Select Committee on Treasury Minutes of Evidence


Memorandum submitted by HM Revenue & Customs

MANAGING THE MERGER PROCESS

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 scale.

  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 priorities—maintaining "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 accomplished.

  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 90%).

    —  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 taxes;

    —  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 them.

  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) posts—almost two-thirds of the 12,500 net target;

    —  relocated 1,131 posts out of London and the South East—almost 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 streams—Operations, 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 this aim.

  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 Annual Reports.

  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.

COSTS AND SAVINGS

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 work—STRIDE (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 posts—almost 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 areas.

  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 efficiency targets.

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 network?

  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 where necessary.

  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 bodies.

  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 process.

  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 document—subsequently published on 19 December 2006—with 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 areas:

    —  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 Safeguards—a 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.

ORGANISATION AND STAFFING

Is the structure of HMRC likely to change further as the merger beds in? What are your plans for appointing a permanent Chairman?

  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 integration?

  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 HMRC—a 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 been made?

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.

    —  Conduct and Behaviour.

    —  Diversity and Equality.

    —  Pay and Pensions.

    —  Staff Surpluses.

  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 2005.

  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 levels—Top, 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 critical services.

  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 £161 million.

  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 on budget?

  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.

ACHIEVING THE EXPECTED BENEFITS

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 benefits?

  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 P46—giving 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 them; and

    —  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.

January 2007





 
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