approach, which would bring the costs somewhat earlier and increase the risks, in my view, or you can phase it, which would phase them out over a different period. Those can give you different numbers in terms of cost. The risk implications are very different. When we come to an implementation plan which the new executive chairman and the new team will put together to deliver what is purposely just a strategic goal that is laid out in the report, not a blueprint of how to do it, then will be the time to do a detailed risk analysis and quantify those risks for a particular different type of sequencing."[30]

19. We asked the executive chairman designate when he gave evidence to the Committee some six months later whether costs and savings had been quantified. Mr Varney noted that this had not been done as "one of the issues is the sheer size and complexity of the two organisations."[31]

20. Witnesses supported the proposed merger as a logical development that should in principle provide benefits to both taxpayers and the Government. We hope this proves to be the case in practice and that a detailed analysis quantifying the expected costs and benefits will be carried out as soon as practicable.

Risks

21. The O'Donnell review noted that "creating a new department is the most radical option, opening the way to transformational change in the way the revenue departments conduct their business. It would be a major challenge to continue effective implementation, while developing plans consistent with the vision set out in this review. It carries substantial transitional risks and costs, but also potentially the greatest rewards in terms of effective tax collection, customer service and greater efficiency, and the review assesses that the benefits significantly outweigh the risks and costs."[32]

22. Several witnesses were concerned about the risks posed by the merger. The Chartered Institute of Taxation expressed "some scepticism that staff reductions of the order outlined will result from using new technology, merging related functions (e.g. debt collection) and changing working practices (e.g. joint auditing) without affecting operational efficiency and customer service."[33] The Institute of Payroll and Pensions Management noted that "[…] it is the 'business as usual' approach that is vital. We have just begun the tax year that sees a significant change to PAYE, through the move to mandatory online filing for employers . We therefore need the Inland Revenue to continue to be outward looking even if it is facing huge internal reorganisation. Can one really believe that 'much of the business would not be directly affected by the creation of a new department' when 10,500 posts are to be lost with all the insecurity this entails?"[34] The Institute also questioned whether the focus on priority areas would mean valuable projects were shelved.[35]

23. The Public and Commercial Services Union (PCS) considered that for the new department to be successful "[…] it must deliver: additional yield for the Chancellor; improved support for business, employers and customers; a quality department, providing quality jobs; a national, accessible service for cities, towns and rural areas; [and] well paid, well motivated staff. PCS does not accept the proposed job losses as we believe that these objectives cannot be achieved with reduced staffing levels."[36] The PCS acknowledged that the merger of the departments would inevitably bring rationalisation and change, but considered that "[…] ensuring that proper resources and processes are in place and involving the staff will be fundamental to the success of the new department. We believe that pre-emptive decisions and a tendency to move too fast, too soon will prove to have disastrous consequences. We therefore hope that the […] management board will take a measured and rational approach to change and to the delivery of effective public services."[37]

24. We asked Mr O'Donnell what assurances there were that the revenue departments could cope with the significant changes involved in the merger without disrupting tax collection and the level of service provided to taxpayers. Mr O'Donnell told us:

"I think everyone is clear both from the direction the Chancellor is giving and from the signals which we will set for the new management. They need to manage this risk of making sure that business as usual carries on in those specific mission critical projects like Tax Credit Renewal and they need that as their primary focus. It matters enormously to us that the revenue keeps coming in and Tax Credits keep being paid out. That is very much a focus. That is precisely why we are not trying to specify in this report a detailed blueprint of what they should do when. I had a personally very important and persuasive conversation with Howard Davies when I talked to him about setting up the FSA when he had the various different independent regulators and putting them into one. He said one of the things which was crucial in making a success of that is that people said to me, 'these are the strategic objectives go and do it'. They did not say how because I actually wanted the freedom to ensure that regulation could work through that period and do it in a way which minimised the risk of a transformation when you are trying to carry on doing business as usual. That is very important and we will need to learn from successful integrations that have taken place in the public and private sector to make sure we do not let that happen. I agree that it is really important we focus on that."[38]

