Memorandum submitted by HM Revenue &
Have you established a set of targets for the
merger to achieve? Do you have a baseline of data in order to
track the success of the merger process and the benefits realised?
If so, please provide details.
What further analysis has been carried out on
the expected costs and benefits of the merger?
When do you expect the merger process to be complete
and HMRC to be a fully integrated organisation? Do you have an
overall plan and timetable against which progress can be measured?
Are you on track? What will a successfully merged HMRC look like?
1. The aim of creating a single Department
was to lead to improvements in:
Customer service and compliance costs.
Effectiveness, through alignment
of strategies, a coherent approach to information etc.
Efficiency, through economies of
2. At the same time as the process of integration
got under way the two Departments were also embarking on major
change programmes to meet PSA and efficiency targets which committed
us to significant service improvements and cost reductions. Subsequent
to the announcement of the merger the scale of the efficiency
challenge was increased when the headcount reduction target was
increased from a net 10,500 (FTE) posts to a net 12,500 (FTE)
posts by April 2008. Within that figure, as set out in the Regulatory
Impact Assessment (RIA) "approximately 3200 FTE savings were
to be achieved as a result of the integration of HM Customs and
Excise and Inland Revenue".
3. From the time that the merger was first
announced we have concentrated on the delivery of existing prioritiesmaintaining
"business as usual", delivering short/medium term improvements
in performance and transforming the Department so that it is in
a position to deliver further improvements in the longer term.
4. Bringing together two large organisations
while maintaining "business as usual" performance has
been a significant challenge and one that has been successfully
5. We are making good progress towards meeting
our PSA targets in a number of key areas.
6. We have reinforced our commitment to
reducing the administrative burden for business and individual
taxpayers and continue to develop our services and processes in
consultation with key stakeholders.
Provided the Short Tax Return and
guide which received very positive reaction from taxpayers (over
The error rate of employers filing
their annual returns fell from 13% in 2004-05 to 5% in 2005-06.
We reduced the number of incorrect
tax credits claims in payment by increasing the percentage of
cases enquired into before payments were made from 16% to 45%.
We also developed a new tax credits
award notice and shorter, clearer guidance notes.
7. In 2005-06 we accrued over £400
billion in taxes, duties and other revenues. We
deployed integrated Hidden Economy
Teams comprising staff who have expertise in direct and indirect
focused our VAT compliance activity
on businesses with the highest risk of defaulting; and
developed new products and processes
within our Large Business Service to enable them to identify and
prioritise risks and allocate resources more effectively to tackle
8. And we remain on track to deliver our
efficiency targets. By 1 December 2006 we had:
reduced staffing levels by a net
8,244 (FTE) postsalmost two-thirds of the 12,500 net target;
relocated 1,131 posts out of London
and the South Eastalmost 60% of the target to move 1,950
posts by 1 April 2008; and
delivered significant procurement
and estates savings. By the end of 2006 we had closed or part
vacated 58 properties since the merger. These changes have removed
43,900m2 of office space from the Departmental portfolio worth
£9.5 million in annual running cost savings.
9. We put a lot of effort into building
solid foundations for the new Department by creating the right
structures and processes. In line with the O'Donnell recommendations
HMRC is structured around customers and functions rather than
taxes with four interrelated business streamsOperations,
Product and Process Groups, Customer Units and Corporate Functions.
10. Merged HR policies and processes have
been gradually coming into effect since the creation of the Department
in April 2005, we implemented a new, merged, financial accounting
system using SAP software in April 2006 and a new merged single
integrated IT infrastructure has now been rolled out. These are
significant achievements upon which we are now building.
11. All of this is very much the beginning
of the HMRC journey. What we have achieved so far has to be followed
by actions that will realise the full range of benefits that can
come from having an integrated Department.
12. Our early Spending Review settlement
announced in the 2006 Budget set us the challenge of continuing
with our service transformation while operating with a 5% cut
in real terms in our budget each year in the next Spending Review
period. The Chancellor also announced that we would have £300
million available from a modernisation fund to help us transform
how we do business at HMRC between now and 2011.
