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Dawn Primarolo: I gave way a lot.

Mr. Tyrie: I agree. I am sure that the right hon. Lady is pleased that I also gave way a good few times.

The merger of the two Departments was first described by a royal commission in 1887 as an "old question", and a Select Committee had looked into the matter 15 years before that. Gladstone was first against it and then, as with so many issues—home rule, the great Reform Act, extension of the franchise—eventually in favour of it. It took him about 20 years to change his mind about the merger of the Departments, but this Government have stood on their heads in a mere four years.

The Government's response to the Select Committee's first report on the matter in 2000 said that they believed that the synergies

"can be achieved without the risks, upfront and opportunity costs and structural upheaval which merger would inevitably entail . . . Thus, while the Government accepts that merger might bring some of the benefits outlined by the Committee, it believes that they can be achieved without the disbenefits of merger through a dynamic and focused programme of closer working."

That is official jargon for saying that it is not worth the candle. Four years later, we are told that it is worth the candle. Why the volte-face? I hope that it is because the Government have done a good deal of backroom work, which they have not yet published, and that they will shortly show us that the real benefits of the Bill relate to protection of the yield and reduced compliance. I hope that they will be able to add some numbers and some substance to their claims and be able to quantify the so-called synergies in order to produce a sensible estimate of the full benefits of the merger.

I hope so, but I fear not. I fear that the Government have not been feeding on the pure milk of administrative common sense, but have taken a dose of raw politics. They have sharply increased the size of the civil service. In the Revenue departments alone, the number of civil servants has increased by more than a third in seven
 
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years, from 73,000 to almost 100,000. The public—the Labour party's focus groups will have told them this—made it clear that they did not believe that they were getting value for money, and they were probably right. So the Chancellor had his Gershon review, and subsequently put the whole recruitment drive for the civil service sharply into reverse. But he could hardly go around telling other Departments to put their recruitment into reverse without having a look at his own. I believe that that matter explains, at least partly, the timing of the Bill.

There may be some benefits from the merger, but they are not necessarily great. The two Departments have developed different styles and different cultures for very good reasons. As a result, capturing the benefits will take a long time and will not be easy. There are attendant costs and risks. Conservative Members will not oppose the Bill, but we would like to see much more evidence that the Government have carefully thought through what they are trying to achieve with the Bill and what their ultimate objectives are. We would also like to see more evidence that the Government know how to accomplish them, but we have not heard much evidence today.

2.8 pm

Mr. Nigel Beard (Bexleyheath and Crayford) (Lab): The merger of Customs and Excise with the Inland Revenue was proposed by the previous Treasury Committee and has been welcomed by the current one. On the face of it, as the hon. Member for Chichester (Mr. Tyrie) touched on, it is a peculiar coupling. Customs and Excise has an image of speed boats and James Bond activity in remote inlets of the coast, whereas the Inland Revenue has the Bob Cratchit quill-pen image of someone at home in a dusty office with ledgers. That is not how it seems to many business people, who deal with one set of people to pay VAT and another set to pay company and income tax.

Bringing those two cultures together with compatible IT systems will ostensibly lead to savings, as already mentioned, but realising the potential benefits that are pointed out in the O'Donnell report needs managing—indeed, a degree of management that has not always been apparent in the past. That said, we must not lose sight of the wood for the trees. The dominant and primary objective of this merger is not cost saving in organisation: the overriding aim must be to reduce the gap between the potential revenue to the Government from tax and what is realised. That tax gap is too large.

The touchstone of success of this merger is not some recondite measure of administrative efficiency—it is the reduction, virtually to elimination if possible, of tax evasion. The amount of tax currently not paid by those who should pay VAT or company tax or income tax would make a significant contribution to the national accounts. At the same time, we must foresee and minimize the impact of new tax policy on the competitiveness of businesses.

In that context, I welcome the proposal for retaining an ability to assess the business impact of tax proposals within the new organisation, while at the same time strengthening the Treasury's ability to assess the overall
 
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effect of tax policy. If there are to be adverse effects of new taxes, at least we should expect that they were known about and weighed against the benefits of the tax. Normally, we should expect that adverse effects are anticipated, and eliminated as much as possible.

Above all, we must avoid the costs that honest organisations face in complying with tax law. I know very well that the CBI goes on and on, boringly, on the subject, as though all tax were an unnecessary imposition, and Digby certainly does moan an awful lot—but he is not always wrong.

There is no real reason why the basis for calculating income tax, for example, should be slightly different from the basis for calculating national insurance contributions and so involve a different set of calculations. More generally, the accounting needed for tax purposes could be brought nearer to the principles involved in normal company accounts. I hope that the new tax policy unit will home in on such issues.

A great gain for many businesses will be that they will have to deal with one inspector only for VAT, company tax and income tax. However, the primary measure of success of this reform will be the reduction of tax evasion, and the record is not good in either detection or prosecution.

