Appendix 2
Letter to Dr Tony Wright MP, Chairman of the Public Administration
Select Committee, from Sir David Varney, Chairman of HM Revenue
& Customs, dated 20 March 2006
You wrote to me on the 8th December raising some
additional queries following the PASC hearing into The Ombudsman's
Report into Tax Credits on the 20th October, 2005. Please accept
my apologies for the delay in replying.
For clarity, I have listed the questions in order,
followed by my response.
At Q173 you were asked "Can you tell us the
number of overpayments resulting from Revenue errors?" You
referred the Committee to the Standard Report on the Accounts.
The Committee would like to know whether there is now any further
information about the proportion of errors caused by a) Revenue
staff error, b) software errors and c) customer error
and omissions respectively and their respective financial quanta?
If not, what steps are being taken to gather and report such information?
It is difficult to ascribe every error to the particular
categories mentioned. In some cases—for example where there
has been a particular computer problem—we can assess the
size of the error and ascribe it to a particular cause. The following
details provide an overview:
(a) The accuracy of the Department's processing
of tax credit awards was 96.5% in 2004-05 (78.6% in 2003-04) against
a Public Service Agreement target of 90%.
(b) The Comptroller & Auditor General's reports
on the Inland Revenue accounts for 200304 and 200405
provide details of software errors. These gave rise to write-offs
made centrally of £37m in 2003-04 and £1 .85m in 2004-05.
In addition, where software errors which resulted in overpayments
were corrected, some further write-offs will be authorised in
instances where it was not reasonable for claimants to have detected
the error. More recently, the Department was able to quantify
accurately the impact of three other software errors that had
led to overpayments mainly relating to 2003-04. As a result write-off
of a further £44.85m has been authorised. This write-off
will be included in HMRC's 2005-06 accounts. The Department has
ongoing processes in place to detect and, where necessary, quantify
the financial impact of software errors.
(c) To produce a reliable estimate of the level
of claimant error and fraud the Department is examining approximately
4,700 randomly-selected 2003-04 awards to determine whether any
non-compliance has occurred and whether this non-compliance was
deliberate or resulted from simple negligence. This approach is
in line with that used by DWP for benefits and by the IRS in the
US for their Earned Income Tax Credit (EITC). Progress on this
exercise will be reported when final results from it are available.
You say in your statement that the £71.25
million settlement is "commensurate" with EDS's responsibility
for the IT problems surrounding the launch of the Tax Credit System.
But the report to which you referred the Committee suggests that
software errors resulted in overpayments of £94m in 2003-04
and £7.9m in 2004-05, in addition to "various other
incorrect payments" and, presumably, to the cost of a far
more extensive customer support operation than originally planned.
Some press reports state that EDS was paid £168m for the
project. Is this correct? If so, is it reasonable to assume that
software failure and inadequacy accounted for nearly half the
difficulties in the tax credit system?
After many months of detailed legal and forensic
accounting analysis, we were able to identify a loss legally attributable
to EDS failures of £104 million after taking account of overpayments
being recovered from claimants and other acts of mitigation.
Our assessment of the maximum amount we could recover
from EDS had to take into account the "limitation of liability
cap" under the contract which limited damages to a maximum
of £31 million "per event of default". The number
of events of default would have been the subject of considerable
argument in any legal proceedings, with EDS proposing a single
event and HMRC arguing for three or more. Even if HMRC had succeeded
with its arguments, it was clear that not every event of default
would have involved the maximum amount of £31 million.
In considering the settlement offer, HMRC looked
for precedents for settlements in software-related cases in the
public sector and elsewhere. We could not find any situation in
which an IT company had made a compensation payment to a UK government
customer of a similar magnitude to that eventually obtained by
HMRC from EDS.
Against this background, and given the settlement
avoided at least two years litigation, which would have been very
costly both in money and senior management time, we believe the
settlement of £71.25 million represents a very satisfactory
outcome.
How far were the initial problems over the launch
of the Tax Credit scheme due to bad systems design? Did this make
the problems over the IT system inevitable?
The initial problem with the IT system to support
Tax Credits arose from poor system architecture, poor software
coding and the use of EDS staff who had not been fully trained.
We have stabilised system availability and performance
and we continue to enhance its functionality in periodic software
releases. We also continue to look for ways of improving the design
of the system through our new IT suppliers, Capgemini.
Did the Revenue work with EDS to design the system,
or simply define its requirements at the outset?
The Revenue did not work with EDS to design the system;
its role was to define requirements.
What consideration was given to the users and
client base of the New Tax Credit system in drawing up the systems
design and procurement specification?
The System design was informed by the initial policy
consultation. Pilots were also conducted to understand how customers
would cope with forms, processes and portal services, which informed
the design. Detailed walk through exercises to test customer experience,
and revise accordingly, were held at all major stages.
The needs of our system users were established through
model office testing, as well as business testing of IT with business
processes.
Were there extensive changes in the specifications
of this system during the development process?
As is normal with a project of this sort there were
changes to the system requirements as the development process
progressed. EDS were given the opportunity to object to any requested
change on the basis that it was too late or not deliverable.
How long did it take for the IT system to become
stable? Was EDS paid to supply the software fixes the revenue
found necessary? How many fixes were needed as a result of initial
IT faults, and how many changes in Revenue operational requirements?
The IT system was stable and performing to availability
and other service levels by autumn 2003. Large numbers of fixes
and process workarounds were needed because of IT problems. These
were fixed by EDS with no additional payment.
When you gave evidence to us, you told us you
would not be able to produce an automatic pause between the recalculation
of tax credits and the recovery of overpayments until 2007; Is
it usual to have an IT system which is so difficult to adjust?
The department has agreed to look at the proposal
for a pause, however, having established the system's integrity
and significantly improved its performance, the priority is to
ensure that progress takes place in a measured and orderly way.
We continue to look for ways of improving the flexibility of the
system alongside our new IT suppliers, Capgemini.
What sorts of governance arrangements were put
in place to oversee delivery of the new scheme and the associated
IT system? Did such arrangements include external or independent
assessors?
A full programme structure was put in place in line
with best practice and OGC guidance. This included board level
involvement and independent reviews undertaken by OGC through
their Gate processes. In addition, IR commissioned an external
review by Deloittes in the early months of 2003-04 when the system
problems emerged which resulted in an agreed action plan.
How important is it to have an "intelligent
customer" capacity when designing and producing new business
critical systems? How is this intelligent customer function being
discharged at present and how was it discharged at the time of
the EDS contract?
It is very important. It is a key plank in the reforms
our new CIO is making with the engagement of experts to ensure
we can articulate our needs effectively to our new IT supplier,
Capgemini, and validate IT changes proposed by them against the
latest technology industry standards. We see ourselves as owning
the IT strategy for HMRC and not being dependent on the supplier
for that.
This differs to the arrangements in place in 2003
when former IR relied heavily on EDS for this role.
Why was not enough time given to testing the new
IT system? What measures have been put in place with your current
partners to avoid a repetition of these problems?
Testing was undertaken accordingly, to plans put
forward by EDS.
With Capgemini, we have a new testing strategy that
adheres to latest industry standards. Recent software releases
have been implemented successfully.
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