13. Our aim is to deliver a customer focused
organisation by radically improving the way we do business, ensuring
wilful non-compliance is detected and dealt with and reducing
our running coats by improving process management and sharing
resources with other departments. The review of HMRC's Powers,
Deterrent and Safeguards is integral to successful delivery of
14. The formal launch in November 2006 of
our programme of work to achieve all of this was significant for
the Department and its customers.
15. We have created a Departmental Transformation
Programme, with constituent projects led from within the business
units but managed centrally as one portfolio. This is the vehicle
we are using to plan and timetable the delivery of benefits. And
we're committing about £500 million a year to these projects.
16. The highlights of where we plan to spend
this money include:
Over £100 million to improve
our understanding of our customers, and to join up our IT systems
to provide a single customer account.
Around £75 million a year to
help us collect more of the tax that's due and ensure we make
the correct benefits and credits payments. This will also allow
us to generate efficiency savings of more than £130 million
a year in Enforcement and Compliance.
In Debt Management and Banking investing
around £30 million a year to cut outstanding debt and make
efficiency savings of about £50 million per year.
And in Processing about £30
million a year to make a 40% productivity gain, and even more
important, a 40% quality improvement with efficiency savings of
around £160 million a year.
17. We have announced that we will look
at our offices across the country and then consult on their future.
The aim is to match our building and office needs with our business
needs. We are conducting genuine consultation with stakeholders,
including staff, on these proposals.
18. Although delivering our Transformation
Programme will not be "the end of the story" we will,
by that point, have gone a long way towards achieving many of
the benefits identified when HMRC was created.
19. When he moved on in August last year
Sir David Varney said that he saw that as a point that represented
the end of the first stage of the merger process.
20. By then it was also becoming increasingly
academic to try and distinguish the merger process from the everyday
business of the Department. As we implement our Transformation
Programme that becomes ever more so.
Have you undertaken any reviews that take stock
of progress? Have you monitored staff and stakeholder views of
the merger through surveys? What have been the results?
21. The process of creating HMRC has involved
work across all of the Department's business areas. Much of the
work has been organised on formal project lines and we have, therefore,
undertaken almost constant reviews of the progress being made
in those areas.
22. We have taken stock of progress in our
23. As one of the main aims of the merger
was to improve customer service we have regularly reviewed progress
with key stakeholder groups through meetings and workshops. In
September, for example, 18 of HMRC's key stakeholders attended
an event on "Delivering our Future Vision".
24. We have also started to run a series
of regular employee surveys. The 2005 results showed little change
between May/June and November/December. This was interpreted as
indicating that many employees, particularly those at the front
line, had at that point experienced little change in their jobs
and how they carried them out as a result of the merger. This
was to be expected as the merger had been deliberately "low-key"
in order to minimise disruption to the flow to the Exchequer,
while reorganising the structure of the department in order to
start achieving the benefits of integration. Most of the visible
changes at that stage related to changes at the top of the department.
25. By 2006 the impact of HMRC's significant
programme of change and reductions in staff numbers began to be
felt more keenly by staff. The May/June 2006 results suggested
uncertainty among a large group of staff at these changes and
at their perceived impact on the department's performance. The
results from the winter 2006 survey are not yet available.
26. This is the sort of response to be expected
from staff in an organisation at the beginning of a substantial
change programme. We have since started a comprehensive exercise
to engage staff in understanding the reasons for changes in the
organisation, as well as to provide the right culture, people
and skills to support our ambitious change agenda.
Was the cost estimate of £75 million in the
Regulatory Impact Assessment realistic? How much has been spent?
How much more is likely to be spent?
27. The RIA stated that the known costs
that arise directly from the creation of HM Revenue and Customs
were anticipated to be of the order of £75 million over 2004-05
and 2005-06, including the preparatory costs of alignment of basic
services, such as work to put the future IT desktop requirements
of the departments on a common platform.
28. The total direct integration costs were
£1.9 million in 2004-05 and included the HMRC brand costs
and the website. IT costs were £10.3 million, some of which
was refocused planned expenditure from the previous departments
and £5.6 million on organisational design, creating early
joint teams and HR processes. This totals £17.8 million.