The case of the London bonded warehouse was a scandal that could be presented theatrically as a farce. Duty-free spirits were donated to the back doors of public houses throughout south-east England on a grand scale. They left the bonded warehouse heading for the continent, and so no duty was paid on them. However, they had a regular habit of turning round at the sight of the channel and returning to London. Once that was spotted, an exercise was established for acquiring the evidence needed for prosecution. The Exchequer lost the unbelievable sum of £670 million just in the process of gathering the evidence.

Then there was the case of Regina v. Doran, a large-scale drug dealer. He was caught redhanded in possession of a huge haul of class A drugs. Someone had to try really hard to allow him to avoid due punishment, but the case failed because of a legal mix-up in mounting the prosecution. After those two cases, the Roques report looked into the management and administration of Customs and Excise, and the Butterfield report analysed whether Customs and Excise should have its powers to mount independent prosecutions taken away.

The Treasury Sub-Committee was assured that the findings of those two inquiries had now been acted upon. That is no doubt true, but I should like an assurance from the new chairman, Mr. Varney, that he is personally satisfied that these events could not be repeated in the new organisation. The Sub-Committee was not reassured when the previous Customs and Excise chairman was asked for an assurance that staff vetting procedures were such that no one with a criminal record could be employed in Customs and Excise. The answer was no, he could not give us that assurance.

Likewise, action against cigarette smuggling is not reassuring. A few years ago, no duty was paid on one in four cigarettes sold in Britain. That 25 per cent. has been brought down to 18 per cent. but many cigarettes are still being smuggled, at a cost to the Exchequer of around £2.5 billion per annum.
 
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The cigarettes in question were not made of mud and brick dust in a shanty town. They were made by three major UK companies—British American Tobacco, Gallahers and Imperial Tobacco Ltd, with the Government health warning printed on the side of packets. The total estimate of smuggled cigarettes in 2002–03 was about 12 billion, out of a total consumption of 75 billion. With duty avoided on that scale, I cannot believe that no one in those major companies knew what was going on.

At a recent meeting of the Treasury Sub-Committee, we were told that progress had been made and that the companies involved had signed a memorandum of understanding to co-operate in reducing cigarette smuggling. So three major companies have decided that they are willing to co-operate in enforcing the law of the land, but that leaves rather up in the air the question of what went on before the memorandum. No doubt all will be revealed in due course.

Mr. O'Donnell, the permanent under-secretary to the Treasury, said when he was commending this reorganisation that

"you need an organisation which is capable of managing different cultures within itself. For honest taxpayers you want a culture that is customer friendly. For dishonest taxpayers and, where there is fraud going on, you need a very tough, ruthless approach."

I agree entirely that that is a good principle of operation, but we seem to have seen too little of the tough and ruthless approach. If anything, the approach seems to have been lackadaisical and benignly indulgent. The great fallacy would be to assume that, because we are setting up a new organisation, all the observations in the Roques and Butterfield reports would be complied with immediately. They will not be, unless there is a clear determination, and a management ethos, to crack down on the cheats and frauds mercilessly.

The message that I should like to see go out from this debate to Mr. Varney, the chairman, and to his management team is that he should stick to the customer friendly approach for the honest taxpayer, but use every power available against the dishonest ones. If he does not have enough powers, he should come back and ask for more.

There is a heavy dependence on management to put right the inadequacies that I have outlined. Legislation is not enough. The management arrangements of the Inland Revenue, as evidence to the Treasury Sub-Committee has shown, do not lead to unqualified confidence. The sale of all the Inland Revenue's properties on lease-back to a company registered in a tax haven did not imply a management with a highly developed sense of the ridiculous. Nor was a sense of worldliness obvious when a so-called comfort letter was given to the buyer that breached Treasury directives that apply to every Government Department. The then head of the Inland Revenue was not told about it, and neither was the Minister.

The Treasury Sub-Committee has welcomed the steps taken to tighten management in the new organisation. We have supported the introduction of a framework document setting out who is accountable to whom, and for what. We also welcome the proposal for my right hon. Friend the Chancellor to issue an annual remit to the executive chairman outlining the organisation's new
 
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and continuing tasks. However, the proposal for the executive chairman to report to three different Ministers on different aspects of the organisation is a formula for confusion, delay and blurred accountability. It is important that the new organisation hits the ground running and puts the past behind it. A first year with management distracted by a flurry of memos around Treasury departments and fruitless co-ordination meetings will not achieve that. I hope that the Sub-Committee's recommendation that this arrangement should be looked at again will be acted on, not when the confusion has happened but without delay.

This Bill is a good basic framework that recognises the inadequacies that have arisen in the past in both Customs and Excise and the Inland Revenue. However, it must not be seen as a ritual incantation that in itself will provide a revenue and customs service relevant to the 21st century. It needs complementing by a highly motivated staff, who are managed to make full use of their abilities, directed to achieve clear objectives and provided with investment in technology. All that is vital to them ensuring that the taxation that this House votes for is fairly levied on everyone who has a lawful duty to pay. I am sure that the good wishes of this House go out to all who will be involved in an endeavour that is so fundamental to the life of this country. They will not be thanked by their customers: let us thank them in anticipation of their services.

2.20 pm

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