Select Committee on Treasury Minutes of Evidence

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 You do not publish on an ongoing basis what the OGC are telling you.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 time.

  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 with the—

  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 less.

  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 been identified?

  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 which—and Stephen will confirm this—20 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 there.

  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 practice.

  Q74  Peter Viggers: Are you able to give us an idea of the range or extent of this fraud in this current year?

  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 to quantify.

  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.

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