Examination of Witnesses (Questions 1
- 19)
MONDAY 24 JANUARY 2005
INLAND REVENUE
Q1 Chairman: Good afternoon, and
welcome to the Committee of Public Accounts, where today we are
looking at Tax Credits, Stamp Duty, Land Tax and Deleted Tax Cases,
and we are joined once again by Mr David Varney who is Executive
Chairman of the Inland Revenue. Would you like to introduce your
team?
Mr Varney: Paul Gray is Deputy
Chairman of the Inland Revenue, responsible among other things
for the business operations, and David Hartnett, who I think you
have seen before is the Board Member responsible for the technical
and policy issues.
Q2 Chairman: Thank you very much.
Could I please ask you to look at the Comptroller and Auditor
General's Standard Report, paragraph 2.7 on page 123. We know
that we had the lengthy tax credit delays and we have already
gone through that in some detail previously; we now have large
demands for recovery of overpayments. Do you think this is the
right way to treat vulnerable people?
Mr Varney: I think there is a
very difficult choice to be made in terms of overpayment, which
is the balance between compassion and compliance. What we try
and do, and we have to do this on individual cases, is look at
what the merits of the case are and of the number of overpayment
cases we have had, which I want to deal with because they are
caused by different reasons, of those which result from the computer
errors we have looked at the cost of recovery of that set of overpayments
as against the amount we are trying to reclaim and decided that
in those cases which are under £300 of overpayment we will
not pursue the reclaim of money. That has reduced significantly
the number of cases affected. In the other cases we think there
is a reasonable case for looking at recovering overpayment in
general, though there will be particular case claims we will look
at, but I think it is a very difficult area. Can I also make clear
that in the design of tax credits it is in the nature of the system
that is relating payment to income and circumstance that there
will be overpayments.
Q3 Chairman: I accept that referring
to paragraph 2.4 on page 121 I just wonder whether it is administratively
acceptable to design a system which generates large amounts of
overpayments. We are talking about vulnerable and, by definition,
poorer people; I just wondered whether MPs, when they voted for
this to go through the House, would have done so if they had realised
that the people in difficulties were, as a matter of course, being
required to pay back money to the Inland Revenue. If you are on
a low income this makes life very difficult indeed. I understand
your point about them not having to pay if the overpayment is
less than £300 but that, of course, may compound the problem.
You are on a low income, you get a bill from you for several hundred
pounds—which is not your fault as the person who may have
a fairly modest wage—and you suddenly get a bill from the
Inland Revenue for several hundred pounds, and you have designed
the system in this way?
Mr Varney: I think what we are
trying to do is operate the system which, as you rightly say,
Parliament has set up. If I can put the computer errors to one
side and just deal with the underlying issue, we dealt with the
estimation of the benefit based on the income of 2001-02, and
a number of people's economic circumstances have improved considerably
during the period up until 2003-04, which is why there has been
a generation of overpayments, and we obviously have set rules
which are laid out in our code of practice which means that we
do not recover the full amount if the person is in great hardship.
There are rules in place to minimise the amount of recovery but
to do it over a longer period of time, and we are clearly not
trying to drive people who are already in difficult circumstances
even more, but we also have to protect a system where people get
what they are entitled to, not receive overpayments as a matter
of course.
Q4 Chairman: You come with all your
experience in the private sector, and this is now your second
appearance before the Committee, and you have had a chance to
look at this, I just wonder whether you think it is fair that
people on lower incomes have been given this double whammy. First
of all they have all these delays; now they have a system which
generates overpayments. Are you entirely happy with this? Is there
no way of redesigning the system?
Mr Varney: We need to go through
two or three cycles. The renewal cycle we have just been through
has operated much better than previously experienced—that
is not to say it is trouble free and it is not to say there have
not been people affected by error, in a system this size we are
bound to have individual cases—but I do not think we are
in a position to add anything more to the debate than Parliament
itself did in terms of the experience of the operation of the
system at this stage. I still think there is more work to be done.
Q5 Chairman: If we look at paragraph
2.10 and subsequent paragraphs on page 24, there were these two
major systems errors which resulted in tax credit overpayments
of £94 million and £80 million. Why were these errors
not picked up during testing?
Mr Varney: Dealing with the first
one, the £90 million, paragraph 2.10, the issue I think was
discussed extensively with the Committee of Public Accounts last
year and I think you were given a considerable amount of evidence
why it was not picked up, and debated the testing period in volume
testing, these are the group that we have looked at and I have
spoken earlier about the balance between administrative cost and
whether it is worth pursuing the smaller sums of money. On the
£80 million, that is the other case which is the one I think
I wrote to you about subsequent to the publication of the Committee's
Report, that was an error which we picked up, we had not picked
it up before, and we addressed it, made some changes to the system,
and we have written to all the individuals that have been affected.
In the majority of cases we are reclaiming the overpayment by
moderating the amount that is paid over the balance of the financial
year.
Q6 Chairman: Let's look at fraud
and error now. By July 2005 you will have spent £30 billion
on tax credits, is that right?
Mr Varney: About that, yes.
Q7 Chairman: So what interim estimates
have you got on fraud and error bearing in mind the undertaking
given by your predecessor? He told us that he was going to halve
tax credit claimant errors to 5-7% by value. Are you generally
meeting that commitment to this Committee?
