Examination of Witnesses (Questions 60-79)|
22 NOVEMBER 2006
Q60 Mr Todd: I indicated that there is
a sort of rule of thumb which is, that may be low yield but we
have to do it; it is as simple as that.
Mr Gray: Exactly.
Q61 Mr Todd: You have published previously
remarks about the OGC reviews of your change programmes and indicated
in previous publications that they were flagged, I think, in December
2005 as "provisional red", and I think there has been
a subsequent judgment that they are now moved to "amber-red".
You do not publish on an ongoing basis what the OGC are telling
you. What is the latest position in terms of their perception
of what you are attempting to do in what is a demanding programme
of closures, relocations and changes in working activities?
Mr Jones: The latest position,
Mr Todd, is that we had an OGC gateway review of the efficiency
programme last month. The assessment that the OGC reached in the
gateway review was amber. They recognised that substantial progress
had been made since the previous review, that the management of
the overall programme had improved and that savings were now being
delivered ahead of track rather than just close to track. They
also gained greater confidence in our management of the various
enabling; programmes that allow us to safely take staff out of
the business. We have a separate assessment by a different part
of the OGC as part of their regular reporting on the Government's
efficiency programme as a whole. That assessment meeting was held
earlier this month and, although the OGC have not come back to
me with the results the self-assessments that we took into the
meeting and with which the OGC seemed pretty comfortable, again
reflected improvement on quite a considerable scale since last
Q62 Mr Todd: Can I just commend you
for having made public statements of at least the summary of what
the OGC are telling you in the gateway process? Not all government
agencies or departments do even that. Could you make that a regular
habit of letting people know, because this is obviously a very
important change programme, as the discussion in this Select Committee
has shown, in that the public ought to be aware of risk analysis
and the actions taken by your team to address it?
Mr Gray: I am certainly comfortable
to do that. I think there is a distinction to be drawn between
our seeking to give those summary assessments and the issue of
publishing the detailed reports where I would feel distinctly
uncomfortable doing that.
Q63 Mr Todd: I am painfully familiar
Mr Gray: That would frankly undermine
the value and purpose of the exercise. To give an indication of
the outcome and the direction of travel seems to me entirely right.
Q64 Mr Todd: I am familiar with that
argument, but, yes, even an indication of broadly what they are
saying and your response to it would, I think, be valuable to
this Committee. Does this suggest that your level of confidence
in achieving the savings set is relatively high, and their confidence
in your being able to do that?
Mr Gray: Yes, I think it is. They
are obviously looking explicitly at the period up to 2008. I think
we do now feel more confident than we did and they feel more confident
than they did that we are comfortably on track for that. Obviously,
the material we were talking about last week is taking us on a
further three years where the planning, and inevitably therefore
the degree of certainty and assurance we have, are bound to be
Mr Jones: If I can just add to
that, I am the senior responsible officer for the efficiency programme
so my confidence is quite important in this regard.
Q65 Mr Todd: Did you have more hair
before you started that?
Mr Jones: It might have been slightly
darker than it is now. One of the things that has meant a great
deal to me over the last few months has been to bring the position
on workforce change and the consultation on how we are going to
manage our people and our offices to the state where it is now.
That is an essential enabler to get the business not only delivering
the right savings by 2008 but also in the right shape that we
can deliver an effective service going forward. That for me is
the key to gaining confidence in the overall successful management
of the programme.
Q66 Mr Todd: I agree entirely. Just
to conclude, one of the elements in this is public confidence
that you are doing the right thing and some of the debate about
this has focused on that. An aspect of that is the public announcement
of staff reductions that have happened from time to time, which
people query as to whether they have been validated appropriately.
Has the 3,671 reduction referred to in the 2006 budget been audited
and accepted as the true picture?
Mr Jones: Yes, it has, and I have
set in place a process with our internal audit whereby we now
validate our ongoing staff reductions on a quarterly basis. I
receive a quarterly report from internal audit, as does Paul,
who receives a summary of this report, to give us continuing assurance.
Q67 Mr Todd: Again, would it be possible
for us to see some more detail of that on a periodic basis because
you will be aware that there is certainly a degree of contention
about whether thee figures are either accurate or conceal various
other changes in manpower statistics elsewhere in the organisation?
Mr Gray: Can I consider that because,
again, I think that striking the right kind of balance in relation
to internal audit reports on the considerations we talked about
before is a delicate one?