25. Mr Varney told us that ensuring tax gathering and service to the public was maintained was "very much the focus of our attention and that will be in our PSA targets and it is in the objectives we are trying to drive through. So we will be working extremely hard and diligently to make sure that happens."[39] The department has established a change management centre: to create the new organisation; to rationalise and prioritise the existing change programmes in each department to ensure they do not conflict and that they support the creation of the new department; and to focus performance on closing the tax gap, improving customer services and achieving efficiencies, particularly in the headcount. To ensure best practice is adopted, the department told us that it plans to establish "an advisory group where we will have individuals and organisations with direct relevant experience from both the private and the public sector and academia in this country and particularly in foreign financial services, and the tax authorities, who can give us the advice and can exchange information with us to make sure that we are picking up every trick that we should on the way."[40]

26. The revenue departments are among the most extensive users of information in the UK, and are heavily reliant on the IT platforms on which information is held. IT provision in the revenue departments is affected by their contractual arrangements with external suppliers. The Revenue and Customs use different models for IT provision based on their different needs, with Customs contracting with Fujitsu for infrastructure whilst outsourcing other work on a project basis or keeping it in house, while the Revenue act as an 'intelligent client' of a single strategic IT partner, bringing in co-partners as required. Both departments have sought to ensure flexibility within these contracts so far as is commercially realistic. Within the new department these arrangements will continue to support existing systems and services, as well as offering the option to migrate some service provision if required. In the longer term it would be possible to harmonise IT provision fully, though not without cost. [41]

27. In January 2004, the Revenue signed the 'Aspire' contract with their new strategic partner Cap Gemini Ernst and Young, which will run from July 2004 to June 2014 (with the option to continue for a further eight years). The O'Donnell review noted that the Revenue "has robust plans in place to manage the supplier transition, and key stages should be completed before any new requirements from integration of the departments start to be felt. The Aspire bidding process also emphasised the capacity to support future business change. Differences in IT provision should not therefore present a barrier to integration of the revenue departments, though management will need to consider:

their IT strategy, to what extent this will involve harmonisation of provision, and what underlying model will best serve the business needs; and
how to ensure a collaborative approach to resolving any issues that arise, bringing in IT partners promptly, for example if there is a need to co-locate teams in offices that currently support only one department's systems."[42]

28. We asked Mr Varney about the proposals for merging the departments' IT systems. Mr Varney told us:

"[…] First of all, we are trying to bring the various IT arrangements that we have with the Inland Revenue and Customs and Excise into some coherence. We have the Aspire contract in the Inland Revenue with Cap Gemini, and in Customs & Excise we have the deal with Fujitsu. So we are talking, and I am hopeful that by the end of this year we will start the process of bringing them together. […] we have 250 major IT systems, and we have 3,000 staff, as I said, working [in IT]. It is a huge expenditure of money. We per year put out 170 million forms and we run 100 thousand desktops. So it is a big issue for us. I think what we are bringing in [in the recent recruitment of a Chief Information Officer] is expertise of somebody who has a track record of managing change in IT and delivering business benefits. We also have to get smarter at our pre-risking and big risk minimisation projects, talking through both the IT risk and the operation."[43]

29. Asked when an integrated IT system was likely to be in place, Mr Varney said "it will take time, there is no getting away from that, and part of the modernisation of the PAYE system, for example, is critical to our achievement of the efficiency savings we have to make. So some of these projects are mission critical for both delivering cost and service objectives. I think we will bring what we want to bring because we bring the management potential and the discipline to the problem of investing in technology. What differentiates successful oil companies that use technology and those that are unsuccessful is essentially not the technology but the people and the attitudes."[44]

30. Whilst desirable in principle, merging the revenue departments is a major challenge involving significant change over a prolonged period. The Treasury and the revenue departments acknowledge that this process carries risks, but are confident they can be overcome. Other witnesses expressed doubts that existing levels of service could be maintained, particularly in view of the significant staff reductions that are planned. We note these differing views.

