Select Committee on Treasury Minutes of Evidence

Memorandum submitted by the Public and Commercial Services Union (PCS)


  1.  The Public and Commercial Services Union (PCS) is the largest civil service trade union, with a total membership of 325,000 working in over 200 civil service departments, non-departmental public bodies and related areas. We represent the majority of staff and senior managers in Her Majesty's Revenue & Customs (HMRC) with over 80,000 members.

  2.  PCS welcomes this timely inquiry into the creation of Her Majesty's Revenue & Customs and would be pleased to supplement this submission by further written or oral evidence.

  3.  PCS submitted evidence to the Treasury Committee in relation to its 2004 scrutiny of the merger proposal. We expressed both our commitment to high quality public services and the success of the new Department, and our concerns about a range of issues including job cuts and the impact on services to the public. Our view was that the creation of HMRC presented an opportunity to establish: a "model" Government Department delivering high quality services within communities; additional Government revenue; a safer society; and good quality job opportunities.

  4.  Our experience after nearly two years of the operation of HMRC is that this opportunity has not been taken. We have grave concerns for the future of the Department and its ability to undertake its defined role and meet its core objectives, not least because of the Government's civil service job cuts programme. This submission sets out our concerns and identifies the opportunities that we believe are now available to build a successful Department into the future.

  5.  PCS believes that the emphasis should be on establishing the resources necessary to meet these objectives. Where any genuine efficiency savings can be achieved within HMRC as a whole, resources should be redeployed as necessary in an effort to achieve further net improvements in services. We believe that it makes more sense to employ HMRC staff on work that would generate billions of pounds from uncollected tax and excise on goods currently being smuggled illegally, rather than seek to generate millions of pounds from job cuts, realising a huge net increase in government income, making funds available for schools, hospitals and other services.


  6.  We believe that the ongoing Civil Service "efficiency" programme, coupled with HMRC's plans for change over the next five years, represents a serious threat to the effective delivery of revenue and customs functions within the UK.

  7.  On 16 November 2006 HMRC announced their intention to consult on proposals to close over 200 offices across the UK and to reduce the staffing complement in the Department by a further 12,500 by April 2011. This is in addition to the current exercise to shed 12,500 jobs under the Gershon review by 31 March 2008. HMRC has shed over 7,000 posts in the last two years, and intends to reduce staffing numbers by a total of 25,000 by 2011. The programme of office closures and job cuts will potentially have a devastating impact on jobs, conditions and the delivery of public services, particularly in areas where service delivery is already impeded by inadequate staffing.

  8.  PCS argue that with the tax gap running at an estimated £25 billion it is irresponsible to cut thousands of the very staff who are responsible for preventing fraud, securing the UK's borders, and collecting taxes.

  9.  Indeed, in one area of HMRC, local compliance, the Department's own calculations reveal that shedding 600 staff will save £74 million on the one hand whilst simultaneously contributing to losses in tax yield of £204 million. Elsewhere it is estimated that 5.7 million taxpayers may not be paying the right amount of tax suggesting a net under collection of tax revenue of £500 million. [4]

  10.  PCS supports the call for a public enquiry into the question of the proper level of resources required to deliver the key HMRC objectives of effective tax collection and the detection and deterrence of crime (Early Day Motion 475 refers).


  11.  The Gershon Report in 2004 recommended that Departments should reduce the spend on external consultants as well as being more transparent about their cost.

  12.  PCS are concerned that since its creation in 2005 HMRC has failed to address the excessive use of consultants. Their spend for the financial year 2005-06 as released in a Freedom of Information request was over £106 million. It is likely there is also a hidden spend on consultants/contractors contained within the ASPIRE contract that has been subject to a separate public accounts committee report. In the same period HMRC reported savings of £105 million on running costs on the basis of having cut 4,000 jobs by April 2006. [5]

  13.  Arbitrary constraints on staffing levels have led HMRC to adopt creative accounting methods to meet work schedules. The Department is therefore employing consultants/contractors to meet work obligations while experienced in-house staff are being declared surplus to requirements or released on early retirement programmes. In some cases these consultants are paid five times the daily rate civil servants are paid. Setting aside the profligate waste of public money, PCS are concerned that this is clearly outside the recommendation given in the recent National Audit Office report[6] which said "public bodies should start with the presumption that their own staff are best fitted for their requirements."


  14.  HMRC have further sought to plug the gaps emerging following the release of permanent staff by hiring staff on rolling, limited fixed term contracts. The employment of staff on fixed term contracts has grown in direct proportion to the release of permanent staff. Thus at September 2005 there were 4,400 staff on short term contracts in the Department. This had increased to 5,369 by June 2006. During this same period the Department had decreased in size from 95,766 to 92,691.

  15.  We strongly believe that HMRC will work best if it values and invests in staff to establish a highly-trained, skilled and committed workforce with good job security, conditions and career development opportunities. This will enable HMRC to draw upon the consequent goodwill and commitment of staff.