Mr Hartnett: Chairman, I will
pick that up, if I may. The first round, the 2003-04 year of tax
credits, will not be finalised with investigations carried out
until probably July 2005. That is the first time we can get a
reliable estimate through random inquiries of what the level of
fraud and error might be. However, we did look at a sample of
provisional claims, because they have to remain provisional, and
looking at that sample it seemed that the error rate was below
10% and depending on groups somewhere between 6% and 10%, but
that did not lend itself to a financial quantification.
Q8 Chairman: So what is the answer
to my question? Are you meeting the commitment given by your predecessor
to this Committee, Mr Varney?
Mr Varney: I think, as we are
saying, we have not been able to measure the error rate.
Q9 Chairman: Then why did you give
that commitment to us, if it is not measurable?
Mr Varney: I think you will have
to ask him.
Q10 Chairman: We cannot ask him;
you are now responsible. You are the Accounting Officer. A commitment
was given to this Committee. We are talking about £30 billion
spent on tax credits; a commitment was given to this Committee
about fraud and error and we expect it to be met, and you are
now saying "It is no good asking me, Guv; ask my predecessor".
Mr Varney: I will explain the
reality which is that we have not yet completed the work on the
errors.
Q11 Chairman: When will you complete
it?
Mr Varney: I think some time around
the middle of the year. We have also had a situation where we
have stepped up the amount of work that we have been doing in
terms of detecting fraud, and you can see this on stamp duty as
well. When we introduce a new tax or benefit, we try to put all
our effort into trying to explain to people how the system works,
which we do because in the longer term it is in the best interests
of maximising compliance. As we get clear evidence that people
understand what the system is and the way it works we step up
our efforts in terms of deterring non-compliance, and that is
because we feel we have more people understanding the system.
That is a balance issue, and so I am unable to give you an answer
more than was said last time by the previous Accounting Officer.
Q12 Chairman: Will you ever get below
5%?
Mr Varney: I do not know.
Q13 Chairman: So it was unwise of
your predecessor to give us the commitment that he did, then?
Mr Varney: I can only tell you
the position I am in.
Q14 Chairman: Clearly it was because
you are saying you are now unable to give any kind of prediction
or commitment whatsoever?
Mr Varney: I am saying we will
do the work and when I have done that it will inform the advice
I can give.
Q15 Jim Sheridan: Mr Varney, I am
sure the frustration that this has caused among many of our constituents
is not lost on you, and the additional workload it has caused
to Members of Parliament. Starting with a clean sheet of paper
and with the benefit of hindsight, what lessons, if any, have
you learned from this debacle, and what advice would you give
any other members in the Department embarking on such a programme?
Mr Varney: First, let me apologise
for any failure on our part to reply to questions promptly and
accurately and meet our obligations. You are right, we have been
struggling, in the number of cases where people have been affected,
to consider what is the appropriate response and many of these
are quite complicated cases. I think there are lessons which came
out of your last Report which we looked at in terms of large and
complicated systems, and in terms of introducing them I think
we have tried to apply those lessons, not least in stamp duty
land tax but the way we go about big computer projects. There
was a lot of discussion about being an intelligent customer and
there is the major cultural challenge, which I think a lot of
our people have risen to, of moving to a bigger tax collector
and also of being a distributor of benefits. I think that has
been a major challenge. On the size and scale of this operation
I think there are some bits that have worked incredibly well.
We have taken over the last 12 months 15 million phone calls which
have been answered within 20 seconds which is a volume of telephone
calls which is truly alarming, so lots of things that have gone
well have been overshadowed by the problems in those areas which
you know we have had.
Q16 Jim Sheridan: Did your Department
have the technical expertise for this programme?
Mr Varney: We put a lot of faith
in EDS' technical ability as part of the selection and that turned
out to be misplaced. We have taken advice. As you know I have
recruited a chief information officer from outside the public
sector; I think we have reflected with colleagues in OGC and with
colleagues in government the experience and are trying to learn
from it.
Q17 Jim Sheridan: I assume that you
are pursuing EDS for compensation. Where are we with that, and
how much?
Mr Varney: We are pursuing them.
We had, as is normal in these sorts of cases, a period of an independent
specialist counsellor, I suppose is the best word, who was technically
and legally qualified to whom both sides put their evidence; this
was entirely voluntary, trying to resolve the impasse between
us. The gentleman has reported; his report has not been accepted
by EDS, and therefore we are considering our legal options, and
I do not think I can really say more to the Committee without,
in a sense, treading into territory which may lead the public
purse to suffer in the event that we want to pursue this in a
court case.
Q18 Jim Sheridan: Is there a timescale
on this?
Mr Varney: I think in terms of
the case itself, once it gets into the courts these things tend
to take a number of years. If you look at most of the cases they
tend to be settled some time during the court case by one side
or the other, so I think we are doing all the steps we can now
to prepare for a legal case.
Q19 Jim Sheridan: Given the announcement
there will be thousands of civil servants losing their jobs, in
any future thinning of the Inland Revenue, will that impact in
any way on the progress you are making?
Mr Varney: I do not think so.
I think our challenge is to make the reductions we have to make
in ways where customer service does not suffer.
| 