29. As planned, we have, in the course of
the last two years, successfully created a single IT desktop.
The preparatory costs of this work, taken together with the direct
integration costs outlined above, were broadly in line with the
estimate of £75 million.
30. The full costs of the desktop workSTRIDE
(STRategic Integrated Desktop Environment)are set out below
in answer to Question 15, as are the costs of the creation of
a single financial accounting system. In common with expenditure
on achieving our Five Year Ambition attribution of these costs
or a proportion of them to "the merger" has become an
increasingly artificial exercise.
You estimated that the merger would result in
reductions in staffing of 3,200. Has that figure changed? How
have you been able to assess the reductions attributable to the
merger? What progress have you made in achieving staff reductions
that are attributable to the merger?
31. The 2004 Spending Review set HMRC the
challenging target to reduce full-time equivalent (FTE) posts
by 16,000 gross, 12,500 net of 3,500 redeployments to front-line
areas, by 31 March 2008. The Department has made good progress
on implementing its overall SR2004 efficiency targets, and by
1 December 2006 had reduced staffing levels by a net 8,244 full-time
equivalent postsalmost two-thirds of the 12,500 net target.
32. There was no efficiency target specifically
related to integration. However, the overall target took account
of the additional opportunities generated by integration and the
Regulatory Impact Assessment stated that "approximately 3200
(FTE) savings are to be achieved as a result of the integration
33. It was anticipated that these savings
would come initially through the formation of single organisations
for Finance, HR, Large Business, IT and Estates. In addition,
integration has offered the opportunities to make savings in areas
such as debt management, contact centres and specialist compliance
34. We have made good progress in all of
these areas and are on track to achieve the sort of savings envisaged.
However, the business design and structural organisational changes
that have taken place within HMRC do not readily allow us to quantify
the efficiency savings directly attributable to "integration"
itself, as opposed to savings achieved through more efficient
work practices and processes. There have also been new efficiency
initiatives, such as PaceSetter/Lean working processes, which
are making a significant contribution to the achievement of our
Do you have a specific target for the efficiency
savings that you expect to make as a result of the merger? What
efficiency savings have been achieved apart from those related
to staff reductions?
Has the merger led to reductions in the size and
cost of the Department's estate so far? What more do you expect
to achieve? When will any changes to accommodation requirements
be complete? How long will it take to achieve a fully merged office
35. As set out in the answer to Question1,
it was always envisaged that the main cost savings from the merger
would be staff savings. The main opportunities for non-staff savings
are in areas such as estates and procurement. Here too we are
on track to achieve our SR2004 targets.
36. We are committed to reducing the size
of our office network in line with business needs and being able
to look at an estate comprising former IR and Customs buildings
gives us the opportunity to maximise potential savings.
37. As at 31 December 2006, HM Revenue and
Customs had closed or part vacated 58 properties since the merger.
These changes have removed 43,900m2 of office space from the Departmental
portfolio worth £9.5 million in annual running cost savings.
These closures have not affected face-to-face customer enquiry
centres which have been replaced with more appropriate facilities
38. The Department is on track to deliver
£30 million in annual estates running costs savings by 31
March 2008 and is committed to achieving a further £70 million
in annual estates savings by 31 March 2011. The merger has created
surplus capacity and this together with reducing staff numbers
across the department provides the scope to reduce the size of
the portfolio by up to 40%. This will be done principally by fully
utilising flexibility provisions within the STEPS PFI contract
and through subletting surplus accommodation to other Government
39. The Department published details of
its Regional Review Programme in November 2006. This sets out
the timetable and consultation processes that will be followed
in establishing which properties will be retained and vacated.
40. The current programme of estates rationalisation
will continue through to March 2011, and will encompass feasibility,
consultation and implementation phases. However, it is anticipated
that there will be further change in future years to meet operational
and customer requirements and these will be reflected in our planning
41. We are also investing in a number of
our existing large properties to improve their flexibility for
future use and capacity and much of this work will be completed
by March 2009.
What are the overall results of your consultations
on HMRC's powers? What are the main features of your proposals
for change? What is your timetable?