  16.  In an attempt to realise efficiencies across HMRC, Lean processing techniques have been introduced. Lean has been criticised by outside experts as "fundamentally the wrong thing to do"[7] and is currently at the centre of a highly damaging industrial dispute between HMRC and PCS. The imposition of arbitrary targets and individual work measurement carried out on an hourly basis with the results shown on whiteboards has proved counterproductive and demoralising for HMRC staff. The Large Processing Office's own figures show that there is now a backlog of over one million letters that are unactioned, some of which are over 12 months old. Our view is that this indicates that the work is under resourced.


  17.  The "E-Filing of Personal Tax Returns Survey", a survey carried out by the leading accountancy bodies in the UK, published its findings in December 2006. They echoed concerns expressed by PCS that HMRC would not be able to deliver a robust system given their track record, and that they believed paper returns would still be required after 2008. The 2006 budget report claims Lord Carter's review of online services will provide a yearly saving of £250 million to government and taxpayers/agents. However, the Institute of Chartered Surveyors state: "we are concerned that the bringing forward the filing date will increase costs for both taxpayers and HMRC and that these extra costs may dwarf any savings that arise from increased use of electronic services."

  18.  PCS believe that there will still be a continuing need for HMRC staff to be involved in dealing with post despite HMRC's views that their online services will deliver substantial job reductions.


  19.  In their Tax Credit Office HMRC are seeking to rely on a large number of staff on fixed term contracts, with a resulting high turn-over of staff. In September 2005 there were 17,654 Full Time Equivalent staff (FTE) working in centralised processing, the unit that covers tax credits, which included 2,423 staff on fixed term appointments (FTAs). By June 2006 centralised processing employed 18,191 staff, of which 3,369, or 18.5%, were staff on short term, low paid fixed terms contracts. This has led to a lack of time to train staff properly before they leave, with staff mainly deployed to clear work-lists rather than properly managing cases.

  20.  The NAO had to qualify their opinion on the Trust Statement as they believe the levels of error and fraud are unacceptably high and there is no evidence that they would be lower for 2005-06. The accounts reported that between £1.06 billion and £1.28 billion (8.8 to 10.6% by value) being paid to claimants to which they were not entitled. It also estimates that claimant error resulted in between £190 million and £280 million (1.6 to 2.3% by value) of tax credits not being paid to claimants when they were entitled to them.

  21.  The level of complaints increased in the first full year of HMRC from 93,754 in 2004-05 rising to 106,783 for 2005-06. 47,921 in 2004-05 and 62,686 in 2005-06 were related to tax credits.


  22.  The Government suffered its first fall in VAT revenues since the advent of the tax in 1973. PCS believes the fall in revenues is remarkable given that the economy has had two severe recessions since the early 1970s that did not cause VAT revenues to drop. In large part this has been due to a rise in "carousel" or MTIC (missing trader intra-community) fraud. MTIC fraud occurs when a trader imports goods free of VAT, then sells them on with the 17.5% VAT added and disappears with the VAT money. A more sophisticated version is when the cargo is sold along a chain of traders, some of whom may be innocent, and re-exported with the exporter reclaiming the VAT—a double loss for Revenue & Customs. The cargo can then re-enter Britain and go around the same chain of traders several times, hence the term "carousel".

  23.  The Government's own estimates reckon that VAT fraud is responsible for a £3 billion shortfall in revenue. European estimates put the figure closer to £8 billion. The Office for National Statistics have admitted that the problem was so large that it was overstating the true size of British exports since carousel frauds can show up several times as exports.

  24.  HMRC claim that 1,500 staff are now dedicated to combating the fraud. We would argue that with VAT fraud running at over £3 billion the area remains inadequately resourced. HMRC have in fact merely shifted staff from other areas of VAT work to respond to the crisis in VAT fraud. In the main the resources that have been diverted are from VAT assurance work. We are concerned that merely diverting staff from other areas of work to cover VAT fraud investigations is creating problems elsewhere in VAT work and across the Department. Taking staff away from VAT assurance work has led to a significant reduction in the VAT being examined. The reduction in VAT assurance work is drastically reducing the number of visits and checks being carried out, thereby further undermining the deterrent effect.

  25.  Whilst HMRC may purport to claim that MTIC losses are being reduced and VAT fraud being tackled, the approach the Department has taken to shifting staff between work areas fails to address the real problem that VAT is under resourced.


  26.  PCS have consistently expressed concern about the inadequacy of resources to provide Customs cover at ports and airports in the UK. Our concerns support Lord Carlile's comments made to MPs in March 2003, repeated more recently, that Customs officers are spread too thinly, and that security at small ports, airports and coves should be tighter. He said: "We have to remember that lethal material could be brought into this country on a small yacht into a small harbour anywhere around the coastline." The Maritime, Aviation and Intelligence Team (MAIT) were the only such intelligence team in any law enforcement agency, and were looked on as the leaders in this field by other agencies who called on MAIT for intelligence and support. The MAIT have now been specifically directed away from uncanalised work. With no equivalent law unit there is effectively nobody proactively looking for intelligence in relation to anything other than the very major canalised ports and airports, and nobody identifying and cultivating sources in these areas.

