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Mr. Michael Fallon (Sevenoaks) (Con): The House will be impressed by the integrity of the hon. Member for Luton, North (Mr. Hopkins), given his vignette about his return from France. He spoilt it only slightly by suggesting that under a Conservative Government there were fewer customs officers on duty. It is true that, under the Conservative Government, duty was much lower than it is now.

The hon. Gentleman made some important points about jobs, to which I shall return. It is important that Ministers address seriously the argument that the PCS has advanced. It has been put to the Treasury Sub-Committee. I am grateful for the kind words that have been said about the report of the Sub-Committee, which I have the honour to chair. The Committee, as my hon. Friend the Member for West Worcestershire (Sir Michael Spicer) reminded us, has been on this track for some time. It was in 1999, when he chaired the Committee, that it first recommended that a feasibility study should begin of the prospects of merging these two great and historic Departments. It was a year later, after taking evidence about other countries that had merged the two services successfully, and notably Canada, that the Sub-Committee made its final report in April 2000, recommending a full merger between the two Departments.

That recommendation was rejected by the Government, as has been said. One of the things that puzzled the Sub-Committee when we came to consider the merger again was why the Government had changed their mind. It is important for the Government to declare why they have now accepted the recommendation.

I was alarmed by the permanent secretary's reply when he was asked why he had changed his mind. He pointed to the record of other bits of Whitehall being merged. He pointed to the emergence of the Department for Work and Pensions. I do not think that it is
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necessarily the case that the functions carried out by that Department are demonstrably better carried out now than they were when they were distributed among other Departments.

Secondly, the permanent secretary suggested that the creation of the Financial Services Authority, which had taken on the functions of a number of different regulators, had also encouraged the Government to think again. I am not sure about that parallel either. Regulators are much smaller than the bodies that we are now considering.

Sir Michael Spicer: My hon. Friend is making a strong point about the Government changing their mind. Perhaps an even stronger point is that we have had a change of Ministers between the two decisions. I think that the Paymaster General was in office at the time.

Mr. Fallon: My hon. Friend makes the point. We were surprised when we heard the announcement a year ago and it is worth trying to probe the Government on the reasons that they put forward. The evidence that we took from the Institute of Chartered Accountants of Scotland pointed to a very different parallel. It said:

It pointed out that, five years on, those two bits of the Inland Revenue still cannot properly exchange information on their computer systems. That is why it is important that this merger, which I welcome, is justified on genuine grounds. It is not enough to say that it is simply strategic or that such mergers have worked elsewhere in Whitehall.

Mr. David Ruffley (Bury St. Edmunds) (Con): In the course of my hon. Friend's Sub-Committee's inquiry, was he furnished with any statistics showing the greater cost and efficiency savings that should be delivered by the merger?

Mr. Fallon: We probed hard on that point and I will come to the costs and benefits, but first I want to deal with the reasoning behind the merger. As I said, it is not enough to say that merging two departments like the ones covered by this Bill has worked with other departments or that the decision is simply strategic. In the business world, that would not justify a merger. I should remind the House of my business interests. One usually becomes involved in a merger in business because one can convince the board or shareholders that a merger will add value, reduce costs and make organisational sense. I had hoped that the Ministers behind the Bill and the Chancellor would have set the case out more clearly.

To be fair to Ministers, they have set out some reasons. First, they have said that they hope that the merger will improve taxpayer compliance to close the tax gap. Several colleagues have already mentioned that important point. Secondly, Ministers have said that the merger will reduce the cost of compliance and, thirdly, that it will reduce the costs of collection. If
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those are the three stated objectives behind the merger, we should, as my hon. Friend the Member for Bury St. Edmunds (Mr. Ruffley) implied, perhaps have had a stronger indication of the exact savings that can be quantified.

Any merger in the private sector—David Varney has been involved in a number of mergers in the private sector—would have been preceded by a proper cost-benefit analysis. We pressed the permanent secretary and Mr. Varney hard on that point and, although it is hard to be sure, there appears to have been some attempt at quantifying the actual costs and benefits. However, that attempt seems to have been abandoned. We recommend in our report that such analysis should take place as soon as practicable. Even if we believe that the Government's explanation that we cannot properly cost the savings until some of the second-order issues are resolved, we are still entitled to ask for the cost-benefit analysis to be carried out as soon as possible.

Mr. Ruffley: Is that explanation not puzzling given that, under the Gershon review, very detailed numbers have been given for efficiency and cost savings? Is there not a contradiction there?

Mr. Fallon: There is a contradiction and I would have expected the Sub-Committee to have been presented with more detailed analysis than we received.

The explanatory notes on the Bill contain a particular figure. It is tucked away in paragraph 284, which tells us that integration

At least we have some indication of the initial costs.

The Paymaster General has also told us today— I think for the first time—that there will be savings of £500 million by 2007. It is still not clear where those savings will come from: whether they result from the 3,200 posts that will be scrapped directly, from the Gershon exercise or from a combination of the two. When the Economic Secretary winds up, I hope that he will be clearer with the House about the figure of £500 million. As the hon. Member for Yeovil (Mr. Laws) said, it seems a large figure if we are simply talking about the 3,200 posts. I am not clear whether it is a cumulative figure—the Government have previously counted things several times—or whether it is the actual figure that directly relates to the cost savings.