31. We consider that tax collection and customer service must remain the departments' first priority during the merger process. We recommend that this be clearly articulated by Ministers and senior management to ensure that in the event of conflicting priorities it is clear which takes precedence.

Legislation: confidentiality and powers of the new department

32. The integration of the revenue departments into a single department will require primary legislation. The O'Donnell review considered that legislation, which should be brought forward when parliamentary time allows, should address the following issues:

organisation and structure of the new department, to provide for its financing, and to define the relationship between the Treasury and the new department;

information sharing within the revenue department, and between the new department and other bodies, subject to the need to preserve taxpayer confidentiality;

powers of the new department to audit and investigate and to deal with non-compliance; and

other synergies, such as an integrated debt collection facility.[45]

33. The O'Donnell review noted that confidentiality requirements mean that disclosure of taxpayer or claimant data to other bodies, including between the revenue departments, must be legally justified—usually by a statutory gateway. The principal gateway between the revenue departments, Section 127 of the Finance Act 1972, is extensive, providing that Commissioners or authorised officers of the Revenue and Customs may disclose information to one another and use information received from the other for the purpose of assisting them in the performance of their duties. This gateway allows officers of the revenue departments to share, for example, information relating to an individual case of fraud, or information to improve risk assessment on a specific business sector.[46]

34. The review considered that:

"Although the existing gateway is extensive, the passage of legislation to create a new department […] will present an opportunity to consider how data can best be used to improve risk assessment, customer service, and policymaking. This would also present an opportunity to consider the gateways with other departments, such as DWP. […] The statutory rules in relation to particular taxes determine the obligations on customers to provide particular information at particular times, which in turn affects processes and the ways in which information can be used. For example, the Revenue may work with information from past accounting periods after the end of the three-year VAT enquiry window. Legislation also determines the departments' powers to require information, gain access to premises and so on. For example, at present joint visits can require taxpayer consent since Customs has powers to enter premises that the Revenue does not have.

There are good reasons for different powers in some circumstances. However, the creation of an integrated department will allow an overview to be taken of powers, and their impact on information use. There is a balance to be struck between lowering compliance costs for customers, and ensuring that the right information is collected to inform future development and analysis. The right technical solutions and use of information, for example collecting basic data on a once-only basis and/or through electronic channels, can ensure that costs are lowered without leaving out data that may be important. There is therefore an important link between powers and information strategy, and the powers of the revenue department will need to be considered as part of the legislation to establish the new department […].

35. The Law Society was "pleased to see that the [O'Donnell] report recognises the legal differences between the taxes administered by the two departments, which will need to be addressed over time. As is acknowledged in [the report], there is good reason for the difference in powers. Any alignment of powers following the integration of the two departments should not result in an automatic levelling up of the powers to the highest level currently applied. The opportunity should be taken for a thorough review of all information gathering and enforcement powers. While there needs to be a credible enforcement regime with commensurate powers, the approach to be adopted should be to adopt powers which are tougher on those who are deliberately non-compliant with a lighter touch for those who are compliant."[47]

36. The Chairman of the Tax Law Committee at the Law Society also told us:

"I think the main concern, to take the criminal and civil powers, is that there should be consistency in the circumstances in which criminal powers are used across the various categories of taxpayers, and the various taxes; that where criminal powers are to be used they are used properly—[that is] the process is human rights compliant, so that people are cautioned at the appropriate stage and have the opportunity to take advice, and this exercise seems to be a convenient opportunity to codify what the process should be, going forward. In terms of timescale […] if, as we understand it, the aim is to carry out the merger by early spring next year, then I think the review of the use of these powers will have to follow on behind, because I think it is important that the review is done properly, that there is proper consultation, and that is not going to happen in the time before next spring. So it needs to be a two-stage approach."[48]

37. We asked the Law Society whether any further specific safeguards on taxpayer confidentiality were needed in the forthcoming legislation. The Law Society thought that "there would be advantages in re-stating the Inland Revenue oath of confidentiality in the legislation, so it is clear on the face of the legislation that tax officials must keep […] taxpayer information [confidential]."[49]