Q68 Jim Cousins: As part of the Treasury's
review of financial management that is going on right across all
government departments, not just Treasury departments, have you
been asked to implement any improvements? Have any areas of weakness
Mr Gray: Again I will ask Stephen
to add things in a minute, but we did indeed have a Treasury review
of HMRC's financial management in the summer of last year. The
conclusion at that stage was that there were no significant weaknesses
identified and the Treasury were comfortable that if we continued
to implement the strategy we were operating that would result
in a good overall financial management process. I think there
were something like 24 detailed recommendations that came out
of that report, of whichand Stephen will confirm this20
or 21 have already been implemented. I also think it is relevant
to note, although Stephen would probably be too modest to say
this, that over the course of the last year there have been a
couple of public, or at any rate external, judgments reached on
the value of our financial management and Stephen's team for 2005
gained the award of Public Sector Finance Team of the Year, and
in terms of our cash management function in relation to the latest
year, for the first time the Treasury has placed HMRC at the top
of its cash management league table, so we are not perfect, there
is still work to be done, but I am satisfied both with where we
are on that and the progress we are making.
Q69 Jim Cousins: In your annual report
you do reveal a situation in which your internal audit was unable
to track any paperwork to assess the accuracy of 16% of PAYE income
tax cases, and in a further 18% of cases measurable errors occurred,
of both underpayment and overpayment. That is quite a disturbing
situation, is it not?
Mr Gray: It is not a happy situation
and in response to that internal audit report and a number of
other reports on other aspects of the PAYE system my predecessor,
supported by Stephen and other colleagues, put in place a number
of actions to seek to improve our performance very considerably
Q70 Jim Cousins: There are a large
number of policy changes that the Government has brought about,
which obviously creates administrative difficulty. In April we
had the change to the pension tax arrangements, the simplification
of tax. Again, it is difficult to implement and I am indebted
to a constituent who sent me rather an interesting piece of Sanistat
that circulates, which tells me that the task of dealing with
a million retired annuity contract cases as a result was given
to former contact centre staff in Leicestershire and Northamptonshire,
and they had not been trained in self-assessment so there were
a large number of referrals back to other bits of HMRC. Even accepting
that the changes with regard to pension tax simplification were
indeed dramatic, that is quite worrying, is it not?
Mr Gray: On the specific retirement
annuity contracts, we did face a challenge there. There was that
particular workload to overcome. We reached the conclusion that
it was right to seek to allocate that work to a dedicated team.
Did that process work absolutely perfectly to 100%? Possibly not,
but I am not sure I quite recognise the picture that is painted
there. I thought that was a broadly successful operation for dealing
with that particular business need. As to whether there were some
imperfections around the margin of it, I am sure there were.
Q71 Peter Viggers: VAT fraud, and
specifically missing trader VAT fraud losses, were estimated by
the Comptroller and Auditor General in his report to have amounted
to between £1.1 billion and £1.9 billion in 2004-05,
and it is believed that these fraudulent activities are increasing.
To what extent do you feel confident that you know the amount
of the fraud involved?
Mr Gray: I am not sure that we
feel confident we know precisely how much there is. In the forthcoming
Pre-Budget Report the Government will seek to set out the latest
view of that position in relation to 2005-06. I will ask Mike
to add comments in a minute but we clearly have faced over the
course of the last year a significant rising challenge in relation
to missing trader fraud. We have put in place a large number of
measures and additional resource over the course of the last year
to seek to get on top of that problem.
Mr Eland: What I would add is
that in response to the rising levels of attempted fraud we have
switched additional resource into verification of virtually all
claims made in the suspect area, so we are not making VAT repayments
until we have been able to go through a fairly detailed process
of validation, and we think has begun to make a real impact on
the fraud. In addition to that we have had some successes in criminal
investigation. There was a big operation in the summer where we
believe that we have succeeded in disrupting and breaking up one
of the organising gangs and we are following through on that investigation,
which I cannot go into details of because it will obviously have
to come before the courts, but we are following through tracking
the assets and financial receipts and trying to get freezing orders
on those in overseas banks and so on where some of the money has
gone. We are seeing some signs of progress in really being able
to tackle it but I do not want to be complacent about this at
all. The people who are involved are very determined. They constantly
switch their ways of operation and we have to be very vigilant
to keep up that and preferably, obviously, get one step ahead.
Q72 Peter Viggers: In your 2005-06
accounts, and I am referring to pages 92 and 93, it seems that
other taxes and duties are all very buoyant with the exception
of alcohol duty. Every duty and tax is up, really quite substantially
in some cases, but I see on page 92 that VAT repayments have caused
the VAT receipts to go down from £74.2 billion to £73.8
billion. Is there likely to be any relationship at all to that
higher repayment level and VAT fraud or can you reassure me that
this is caused by other factors?