42. Wide ranging consultations have taken
place in relation to the Department's powers. On 30 March 2006
a consultation was launched on the developing programme of work
and in August views were sought on the powers and safeguards used
in the investigation of serious tax crime. Responses to the March
2006 Consultation document were published at the time of the Pre
Budget Report. The outline proposals for change were broadly supported
and detailed proposals are now being worked up.
43. The PBR also contained an announcement
of a consultation documentsubsequently published on 19
December 2006with draft legislation and explanatory material
on a new single penalty model for completing incorrect tax returns
to apply, initially, to Income Tax, Corporation Tax, Capital Gains
Tax, VAT and employers' responsibilities for PAYE and NICs, with
the aim of legislating in this year's Finance Bill.
44. A further consultation document is being
published on proposals to adapt the Police and Civil Evidence
Act (PACE) for England, Wales and Northern Ireland, so that will
form the basis of HMRC's statutory powers to investigate serious
criminal activity against any of its responsibilities with separate
draft clauses proposing a broadly equivalent framework for Scotland,
where PACE does not apply. The timing of legislation will be determined
in the light of the responses to consultation.
45. Work is also under way in the following
Interventions (interactions with
the taxpayer, representative, HMRC and third parties that make
up the compliance assurance regime).
Debt Management (improving the customer
experience and increasing departmental efficiencies).
Taxpayer Safeguardsa vital
strand of the Review and we are working to strengthen the safeguards
available to citizens and businesses.
These options aim to improve tax compliance,
increase tax yield, and reduce compliance costs.
Is the structure of HMRC likely to change further
as the merger beds in? What are your plans for appointing a permanent
46. The fundamental design structure ie
one consisting of Customer, Product and Process, Operations and
Corporate functions is unlikely to change. However, within that
structure we will continue to make changes, both in the number
and nature of individual business units. We will also continue
to review and change as necessary the management responsibilities
of Executive Committee members to ensure that we make the most
of their skills and experience.
The appointment of a new Chairman is a matter
for the Civil Service Commissioners and Ministers.
What steps have you taken to achieve cultural
47. The creation of a unified culture depends
on having a simple coherent expression of what HMRC is about.
We have now reached the point where we have a clear view of what
HMRC stands for. That provides the basis not only for improving
business performance but also for reaching the point where everyone
in the Department understands what we do and why we do it.
48. We have been helped in getting to where
we are now by being honest about the degree to which there were
strengths and weaknesses in both former departments. From the
outset we made it clear that we were determined to build on those
strengths and introduce some areas of good practice that neither
of the former departments had adopted.
49. We have shared widely the nature of
the challenge to create a successful new Department while still
delivering our current targets and business results. And we have
made it clear that the leaders and managers in HMRC have a key
role in achieving the complete transformation that will deliver
the sort of performance shift required.
50. The development of our People Strategy
aims to embed a performance management and improvement culture
throughout HMRCa culture which "enthuses our people,
focuses on our customers and delivers great performance".
51. That approach has been reflected in
the implementation of new HR policies and procedures and in the
Management Capability plan which is designed to develop an effective
management cadre capable of leading change and driving performance
improvement. It is about managers adopting a consultative and
empowering approach, and those who are being managed taking personal
responsibility for contributing to the performance and future
of the organisation.
52. We have also continued to build and
strengthen the senior leadership cadre. That has enabled us to
create a senior leadership team that is a rich mix of people from
various backgrounds, including the two former Departments. We
have regular sessions with that team in which we seek to build
and develop an "HMRC leadership style".
53. Finally, an important aspect of the
"HMRC culture" is the degree to which we are committed
to being much more open and clear with people about the future
than we might have been in the past. There are clear signs that
many people have appreciated this.
What have been your plans for aligning the terms
and conditions of service of staff in HMRC? What progress has
Have you introduced a remuneration strategy for
HMRC? What are its main features?
54. We have designed and implemented a number
of key integrated policies and supporting guidance for terms and
conditions under the following headings:
Careers and Performance.
Diversity and Equality.
55. We involved senior managers across all
business directorates and the Trade Unions at all stages of design
and implementation. Having reached agreement with the Trade Unions
the majority of policies were in place by 31 December 2006 and
we expect to meet our target date of 31 March 2007 for the remaining
policies that impact on terms and conditions.