38. We asked the Treasury and the revenue departments what steps they were taking to review the legal powers the new department would need. The Treasury told us that it had set up a Bill unit:

"to look at all the issues relating to the new legislation that will be needed. It is a unit that will coordinate activity across the three departments to make sure that we come up with legislation that will then be put to parliament in the normal way. […] they are working very closely with colleagues in Revenue and Customs to look at the existing information legislation and what are the possible implications depending on how far one decides to go on information for the new department. These are all issues that we would just want to stress are being taken very seriously, both in terms of the potential benefits of sharing information and also the importance of preserving taxpayer confidentiality."[50]

39. The revenue departments noted that one of the questions they were considering was what powers were necessary for the new department to discharge its functions and whether they were proportionate and reasonable, and considered that that was what parliament would be asking itself.[51]

40. The O'Donnell report recognised that "as a result of their different histories and tasks, Customs and the Revenue have distinct cultures. For example, Customs' involvement in law enforcement activities has helped to condition its culture. VAT is collected in real time—this too has conditioned Customs' culture. By way of contrast, the Revenue's main taxes are retrospective. Whatever changes are made, it is important that the differences of the departments are recognised and their respective strengths celebrated."[52]

41. Other witnesses were concerned about the different approaches of the revenue departments and how this might impact on the new department. The Association of Chartered Certified Accountants questioned whether the contrasting cultures at the UK's tax authorities lent themselves to a merger and considered that "the perceived problems here explained why a merger, while mooted for the last ten years or more, has never been contemplated until now."[53] The Association considered that:

"The Inland Revenue is more prepared to negotiate and has a more human face. By contrast, mention Customs investigators to accountants and businesspeople and exasperation sets in. Once the Revenue has made a ruling, it generally sticks to it. VAT offices change their minds more often—partly because they tend not to commit themselves in writing.

The historical background to Customs is that it was not set up as a tax collecting agency, chasing payments from people who are essentially honest. It was set up to chase smugglers. Some of that ethos persists—and it is this which needs to change if a merged entity is to operate as an effective public service agency."[54]

42. Mr John Whiting, Tax Partner, PricewaterhouseCoopers told us that the culture of the new department was:

"[…] a very big and major issue. I think, and the personal view of most of the practitioners that I represent would be, that we want a business-friendly, taxpayer-friendly approach, a 'We're all in this together, let's cooperate' sort of approach, because frankly that is what we as advisers and most taxpayers would want to do, rather than, [a] rather confrontational approach. How do you get that tone, assuming that is the agreed stance? Frankly, it has to come from the top, as with any organisation, therefore the new chief executive, say, must ripple down and set behaviours, and monitor it. There is a time, obviously, for hard behaviour. There is a time, if you are cracking down on drug smugglers, to take the police-type behaviour. That is fine. But for general taxpayer compliance we want to set a proper tone of 'Let's try and get it right together'; but if you go wrong, and deliberately wrong, obviously there is a bit of a mailed fist behind, but it is well behind, it is not the first step."

43. We asked Mr Varney whether he accepted that a new culture was needed for the new department and what he thought that should be. Mr Varney told us:

"[…] My experience of managing the two departments is they have a range of cultures in them and there is a considerable overlap. The reason they have cultural differences is because they have got different tasks. I think one of the tricks for us is to be clear about why different cultures are appropriate in different situations. If you talk to the serious compliance people in the Inland Revenue you will find a much more law enforcement-type attitude. They may go about it in a very polite way but then they are not dealing with people who have got drugs in their possession or contraband cigarettes. The market gets the response which is likely to dissuade people from doing the activities that they are doing."[55]

44. On the question of powers for the new department, Mr Varney noted:

"Customs and Excise have come out of an environment and are part of a tax system where an entity is taxed in real time […] The Revenue has more time because they can do investigations and they can always reopen cases within a certain period of time. I think the proposition we will be putting, if the Bill is introduced, will be to keep the powers that each individual tax activity has in place and to accept that when [the new department] is up and running we will look again at the question of proportionality of powers in the context of broader institutions that exercise powers of enforcement."[56]

45. Merging the revenue departments to create Her Majesty's Revenue and Customs requires legislation. It appears that a two-stage approach is to be adopted. The bill to create the new department will transfer the existing powers to require information, gain access to premises and so on unchanged. Consideration of what powers the new department needs to discharge its functions and whether they are proportionate and reasonable is to be delayed to a later date.