Mr Gray: I think there is likely
to be some relation between the two, yes, and the measures which
Mike has talked about in relation to verification that we have
been taking in the current financial year, 2006-07, are directly
related to and addressed to exactly that challenge.
Q73 Peter Viggers: You appear to
have been unsuccessful in persuading the European Court to support
some of the weapons you are seeking to use in your fight against
fraud. What other weapons do you have available to you?
Mr Gray: We win some, we lose
some in relation to court cases, as you say. As Mike was saying,
we are looking always to be adapting our approaches to seek to
keep ahead of the people who are designing sophisticated ways
around our systems. Obviously, we consider with our Treasury colleagues
from time to time whether part of that approach might require
some changes to legislation as well as changes to our operational
Q74 Peter Viggers: Are you able to
give us an idea of the range or extent of this fraud in this current
Mr Gray: Not at the moment. As
I say, the Government is planning to publish some figures in the
Pre-Budget Report. The other thing I would add is that there have
been a number of widely ranging figures quoted for this and speculation.
It is important to bear in mind that there are different things
that can be measured here. What has clearly been the case over
the last year or so is that the levels of attempted fraud have
very significantly increased and that is a distressing phenomenon,
but our job is to do what we can to keep to a minimum the extent
to which those attempts are successful and that is the focus of
the verification work that Mike has described and the other measures
that we are taking.
Q75 Peter Viggers: We are told that
tax advisers first suggested the reverse charge mechanism more
than three years ago. Why, in the face of rising VAT fraud levels,
did you not do anything until last December?
Mr Gray: We are constantly keeping
the strategy under review. Hindsight is a wonderful thing when
one looks back on these things. What we have certainly been seeking
to during the course of virtually the whole of this year, as you
are aware, has been to get a reverse charge mechanism in place,
and our Treasury and ministerial colleagues are actively pursuing
that as we speak.
Q76 Mr Gauke: I would like to continue
on the subject of missing trader fraud and will just come back
to the issue that Peter raised a moment or so ago about the various
European Court judgments that ruled against some of the methods
that you have deployed. It is slightly familiar territory, I have
to say, having served on the Finance Bill Standing Committee.
It would be fair to say, I think, that the Paymaster General was
somewhat agitated by some of these judgments. Is it possible to
quantify how much more difficult it has made your job that you
have had these judgments, or is it impossible to put any numbers
on this, and how concerned are you by the fact that your room
for manoeuvre has been restricted by these judgments?
Mr Gray: I am not sure we can
put precise figures on it, although Mike might be able to add
something in a minute, because it is quite difficult to know what
would have otherwise happened in these circumstances, but clearly
in relation to significant court judgments that go against us
the people who are seeking to perpetrate the fraud follow those
at least as closely as we do, and if some new mechanism which
has not been struck down by the courts emerges we know it is human
nature that criminal gangs organising all this are such that they
are going to look to rush into those breaches, so, yes, it is
very worrying, but precisely quantifying it, as I say, is a little
bit difficult because you have to have so many counter-factuals
in the analysis.
Mr Eland: It is extremely difficult
Q77 Mr Gauke: The solution in the
Finance Act, or the attempted solution, is obviously the reverse
charge. This appears to be being blocked and I am not quite clear
why it is being blocked by other Member States. I have certainly
read about the Germans' sour grapes because they want a reverse
charge for everything and the French do not want to allow this
because they fear that they will then be the victims of this rather
than ourselves. What is happening here?
Mr Eland: Basically I think it
is a matter of reassuring people that by allowing us a derogation
to introduce a reverse charge we are not going to create an impact
on them in their circumstances, and that is particularly the case
with the French.
Q78 Mr Gauke: By that do you mean
that the fraudsters will start targeting the French?
Mr Eland: The way our rules have
changed might have an impact on them and so what we are doing
is going through the process of reassuring them that we do not
think that is the case and also discussing things like how we
can work together to prevent any displacement of fraud from one
country to another and both jointly look to tackle it. It is that
sort of discussion that is going on at the moment.
Q79 Mr Gauke: It does sound a rather
odd one that the French Government are stopping us taking effective
measures in case the fraudsters decide to target France. I have
certainly read reports that this is all delayed for a year, but
that presumably is subject to reaching agreement with the French,
the Germans and the Austrians. Is that right?
Mr Eland: I do not know about
putting a timescale on delay. The Treasury are actively pursuing
those issues at the moment and we hope we can get a rapid agreement.