Select Committee on Treasury Minutes of Evidence

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 colleagues, please?

  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 dimensions—customer function and so on—we 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 we have.

  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 department—and one area of the department alone—deals 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 as usual?

  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 with?

  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 to 2008.

  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 aware of?

  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 arrive?

  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 from when?

  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 merger.

  Q12  Mr Newman: So that I am not mixing apples and oranges—if I am, tell me—when 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 partially met?

  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 think—it is a provisional figure—that 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.

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