46. We recognise the pragmatic nature of such an approach to minimise any delays to the merger and to reaping the benefits that are expected from it. However, we are concerned that the powers the new department needs to discharge its functions should be subject to proper parliamentary scrutiny. We would therefore welcome a firm commitment from the Government to introducing 'second stage' legislation as soon as possible and recommend that this be in the form of a draft bill.

Tax policy-making

47. The O'Donnell review's remit included examining "the most appropriate structure for providing policy advice to Ministers, currently spread across three departments and mainly based around individual taxes."[57] The review concluded that there should be a new division of work between the Treasury and the new department, designed to build upon their comparative advantages. The Treasury would lead on strategic work and policy development, and the new department would lead on policy maintenance and delivery. To ensure continued joining up and partnership working, both departments would assist the other in the discharge of its duties. As part of this, the Treasury's capacity to advise on tax policy should be enhanced.[58]

48. On 11 October 2004 the Paymaster General announced that in line with the recommendations of the O'Donnell review the new arrangements separating the development from the maintenance of tax policy were now in operation. The Treasury had assumed responsibility for policy development, working very closely with the Inland Revenue and Customs and Excise.[59] The new tax office in the Treasury has some 150 staff, about half of whom had transferred from Customs and Excise and the Inland Revenue.[60]

49. There were concerns that these new arrangements would detach policymaking from implementation and operation. The Institute of Chartered Accountants in England and Wales noted:

"The O'Donnell Report proposes that the Treasury will be responsible for tax policy making and that the new merged Revenue Department will deal with policy implementation. Whilst we can see that this should lead to a wider strategic overview and to more joined-up tax policy making, which has been another of our concerns, there is a danger that this will widen the gulf which undoubtedly already exists between policy and operational issues."[61]

PricewaterhouseCoopers stated:

"We note the moves of the policy-making sections of the IR and C&E to the Treasury building. There are clear opportunities here in terms of 'joined up' policymaking. However, we do wonder how this will impact on the connection between policy and operations. In both the IR and C&E there can be times when policy is handed over to be implemented with operational staff seemingly under-prepared and under-supported (the recent introduction of Stamp Duty Land Tax is an example). There is a risk that the policymaking of the combined body becomes more detached from the implementation and operation, and indeed from practical experience. This is something to be guarded against: we hope that the policymaking groups will strive to maintain proper dialogue with users."[62]

50. In response to these concerns the Director of Tax Policy at the Treasury told us that they had considered moving tax policy-making to the Treasury in total, but had rejected that option because of concerns about "the potential that you would break up the link between policy and delivery"[63] and because:

"[…] you would have real issues then about taxpayer confidentiality because to do detailed policy development and operational policy development you would need to go down to the records of individual businesses or potentially individual personal customers and, given that we do not want to go anywhere near undermining taxpayer confidentiality, that was another key argument for why we ruled out what might, on paper, look like a cleaner break. What we think we have got is something where we would be working in partnership to deliver on government objectives."[64]

51. We asked Mr O'Donnell what impact the transfer of some responsibilities for tax policymaking to the Treasury would have on protecting taxpayer confidentiality. He told us that:

"[…] maintaining taxpayer confidentiality is vital. The Chancellor made it absolutely clear to me at the start that under no circumstances should anything we do damage that. I think that is absolutely vital. You are absolutely right that we will be working more closely in partnership but that partnership only goes so far. When it comes to data sources, individual taxpayer records, individual company records there will be very clear firewalls, our computer systems will not be able to interact with their systems for that kind of data, hence when we looked at putting together a tax analysis group at one point we thought why do we not put this in the Treasury and we decided in the end it would be much better to be in the new integrated department precisely because of this data access point. It will be, if anything, strengthened and we will ensure that there is no access by Treasury officials or Treasury Ministers or special advisers to individual tax records."[65]

52. The Treasury has assumed responsibility for tax policy development and has an additional 150 staff, half of whom have transferred from the revenue departments, for this work. We endorse steps to strengthen the Treasury's capacity in this area, but note the concerns that the arrangements adopted may detach policy-making from implementation and operations.

