Examination of Witnesses (Questions 1-19)|
24 JANUARY 2007
Q1 Chairman: Mr Gray, welcome back to
the sub-committee. Could you formally introduce yourself and your
Mr Gray: Yes. I am Paul Gray,
acting chairman of HMRC. On my left is Mike Eland. On my right
is Dave Hartnett. They are two of my fellow commissioners on the
HMRC board who each have a wide range of responsibilities both
around the customer oversight, the operations and compliance work
of the department.
Q2 Chairman: Thank you very much.
Thank you also for your memorandum. In that you seem to indicate
that as there were not specific targets for the merger it was
difficult to track the success of the merger process. During the
Second Reading, the Paymaster General indicated that the regulatory
impact assessment provided the basis for measuring the success
of the merger. Why did you not regard it as a sufficient basis?
Mr Gray: The regulatory impact
assessment sought to cover both the direct and very specifically
separable and identifiable aspects of the merger. For example,
the specific costs that were incurred at the initial point of
the merger. It also sought to estimate the impact of the merger
on some broader projects that would be going forward once the
merger took place. What we sought to do, as we tried to set out
in the memorandum, was to identify the very specific costs and
benefits which over the course of time it is still relatively
easy to more precisely define, but also to reflect the fact that
the overall targets that were set for the new department did not
have precise quantification around the benefits of the merger.
We sought to set out for you as clearly as we can what the broad
contribution of the merger is and also to relate back for you
some specific elements of what were included in the 75 million
cost in the original RIA.
Q3 Chairman: You say in your memorandum
that you are now structured around customers and functions rather
than taxes and you have four interrelated business streams. In
their evidence, the Institute of Chartered Accountants say, "Management
of the merger is the key to success. However, we are concerned
that post merger the overall management structure of HMRC lacks
clarity and focus." How would you respond to that?
Mr Gray: I would not agree with
that. I am absolutely clear it was the right move, as indeed had
been recommended in the initial O'Donnell report, that we should
make a major switch away from a primarily product or tax focus
to seek to reflect in our organisational structure and the way
we operate a much stronger focus on both customers and cross cutting
functions. What we have sought to do with the structure and the
way in which we are trying to incentivise behaviours, as that
is operated, is to capture all those dimensions. There is an inevitable
degree of tension which underlies the Institute's comment. If,
as recommended by the O'Donnell report, we try in our structure
to take account of a number of important, different dimensionscustomer
function and so onwe will not end up with a structure that
is as simple and straightforward as a product focus. We are seeking
to manage that tension. I am comfortable that, as we move forward,
we are getting sufficient clarity but we are also recognising
and responding to the inevitable complexity of an organisation
of this size with the wide range of objectives and tasks that
Q4 Chairman: The Chartered Institute
of Taxation equally say, "The management structure of HMRC
has always struck us as over-engineered. At times, we have found
it difficult to be sure who is responsible for issues; at times
there can be a surprising number of people concerned with an issue.
Is it really working?"
Mr Gray: That is what they say.
That is a perfectly reasonable question and challenge to pose.
As we made the transition from the original structure of the two
separate departments to the new structure of the new department,
I would not begin to claim that there was absolute clarity from
day one for everybody either within the organisation or outside
the organisation. I would not seek to pretend that there was no
transition issue. There was. We are now very largely through that
phase. There is much more clarity but equally a recognition that,
particularly in dealing with complex tax issues, there is a number
of key specialisms in the department that we need to bring to
bear. We are not an organisation which has simple issues that
one person or one area of the departmentand one area of
the department alonedeals with. We need to manage and bring
together different specialisms. I recognise on occasion that may
mean our external stakeholders may find they are needing to deal
with more than one person. We are trying over time, for example,
in our large business service, we have introduced a structure
of customer relationship managers for each big business so that
they have that person as their prime point of contact. If they
have a query, they come to the customer relationship manager.
That does not mean he or she completely deals with all aspects
of the issue or the query but they act as a sort of gatekeeper,
if you like, to bring together the different specialist resources
that need to be brought to bear on the issue.
Q5 Chairman: The other change after
the merger was that the Treasury has taken responsibility for
developing tax policy and you are still in charge of maintaining
it. How workable has that split proved in practice?
Mr Gray: I think it has proven
very successful. Under the old model, there were obviously very
significant dividing line issues that needed to be managed under
the previous accountabilities. As a result of the O'Donnell report
and the decisions that followed it, the formal accountability
line was shifted to give rather greater accountability for policy
development to the Treasury. Again, I would not say this has worked
from day one absolutely 100% perfectly, but overall I would judge
that the model is working very successfully. The fact that many
of the specialists, both in the Treasury and HMRC, as we came
to the merger, were co-located in the 100 Parliament Street building
over the road provided a very important enabling push to cooperation.
