Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 1-19)


12 OCTOBER 2005

  Q1 Chairman: Mr Varney, may I welcome you back before the Committee. Perhaps you could introduce yourself formally.

  Mr Varney: I am David Varney. I am Chairman of Her Majesty's Revenue and Customs. On my right is Paul Gray, who is Deputy Chairman of the same organisation. For the last couple of weeks he has been entirely concentrating on delivering the Paymaster-General's announcement to the House on May 26 on new tax credits. Miss Walker is the Director of Benefits and Credits in HM Revenue and Customs.

  Q2  Chairman: Today we are going to focus on tax credits as well as the progress of the merger of Revenue and Customs. On a procedural point, before we get into that, perhaps I could ask you why copies of your 2004-05 accounts were not made available to us properly until five o'clock last night.

  Mr Varney: I do not know. I can look into that.

  Q3  Chairman: You have known since July that this session was scheduled.

  Mr Varney: I thought they were made available to the House authorities on Monday.

  Q4  Chairman: We did not receive sufficient copies until 5 o'clock last night.

  Mr Varney: I apologise for that. I will look into the reason for that and write to you.

  Q5  Chairman: Given this hearing was scheduled, you might have expected that to have been foreseen.

  Mr Varney: I will look into it.[1]

  Q6 Chairman: Thank you. The new department has existed now for five months. How would you assess the success of the merger?

  Mr Varney: That is going to take a long time. I think we have made a good start. The key concerns that Gus O'Donnell had in his report were in three areas: that business as usual would not be done or would fall short of what was required; that there would be resistance and reluctance to change. Last year, we collected £21 billion more than the year before, so in terms of our revenue-raising side it has gone well. I think we have an organisation which has been designed by the people who work in HM Revenue and Customs which has come into place at the top level—more work to be done—but there are some very important behavioural shifts to be made. Some of those are under way: a much more open attitude to risk, identifying the risks much earlier (you will see some of that in the annual report, laying out concerns), trying to get an understanding in some situations of what the priorities are across the whole HMRC, and then getting a much more customer-focused attitude, as well as delivering the efficiency agenda. We are pretty much on course to where we expected to be in terms of the efficiency agenda, in terms of both costs and people. I think it is a promising start, I am encouraged by it, but I think there is a long way to go.

  Q7  Chairman: You yourself have been in place for a year now but you refer in your foreword to, "A good deal of progress has been made towards establishing the structure of the new department . . ." Why is the structure of the new department not finalised?

  Mr Varney: It is finalised at the top level, but it is not in terms of the new commands. We had a regional organisation and, for example, we now have national and distributed processing, so the national processing organisation which has taken over all the regional processing organisations is now looking at how it can be most effective and efficient at the task it does. So we have the overall framework in place; we are now working through the implications.

  Q8  Chairman: Turning to tax credits—and the extent of the overpayment in 2003-04 of £2.2 billion—there are reports that around one million families will have been overpaid in 2004-05. Is that right?

  Mr Gray: The final figure is being confirmed for 2003-04 at £2.2 billion. That represents approximately 1.9 million families. In terms of where we will be in 2004-05, we do not yet know. We do not yet have a figure. We are only just starting the completion of the renewals process for 2004-05. That still has three months to run, until the end of January. Until that is complete, we will not have anything like full figures for the number and value of over payments for the last financial year. In the accounts that were published on Monday—which unfortunately you did not get until last night—we have made an assumption for accounts purpose that the numbers and the figure might be broadly in the same scale as 2003-04. But that is purely a working assumption for the purpose of the accounts. It will be some months before we have a firm figure.

  Q9  Chairman: So more than one million families, again, who have been overpaid.

  Mr Gray: We do not know, but I would expect it would be on the top side of one million, yes.

  Q10  Chairman: Why are we getting such a scale of overpayment? Is it the competence of your staff in dealing with it? Is it the IT system? Or is it the way the system is designed?