  27.  There is now no permanent customs cover across hundreds of miles of UK coastline, notably in Devon and Cornwall, where permanent Customs cover was removed in 2003, and along the Welsh coastline, where there are no uniformed front line Customs officers from Cardiff to Holyhead or from Holyhead to Liverpool. There is clear evidence that this has led to an increase in smuggling of drugs and firearms as well as people, cigarettes and alcohol. The Department's Annual Report shows that only 21 tobacco gangs were disrupted in 2005-06 as compared to 87 in 2002-03, with lost revenue from tobacco fraud running at over £3 billion.

  28.  We are concerned that inadequate resources deployed at the UK's borders are having a direct impact on the availability of illegal drugs, with prices for class A drugs at the lowest ever recorded. In Middlesborough a bag of heroin can be bought for £5, and for £40 a gram in towns such as Gloucester and Penzance, with cocaine available in Birmingham and Liverpool for £35 a gram, and a tablet of ecstasy for 75p in Cardiff.

  29.  In April 2006 1,264 HMRC investigation and detection staff transferred to the newly formed Serious and Organised Crime Agency (SOCA), which we believe has left a gaping hole in HMRC's ability to be able to resource and adequately detect and deter smuggling in the intermediate drugs market.


  30.  Over 82% of HMRC staff are employed in the lowest three grades, earning basic salaries ranging from £11,730 (the statutory national minimum wage) to a maximum of £24,652 (or £28,510 in London). 15.5% have a maximum salary of £14,783 (£18,765 in London), under the £15,000 threshold for repaying student loans, and 40% a maximum of £18,305 (£22,457 in London).

  31.  HMRC have been keen to introduce pay and reward systems that rely on measuring and rewarding performance. PCS strive for the establishment of a decent and fair pay system within the Civil Service, which is ultimately not linked to individual performance but delivers decent levels of basic pay. We believe that this is consistent with the aims of retaining and motivating staff and maintaining an expert workforce on the basis of which further improvements in Departmental performance may be built in the future.


  32.  During 2006 two areas of HMRC work were outsourced to Cap Gemini/Fujutsu under the ASPIRE contract. One was the High Volume print function at Shoeburyness that produces and distributes the VAT 100 (VAT return). Due to the new supplier being unable to cope the print section at Shoeburyness is still carrying out this work.

  33.  The IT support officer (ITSO) role formally carried out by the staff in the Inland Revenue has transferred to ASPIRE. The current customer satisfaction with the service is far below that of pre transfer due to the inferior service being provided. This will have a clear impact on customer service. The new service centre is unable to manage technical issues and these are still being dealt with HMRC staff.

  34.  PCS believe that these are two examples of why outsourcing does not work in that they do not deliver the services or economies promised by the supplier at the time of transfer.


  35.  PCS is committed to achieving high quality public services and we represent the staff who are the key resource required to deliver customs and revenue services to the public. The creation of HMRC continues to generate momentous change and associated anxiety amongst staff.

  36.  Morale has reached a new low within the Department as a result of threats to job security and working conditions. We believe that working people employed by HMRC should, as a matter of principle, be afforded decent working conditions and be treated with dignity and respect. In other words, we do not believe that Civil Servants should be immune from the standards expected within a decent society, and should be afforded a positive and rewarding experience at work. Ultimately there is a balance to be struck between these considerations and the imperative to maintain efficient public services.

  37.  We believe that our aspirations for good working conditions for our members go hand-in-hand with the delivery of high quality public services. Evidence shows that good working conditions leads to a highly motivated workforce, higher productivity, lower absence rates, lower turnover and a greater emphasis on innovation and development.

  38.  We support new ways of working that improve efficiency and provide a quality service to the taxpayer, but not at the expense of our members' skills, health and safety, and their right to be treated with respect at the workplace.

  39.  We enthusiastically support the objective of effective, high quality public services. However, we believe that the level of cuts proposed in HMRC up to 2011 will result in lower Government revenue, higher levels of crime, a poorer service to the public and effectively risks rendering HMRC unfit for purpose.

  40.  The job cuts programme is already leading to a resourcing crisis within the Department, resulting in HMRC employing thousands of staff on short-term, temporary contracts and using overtime (at an additional net cost to the Government) in an effort to try to cope with backlogs of work. On one hand the Department claims that it is meeting its job cuts quota, whilst on the other being forced to adopt short-term quick (and costly) fixes to mask staffing shortfalls.

  41.  We therefore believe that the job cuts/office closure programme should be reversed, and instead investment made in the frontline services and resources required to:

    —  address the huge UK tax gap;

    —  maintain good quality services within communities;

    —  establish effective detection and deterrence of crime in relation to UK border control; and

    —  build a safer and more secure society.

January 2007

4   HMRC 2005-06 Accounts: the Comptroller and Auditor General's Standard Report, NAO, 7 July 2006. Back

5   "Releasing the resources to meet the challenges ahead: value for money in the 2007 Comprehensive Spending Review", HM Treasury, Cm 6889, July 2006. Back

6   "Central government's use of consultants", National Audit Office, HC 128 2006-2007, 15 December 2006. Back

7   John Seddon Vanguard newsletter-May 2006. Back

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