56. We have set up a Task Force to deliver
presentations, workshops and masterclasses to managers across
the business to explain the new policies, processes and guidance
and how to use them to drive up their own performance and that
of their staff.
57. We have also agreed a three year pay
deal with our trade unions which applied with effect from 1 June
58. The creation of HMRC enabled a complete
overhaul of the pay and grading systems in operation in the former
IR and C&E. Some of the main features of the new system are:
Alignment of the former Customs 11
band structure and the Revenue's 7 band structure to the HMRC
7 band integrated pay and grading structure, reflecting much of
the Civil Service.
Separate London/National pay ranges
with a minimum and maximum and variable length, shorter pay ranges.
Pay and allowances tested against
the wider Civil Service and external markets.
An individual appraisal system with
three performance levelsTop, Good and Improvement Needed,
plus a further category for Unsatisfactory Performers.
Performance related pay comprising
a basic performance award, a progression award and a non-consolidated,
non-pensionable bonus where appropriate.
A Labour Market supplement to tackle
local or skills recruitment and retention issues.
We are starting to consider our reward strategy
for 2008 onwards. We will be consulting internally, and with other
departments, the Treasury and Cabinet Office. We have also begun
initial talks with the TUS.
What effect has the merger had on retention and
recruitment, including senior staff and those with specialist
skills? Please provide supporting analysis.
59. The merger has had no material impact
on retention rates. In general, since the merger the overall resourcing
emphasis has been on reducing staff numbers but we have selectively
used external recruitment to strengthen our senior management
cadre, particularly in providing stronger professional skills.
We have used a variety of methods including permanent appointments,
fixed term contracts and interims to provide the necessary input.
While the numbers remain comparatively small, recent appointments
have covered senior posts in IT, Communications, Project Management,
Finance, HR and Commercial Management.
INTEGRATING IT SYSTEMS
In November 2005, the Paymaster General told the
Sub-Committee that 2006 would see the introduction of a single
operating environment that would allow HMRC staff to communicate
freely across a single network supporting all of HMRC's IT systems.
What progress have you made on this project? What costs are involved
and is the project on time and to budget?
60. During 2006 the STRIDE (STRategic Integrated
Desktop Environment) project successfully delivered a new software
environment based on Windows XP to everyone in HMRC. This was
a huge undertaking with over 100,000 desktops and laptops upgraded.
This was coupled with the complexity of integrating legacy infrastructure
from the two former departments which supports over 800 business
61. The project was delivered on time and
in budget. STRIDE is a key foundational component within HMRC's
5 year ambition and delivers:
A single corporate IT desktop for
HMRC based on Windows XP.
A corporate email service with much
increased capacity and resilience.
A Strategic Remote Access Service
for remote and mobile users.
The design and implementation costs for STRIDE
over the two years 2005-06 and 2006-07 are expected to be about
62. The benefits include a reduction of
over 500 IT support officer roles within Estates and Support Services.
The Paymaster General also referred to a single
back office system covering HR, Finance and Commerce which was
to be introduced in 2006-07. Has it been implemented? What does
this project involve? What are the costs involved and is the project
63. The ERP Programme has introduced common
finance and procurement and HR processes and systems for the whole
department. The Programme has been delivered on time.
64. ERP was delivered in two phases. Finance
and procurement functionality was rolled out in mid April 2006,
followed on 1 November 2006 by HR functionality (including payroll
for 80% of staff, those in the former Inland Revenue, with the
remainder being outsourced under an existing contract).
65. As part of the ERP Programme the number
of suppliers has been rationalised and contracts with key suppliers
have been renegotiated to give us the potential to save 6% on
relevant expenditure (not IT and estates).
66. The Business Case for ERP showed immediate
financial benefits of £214 million over six years.
£190 million on purchases of
goods and services.
£24 million in staff savings
in Commerce and Finance teams.
These savings build up over time
but HMRC is on track to deliver.
We have already seen advantages on the financial
system from easier monthly reporting. The real benefit will build
up over time as we build up a store of data and can begin to recognise
patterns and profiles.