  Mr Varney: When the budget papers were put out in 2002, the expectation of overpayment was 1 million in the first year, 750,000 every year thereafter. The overpayments arise because the change of circumstance of the individuals has not been reported during the year or we have not picked it up. We think the vast majority of overpayments arise because we do not have the correct information about family circumstance and income. There is a paradox that if we do not get that and the economy is doing well and people have improvements in their living standards, then, once it is outside the £2,500 dead zone, there will be a potential overpayment.

  Q11  Chairman: Then there is something wrong with the system where the payment is fixed annually but people's circumstances change within the year so frequently. It is the architecture of the system that is wrong.

  Mr Varney: Following the Paymaster-General's statement on May 26, we are putting a lot of effort into improving the awareness of the need to report change of circumstance and the importance of doing that so that we can make early adjustments to payments.

  Q12  Chairman: So it is the customer's fault?

  Mr Varney: No, I am not saying it is the customer's fault. Part of the process of introducing a new scheme has been to explain to people why it is important that they do report these change of circumstances. I am not in the frame of mind of blame. In order to work a system which is responsive to changes in people's economic circumstance or family circumstance, we need to have that information.

  Q13  Chairman: How can a system that is fixed annually be so responsive to people whose circumstances are bound to change from week to week as they or their partner's employment income changes?

  Mr Varney: The system is designed to be responsive to changes in their circumstances—in the same way that income tax responds to changes in the economic position.

  Mr Gray: Could I pick up your comment about fixed annually. The system is designed on an annual basis so that the eventual entitlement is determined in relation to people's circumstances across the whole of a particular financial year. It is not fixed at any particular point in the year. People's final entitlement depends on any changes in circumstances that they have during the course of the financial year, so that if people do have changes of circumstance, whether it is income change, family circumstance change or whatever, during the course of the year, that gives rise to a change in their entitlement. It is only at the end of the year that we can be clear what the full annual entitlement was. As David was saying, if we have failed to pick up changes of circumstance that have occurred during the course of the year, that is the kind of situation that can give rise to an overpayment.

  Q14  Chairman: One Parent Families' research tells us that 47% of their respondents have experienced between two and seven changes in circumstance in a year, do you not think there is something wrong with the architecture of this system?

  Mr Varney: I think the architecture that we have been given to operate is the architecture that we are trying to operate by improving the degree of communication. The system was designed to be sensitive to changes in circumstance. Presumably, unless there were errors in sending them the notice, the notice reflects changes in their circumstance.

  Q15  Mr Todd: Could I touch on a point in the accounts. I am attempting to find where there might be some reference to overpayments which you obviously seek to recover. Do they feature somewhere in these accounts?

  Mr Varney: I am sure they do.

  Mr Gray: A provision features in the notes to the accounts. I cannot immediately remember which note it is.

  Susan Kramer: Possibly R16, 2.13

  Q16  Mr Todd: Have you made any prudential provision?

  Mr Varney: Yes, we made a provision in the account. The problem is that we have not had any experience of being able to do this before, so we do not have anything to fall back on in terms of that, so we have used the best advice that we can get from the combined resources of the economists and statisticians we have who work inside the department. That led us to the view that we should make a provision of £481 million for 2003 and 2004. That is not a forecast but what we think, in a sense, is the worst outcome we can provide for. When it came to 2004-05, we had no better information to make a different assumption than £481 million again. We then talked to the NAO and to our internal audit department (who were kept aware of the way we had approached this) and they have both agreed with us that that is a sensible and prudent approach. The reason the numbers have come out is the change in government accounting, where we are required for the first time to account for essentially our balance sheet. It is the balance sheet change which has focused attention on these balance sheet items.

  Q17  Mr Todd: That is why I asked the question.

  Mr Varney: I have to say to the Committee that I think this is a very useful move because it brings the government accounting and the plc accounting—

  Q18  Mr Todd: Just to get that clear, you are suggesting that it would be prudent to write off around about £0.5 billion.

  Mr Varney: No, I am not saying that. I am saying that I am making a provision that—

  Q19  Mr Todd: You are making a provision.

  Mr Varney: That we have to do that. At this point in time, given the knowledge I have, this is the best and most accurate way of presenting the accounts of the department.

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