Mr. Laws: Is the hon. Gentleman suspicious, as I am, that the Paymaster General may have muddled up the savings from Gershon with the savings from the merger? Is he particularly suspicious given the answer that David Varney gave to his question in the Select Committee hearings? David Varney said that there would savings of £507 million over the spending review period and a saving of 12,500 jobs net, a figure that clearly relates to total job savings and not just to the merger itself.

Mr. Fallon: I am not clear on that point and it falls to the Economic Secretary to clarify the figure of £500 million when he winds up. He must tell us how it has been arrived at, whether it is cumulative, whether it includes the 3,000 posts, whether it excludes Gershon and whether it relates to annual savings.
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The only other hint of further costs, rather than savings, is the reference on page 10 of the regulatory impact assessment. It suggests that there may be further costs to integration resulting from changes to join up some of the services that the two departments currently provide. It states:

We are not quite clear what those costs are, but it is clear that they are costs and not savings. The Economic Secretary owes us a further explanation of the costs and benefits and I hope that he will reply to our specific recommendation—I do not think that the Paymaster General quite did—that the costs and benefits should be quantified as soon as practicable when the integration policies are agreed and brought back before the House.

The hon. Member for Luton, North raised the important issue of jobs, which is well documented in the PCS's submission to the Sub-Committee. We are told that, as part of the Gershon review, 12,800 full-time posts will be scrapped and that, as a result of the merger, 3,200 specific posts will be lost. That is a rather one-dimensional view of efficiency savings. When one asks Ministers and David Varney about the savings that will result from merging these two great departments, they respond only in terms of the number of posts to be scrapped.

As someone more distinguished in the Treasury keeps saying, it is not the job title that one holds but what one actually does that matters in government. It is not right simply to consider efficiency savings in terms of the number of jobs that will be scrapped. Instead, I would have expected to hear from the Government how the work load of the two departments, once merged, would be handled more efficiently.

I would have liked the Government to have responded much more vigorously on the whole issue of reducing the costs of compliance for business. If it is true that a merged customs and revenue service is going to result in reduced compliance costs for individual taxpayers or for business, I would have expected the Government to have set themselves more vigorous targets.

In an earlier Sub-Committee report, we said how impressed we were by the Finance Ministry in Holland in which officials have been set a specific target of reducing by 25 per cent. over four years the costs to business of complying with taxation. It has introduced modelling for the smallest businesses that enables it to measure the actual costs to small businesses, shopkeepers and medium-sized firms of filling in tax forms and of complying with the tax burden. Some 17 people in a unit in the Finance Ministry are dedicated to reducing the costs of compliance. I hope that Ministers will set the new service a much more specific target for reducing the costs of compliance for business.

I turn to the Bill itself, which is only the first of two Bills. I have two problems with that. Because the Bill is so minimalist, there is a risk, as the regulatory impact assessment pointed out, that its scope is inadequate. Because it is so minimal and has been introduced so quickly, it may not fully cover the arrangements that need to be put in place. I was alarmed to hear that we are to be faced with Government amendments to the Bill as
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soon as it starts in Committee. I very much hope that when choosing the two-stage minimalist approach, the Government have drafted the Bill correctly.

There does not appear to be a firm commitment to the second stage. The Department said:

That does not sound like an explicit commitment to a second-stage Bill, although I understood the Paymaster General to say earlier that there was a commitment to produce the second stage in 2006 or 2007. Perhaps the Economic Secretary could clarify that. It is worth some clarification, because we have some experience of two-stage reform. We are still waiting for the second stage of House of Lords reform, which still has not emerged some years after the first stage was introduced.

Secondly, there is the issue of powers. I welcome the non-transferability of powers to prevent any inadvertent widening of powers in the new department. That will need to be scrutinised in Committee. It reinforces the need for further legislation and for that to be forthcoming reasonably early, to ensure that the powers are appropriate, proportionate and fit for purpose. If the Government are committed to those tests—that the powers they are taking are to be appropriate, proportionate and fit for purpose—they need to get on with the consultation and get the new powers into statute as soon as possible.

One specific power that will concern anyone who scrutinises the Bill in detail is the power in clause 10 requiring officials to comply with

The explanatory notes are helpful. They state that that excludes directions on the day-to-day management of the service or on operational matters. The intention is fine, but the clause is not sufficiently tightly drafted. It might be helpful if the Government specified exactly what those

might cover. It might seem odd to ask for a general direction to be specified, but it would be helpful if we knew what kind of directions Ministers had in mind, given that the drafting of the clause is so wide.

I turn to confidentiality, on which I intervened on the Minister. That is a matter of concern to me and the rest of the Sub-Committee. We should always be concerned about confidentiality. I welcome the strength of the Paymaster General's view this afternoon. A further reason for concern is that the departments are being merged into the Treasury building. That puts into sharp relief the question whether we can ensure that officials who are using the same building, sharing the same cafeteria and meeting in the same corridors are properly separated from the Ministers and special advisers who have the more political function.