What you see within the building day to day is a huge amount of
interaction between the teams in the two departments and I am
very pleased with the way it is going.
Q6 Mr Newman: In your memorandum
you say that "maintaining business as usual performance has
been a significant challenge and one that has been successfully
accomplished" and that you are making good progress towards
meeting your PSA targets in a number of key areas, but your 2005-06
annual report indicates that a significant number of your PSA
targets were not met or only partially met. I do not know if you
have the same chart that I have but I am sure you have seen it.
Is this what I would view as a rather average performance due
to the upheaval of the merger or would you say it is business
Mr Gray: Can I take business as
usual and the PSA targets in turn, because I think there are two
elements to your question. As far as business as usual is concerned,
we were very conscious at the point of merger that most mergers
between big organisations, whatever sector they are in, the private
sector, the public sector, are very often characterised by the
performance dip phenomenon. At the point of merger, people are
focusing on merger issues and the day job goes off the boil. The
point we were trying to make in the memorandum is that we saw
that as a key risk that had to be managed. I am very pleased with
the way in which we achieved that. In the first full year of the
new department, 2005-06, our total revenues we collected went
up by 7%. In the first nine months of this year we have had another
7% increase. I do not claim all of that increase is down to the
efforts of the department but I think those summary figures do
indicate that we did manage to keep performance on a good track
through the inevitable transitional challenges of the merger.
As far as the PSAs are concerned, the material you are referring
to is an assessment, which we certainly share, of where we are
on a path between 2005 and 2008. Our current PSA targets are almost
all specified in terms of the position we will have reached by
March 2008. The assessment that we supported is that in some areas
we are facing challenges. We are slightly behind the profile of
that curve, but those were very challenging targets requiring
very big performance improvements from the start of the merger
over the first three years. Although I am not remotely complacent
about this and we still have some quite big challenges to face,
broadly speaking, I think we are on reasonable course for the
delivery of those targets over the 14 months that remain before
the date of counting.
Q7 Mr Newman: When I look at SR 2004,
it says you are on course for three. You have slippage in three
and four are not assessed. When I look at SR 2002, again it says
three are partially met, one only is met and one is not met. How
much of that is driven by the fact that you were going through
this merger, or are there other issues that we should be concerned
Mr Gray: In relation to the SR
2002 targets, the second figures you quoted, those were all targets
for the period up to 2005-06. Those are statements of historical
record, of what the former departments achieved pre-merger. The
2004 spending review ones, the first assessment you quoted, are
the targets I was talking about covering the period from 2005
Q8 Mr Newman: You have slippage at
least in half that have been assessed. Is that driven by the merger
or are there other issues that are happening that we should be
Mr Gray: I would not particularly
attribute it to the merger.
Q9 Mr Newman: It looks like business
as usual because it looks like things have not changed as much
if your success rate seems to be no better than what was going
on in 2002, which is why I am concerned.
Mr Gray: If I may say so, you
are not quite comparing like with like. In the spending review
2004 targets, most of the areas specified a significantly higher
level of performance in the same areas as the 2002 targets, so
we have moved on very significantly. In a number of areas we still
have some space to make up over the remaining period but I am
feeling relatively comfortable that we are on course.
Q10 Mr Newman: We asked you in writing
when the merger would be complete. In your memorandum you say
that you are "very much at the beginning of the HMRC journey."
How long will that journey take and how will you know when you
Mr Gray: I would describe it as
a journey which has multiple milestones along its route. In some
senses, I would say the merger is complete, the immediate, more
logistical aspects of the merger. We have put in place in the
first 18 months integrated systems for HR and personnel. We have
now, during the course of 2006, implemented two major projects
to give common platform for the department. Our so-called Stride
Programme, a common IT desktop platform across the department,
was completed in December just gone. Our enterprise resource planning
system, so we have a single way of measuring resources in the
department, will be complete by the end of this March. Those relatively
mechanical aspects of the merger we are well through and they
are pretty much completed. What the O'Donnell review pointed to
were some major opportunities where further benefits would come
from the merger in the way in which we are interacting with our
customer base, the way we were delivering our business. We have
made a start on some of those but it has always been recognised
that we are probably talking about a three, four or five year
journey before the full benefits are realised.