53. The transfer of responsibility for tax policy development to the Treasury and the move of some Customs and Excise and Revenue staff to the Treasury building have raised concerns about confidentiality. We welcome the commitment given to maintaining taxpayer confidentiality and the assurance that there will be no access by Treasury officials or Treasury Ministers or special advisers to individual tax records and recommend that this principle be carried forward into the bill.

Ministerial accountability

54. The O'Donnell review noted that the creation of the new revenue department presents an opportunity to modernise the accountability arrangements, and to improve clarity about who is responsible to whom, for what. The review recommended that:

"the new department should, like its predecessors, be a non-ministerial department, as an underpinning of customer confidentiality;

each year the Chancellor should issue a Remit to the Executive Chairman outlining the new department's main new and ongoing tasks. This should be focussed on what should be achieved, and why, rather than how, which should be a matter for the new department;

a Framework Document setting out who is accountable to whom, for what, in the new department, should be published. The Framework will be an opportunity for Ministers to set out long-term principles to govern the work of the department; and

structures should be established to ensure that the Treasury and the new department have a close dialogue, developing a shared view of key issues, and agreeing advice to the Chancellor on the form of the annual Remit."[66]

55. On 4 October it was announced that the Paymaster General would be the departmental minister for HM Revenue and Customs.[67] According to an updated list of ministerial responsibilities on the Treasury website, the Paymaster General's responsibilities also include "strategic oversight of the UK tax system as a whole including direct, indirect and corporate taxation, capital gains tax, inheritance tax and VAT."[68] The Economic Secretary's responsibilities include "environmental issues including transport taxation and lorry-road user-charge"[69] and "excise duties and gambling."[70] Mr Varney told us that he was accountable to three Ministers as, in addition to the Paymaster General and the Economic Secretary, he reported on some issues to the Financial Secretary.[71]

56. We welcome steps to modernise the accountability arrangements that will apply to the new department. We support the introduction of a Framework Document setting out who is accountable to whom, for what, in the new department, and the proposal that the Chancellor issue an annual Remit to the Executive Chairman outlining the department's main new and ongoing tasks.

57. However, we note that the Executive Chairman will be reporting to three Treasury Ministers on various aspects of the new department's work, an arrangement which, at least in theory, appears cumbersome. We recommend that this aspect of the new arrangements be reviewed in the light of practice after the new department has been created.

1 Treasury Committee, Tenth Report of Session 2002-03, Inland Revenue Matters, para 64 Back

2 Ibid. paras 60, 61, 64 Back

3 HM Treasury, Financing Britain's Future-Review of the Revenue Departments, Cm 6163, hereafter referred to as "The O'Donnell Report" Back

4 The O'Donnell Report, page 1 Back

5 "David Varney appointed executive chairman of new tax department", Treasury Press Notice 47/04, 13 May 2004 Back

6 The O'Donnell Report, para 1.17 Back

7 Ibid. Back

8 Committee on Enforcement Powers of the Revenue Departments, Report, Cmnd 8822, March 1983, page 786 Back

9 Commons Journal, Session 1862-63, page 164 Back

10 Committee on Enforcement Powers of the Revenue Departments, Report, Cmnd 8822, March 1983, page 786 Back

11 Treasury Committee, Sixth Report of Session 1998-99, Inland Revenue, para 81 Back

12 Treasury Committee, Sixth Special Report of Session 1998-99, Inland Revenue: The Government's Response to the Sixth Report of the Committee in Session 1998-99, page xi Back