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
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
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.
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 levelmore work to be donebut
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 creditsand
the extent of the overpayment in 2003-04 of £2.2 billionthere
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 Mondaywhich
unfortunately you did not get until last nightwe 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
Q12 Chairman: So it is the customer's
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 circumstancesin 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
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
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
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
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