Given that point, I hope that the Economic Secretary will clarify the downgrading of the oath and statutory declaration. We were told in evidence that it is no longer an oath but a statutory declaration. But, as my hon. Friend the Member for Chichester (Mr. Tyrie) said, a statutory declaration made and witnessed at the beginning of each official's employment has some solemnity about it and brings home to the person
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making the declaration just how serious the matter is. It is therefore not sufficient to write the terms of the declaration into the statute. How many officials taking up office will read the Act? Ministers ought to look again at that and reassure the House. If it is part of the employment contract of staff of the new department, there could still be a case for making that a statutory declaration in front of witnesses, as part of the employment contract. That may be Ministers' intention, but it was not clear from the remarks of the Paymaster General. I think that she appreciates the concern and I hope that the Economic Secretary will clarify the matter.

Finally, on the Bill, I turn to accountability. When we first heard about the merger a year or so ago, I expected that a single department would report to a single Minister. It now appears that the new merged department will report mainly to the Paymaster General, but also to the Economic Secretary on excise duties and green taxes, and to the Financial Secretary on stamp duty, taxes on savings and taxes on pensions. This is not a political point. The hon. Member for Bexleyheath and Crayford (Mr. Beard) made the same point. It is cumbersome for a new single merged department to report to at least three Ministers. The Treasury Sub-Committee will want reassurance that the lines of accountability are not blurred and that everything possible is being done to narrow accountability to one particular Minister, who I expect to be the Paymaster General.

I shall touch on two other issues that are not directly referred to in the Bill, but that flow from the merger proposal. The first is the department's estate—the buildings that it will occupy. I make no apology for returning to the issue of Mapeley, which has preoccupied my Committee and the Public Accounts Committee over the past two or three years. Because the departments are being merged, the case for rationalising the estate and being clear about the costings of that estate is all the more obvious and important. That brings us back to the Mapeley costings. As the House may recall, the National Audit Office estimated that the facility price—in other words, the cost that the departments will pay Mapeley, the private sector consortium looking after the offices—should have averaged out at about £170 million a year over the 20 years from 2001. In a letter on 24 November, the Paymaster General told me that the payments to Mapeley in the first three years were £235 million in 2001–02, £306 million in 2002–03 and £311 million in 2003–04. Those payments were significantly higher than the NAO expected, and we must ask why. One would expect more rationalisation from a merger, and even after the Mapeley contract was signed—we will not go into the sad history of its offshore sourcing—one would have expected some variation to the contract to have been sought to reduce the number of offices occupied by the merged department.

In her letter, the Paymaster General explained why the NAO price of £170 million a year is nowhere near the £300 million a year that she now pays:

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Why not? The merger will provide the department's new business model and changes in the legislation.

One would have expected some rationalisation, but instead we have costs. I accept that the costs are for the first three years of a long contract, but they are now running at nearly twice the NAO assessment of the facility's price. The point of putting offices under private sector management is to get away from the department's business modelling and forecasting and into the real world, where people experienced in estate management and commercial property can weigh up matters and make the required savings. In the private sector, such a merger would yield immediate savings by sharing offices, rationalising space and utilising fewer, not more, square feet. In other words, the price paid to Mapeley should be falling, not rising.

In the end, the Bill is about improving the service that the customer gets. In rather a chilling phrase, the Paymaster General said that she wants "to improve the taxpayer experience". Over the past few years, taxpayers have had much experience of paying more and more taxes. Taking her comment at face value, it is important to focus on the aim of the exercise, which is to improve the service to individual taxpayers and, indeed, business taxpayers. The record over the past few years is not particularly good.

The tax credit fiasco, on which my Sub-Committee reported, is not an encouraging precedent. The scandal of deficiency notices that are issued late or not at all again shows that the follow through is not particularly good when changes are made in Whitehall. Evidence is also emerging that the Revenue is not as good at running the benefits system as it was at running the tax system. We must focus on the service that the customer gets. From my experience of constituency casework, the Revenue and Customs must re-examine their interface with customers. For example, the helpline service is not nearly good enough and needs improving.

I am not sure whether people—perhaps even hon. Members—are sufficiently aware of the function of the adjudicator, who rules on complaints against the Revenue and its various sub-departments such as the valuation office. Last year, the adjudicator investigated 374 cases in the Inland Revenue and 98 cases in Customs and Excise, which is not an awful lot. We should use the opportunity presented by the merger to revamp the way in which the Revenue and Customs treat those who pay for them and rely on their services—the situation could and should be better.

Let me sum up. The merger was recommended by the Sub-Committee and is probably a good idea, but it needs to be driven by set objectives and against measurable benchmarks. I welcome this initial legislation and wish Mr. Varney and his team well in implementing it, but I put him, and Ministers, on notice that this is not the end of the story as far as the Treasury Sub-Committee is concerned. We will return to the merger at six-monthly intervals to see how it is getting on, because the stakes are very high indeed.

3.35 pm

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