67. These patterns and profiles will give
us a better view of the relationship between our change initiatives
and their actual impact on our staff and expenditure.
68. The latest forecast is that the actual
cost of implementation will be marginally less than the c £85
million budgeted (covering IT hardware, SAP enterprise software,
HMRC's IT Partner's costs to lead design and build, and HMRC staff
costs to support development and lead internal business change
to optimise benefits).
Do you now have an integrated IT contract that
meets the needs of HMRC?
69. The integrated contract aligns the supplier's
service delivery to the business objectives of the Department.
It provides the platform for the delivery of HMRC's key programmes
and projects and is a key enabler to the delivery of the efficiencies
envisaged by O'Donnell and Gershon. It provides a robust and responsive
IT platform for delivering a consistent IT service across HMRC.
Responsibility for end-to-end service delivery and associated
risk rests with the suppliers.
70. It delivers the ability to have better
joined-up compliance data allowing HMRC to better utilise the
combined knowledge to close the tax gap and contribute to improved
revenue yield. The integration provides the basis for single back
office systems such as HR and Finance. It enables future improvements
to spread across the whole Department, rather than being limited
to the boundaries of former Revenue or former Customs boundaries,
which in many cases no longer apply.
71. The integration of the two contracts
will deliver around £100 million of savings. The vast majority
of these savings are delivered over the next three years.
What has been the impact of the merger on compliance
costs for customers and customer services? Have you quantified
separately the improvements you hope to achieve in these areas
as a result of the merger, and are you on track to achieve them?
Can you give examples of how the merger has reduced compliance
costs for customers? What changes are expected to bring the greatest
72. We have reinforced our commitment to
reducing the administrative burden for both business and individual
taxpayers. We are currently reviewing the administrative rules
for the main taxes. That work is being done alongside the work
of the Business Customer Unit to reduce the administrative burdens
for business and the work being done to develop a new Management
Act. Progress has been made towards delivery of the targets set
at Budget 2006 to reduce the administrative burden on business
of dealing with forms and returns, and audits and inspections.
Highlights include: the short self assessment tax return, reducing
the pages to be filed in by the smallest businesses from 16 to
4: removing the requirement for 90% of new companies to complete
Form 42, which saves companies and estimated £200 per form;
introducing a new form P46giving one million more employees
the correct initial tax code, substantially reducing the number
of queries to employers. The establishment of the externally chaired
Administrative Burdens Advisory Board will ensure that we correctly
prioritise further actions in this area.
The merger was expected to help improve compliance.
How are you measuring the impact of the merger in this area and
what are the results to date? Can you give examples? What changes
are expected to bring the greatest benefits?
How are you measuring whether the merger achieves
increased revenue flow?
73. We have made a number of key organisational
changes since the merger. The creation of a single large business
service and the implementation of the LBS Operating Model have
formed the basis for a clear relationship between the largest
businesses and HMRC. Local compliance activity is now based on
customer groups rather than tax to enable a more integrated approach
across both direct and indirect taxes to the benefit of both customers
and our understanding of risk. Setting up customer units has been
important in helping us develop our understanding of taxpayer
behaviour and we have created an integrated Risk and Intelligence
function to ensure that we develop a proportionate response to
all revenue risks. We have also created an integrated debt management
and banking service.
74. In the criminal investigation and intelligence
area we have carried out a de-merger of the major drugs investigation
function which has transferred to the Serious Organised Crime
Agency. We have created new structures to bring direct and indirect
tax investigations together.
75. With HMTreasury, we have created new
PSA targets and reporting structures to measure delivery of the
improved revenue performance sought. The greatest benefits for
compliance are expected to come from:
increased customer focus (based on
organisation around customer groups rather than heads of tax),
leading to better risk management;
better use of the vast body of information
that HMRC holds to inform risk profiling and the creation of a
system for identifying risks and directing campaigns to tackle
better use of resources across the
whole range of tax risks, more aligned strategies and the application
of more focused campaigns to tackle particular tax losses and
a harmonised regime for compliance assurance and penalties for
incorrect returns across IT, CT, CGT, VAT and employer respectively
which should lead the way to a reduction in compliance costs for
citizens and business.