Q11 Mr Newman: From this date or
Mr Gray: From the start of the
process. We are certainly looking right through to 2011, the end
of our current planning period, before we have derived the full
benefits that flow from the merger. The distinction I am trying
to make for you is between the point at which the logistics of
the merger are complete, which I would say we are at broadly speaking,
and the point at which, having introduced new systems, processes,
methods and so on, we have driven out the full benefits of the
Q12 Mr Newman: So that I am not mixing
apples and orangesif I am, tell mewhen I look at
this SR 2004 where four are not assessed and it shows you slipping
with three, by the time you are at the end of your journey when
I look at this chart, if I am lucky enough still to be sitting
on this Committee at the end of this process, I will see that
eight or nine of these have been met and maybe only two have been
Mr Gray: I hope what you will
see in 18 months if you are still fortunate enough to be here
is that we will have had a very good record in delivering those
specified targets up to 2008. Were you still to be here in 2011,
you would be monitoring our performance against the next set of
performance targets we are set and I would be rather surprised
if those did not include some pressures on us to do even better
than we have achieved by 2008.
Q13 Mr Newman: I have a long question
and I would like a short answer, if possible. Your memorandum
states that the direct integration costs of the merger combined
with the preparatory costs of creating a single IT desktop for
the department were "broadly in line" with the estimated
cost of 75 million set out in the regulatory impact assessment
for the Commissioners for Revenue and Customs Bill. What has been
the precise cost? Has it been funded entirely from a budget specifically
earmarked for covering the costs of the merger?
Mr Gray: I wish I could give you
one word as an answer. The memorandum went on to try to explain
the difficulty of giving that one word answer because it points
out that the directly identifiable integration costs were well
within that 75 million figure; but the common desktop platform
involved costs that went beyond the pure merger costs.
Q14 Mr Newman: As always with all
government IT projects.
Mr Gray: It was always intended
to cost significantly more. We were trying to identify in the
RIA what was specifically related to the merger as distinct from
general updating of desktop platforms.
Q15 Mr Newman: Can I have a ballpark
figure? How much are those extra costs?
Mr Gray: The 75 million was our
best stab in advance and it is not a million miles away from what
it turned out to be. How has that been financed? It has been financed
Q16 Mr Newman: Could it be 85 at
the end of the day or are you talking 76 or 77?
Mr Gray: It could be within any
of those ranges. The key point is that we financed those within
the overall budget we were given and we have not had overruns
as a result.
Q17 Chairman: It makes it very difficult
to calculate exactly what the cost of the merger is.
Mr Gray: It is. That is the reality
that we sought to bring out in the memorandum in bringing together
two complex organisations where there were already a lot of moving
parts. Both of the former departments had major change programmes
under way. There had been further developments in the ambition
of those change programmes and, in the middle of all that, the
questions you are asking are trying to identify one particular
moving part within what is a rather complex engine.
Q18 Mr Newman: Part of your job as
acting chairman is to have an idea at least of what those costs
are. I appreciate you are not going to get into the minutiae on
a line by line basis but you should have an idea whether it is
going to be two million out or 10 million out.
Mr Gray: That is the answer I
have sought to give you and that we sought to give you in the
memorandum. We think we are broadly on course but I do not think
it worthwhile spending part of my rather limited resources trying
to get to the bottom of what can never be quite a precise calculation
after the event.
Q19 Mr Gauke: The 2002 targets for
customer service have not been met. I take your point that that
is an historic point, but there does seem to be widespread concern.
We have certainly had evidence given to us about concerns over
customer service. Do you have concerns about the quality of service
you are providing to your customers?
Mr Gray: I have concerns because
I am never satisfied at the levels that we are achieving. My summary
is that in 2005, on most of the measures that are available whether
from customer surveys or whatever, our customer satisfaction ratings
did not move very much. In some cases they may have slipped back
a little bit; in others, they may have moved forward. We are still
in the position of not having that range of data for 2006. We
have as it happens in the last week or so just had an initial
indication of the likely outcome of the measure of the proportion
of our customers who say they were satisfied we got it right first
time. In 2006, we thinkit is a provisional figurethat
percentage has gone up about three percentage points from 72 to
75. We do not yet have our overall customer satisfaction survey
results for 2006. I hope they will have gone up a little bit.
I do not know. They are still some way short of the targets we
have been set for 2008. I am never going to be satisfied until
we drive those figures very significantly higher. In terms of
the progress we have made through this initial two year period,
after what may have been a period of stability, possibly with
some slippage back in some areas, we are now moving forward. The
early indications are that customer satisfaction overall is rising.
We still need to do better.