Examination of Witnesses (Questions 60-79)
HM REVENUE &
CUSTOMS
10 OCTOBER 2007
Q60 Mr Bacon: You sounded quite concerned
then and I know that it is okay for this Committee to pursue it
because I asked the Prime Minister about this on 4 July and he
said, and I quote, "The Committee of Public Accounts is welcome
to look at it".
Mr Gray: He did.
Q61 Mr Bacon: So I know from the
highest possible authority that this is an okay thing to look
at.
Mr Gray: And I hope you will accept
that I have been extremely open with you.
Q62 Mr Bacon: You have. I hope, Chairman,
therefore that we can ask further questions on this in private.
But I would still like to know, your department has issued a statement
in which you said "We are exploring with EDS whether the
number of contracts in which HMRC receives payment and the proportion
of each contract paid over to HMRC can be increased." What
does this mean?
Mr Gray: It means exactly that.
At a meeting with EDS just yesterday we have now agreed steps
that we believe will accelerate the rate of payments from January
2008. However, the proof of the pudding will be in the eating;
I am making it absolutely clear to EDS that if the full amount
of the settlement does not look likely to be forthcoming within
the originally envisaged period, roughly towards the end of 2008—
Q63 Mr Bacon: I calculated that at
the rate you were receiving it, it would take 106 years. Do you
differ from that?
Mr Gray: I am not going to comment
on the precise figures for the exact reason that I gave you before,
Mr Bacon; it would clearly take a long time at the present rate
and that is why I am making absolutely sure that should it prove
necessary we will, as the agreement provided for, return to litigation.
We have carefully archived millions of relevant documents in case
that proves to be necessary and I have been discussing with our
lawyers a process for bringing the matter back to the courts if
the acceleration of payments during the course of next year does
not meet my expectations. I hope that it will.
Q64 Mr Bacon: Thank you. I will move
on. What did you think of Ann Abraham's report that was published
earlier this week? This one.
Mr Gray: Yes, indeed, I have got
it in front of me.
Q65 Mr Bacon: I am sorry, I waved
the wrong one, I was waving the June 2005 one. The red one not
the orange one.
Mr Gray: It is an even brighter
red one.
Q66 Mr Bacon: It is even brighter;
it is getting worse. The first one was called Tax Credits:
Putting Things Right, two years later it says Tax Credits:
Getting it Wrong? What does that tell you about what sort
of progress you are making?
Mr Gray: With a question mark,
but I agree it was an interesting title. I am very happy to be
in receipt of Ann Abraham's report, in which she has obviously
been discussing her emerging findings as they have been proceeding
with us. As I sought to say to one of your colleagues—I
think it was the Chairman earlier on—she raises a number
of issues which I am extremely happy and keen to pursue.
Q67 Mr Bacon: Are there significant
points in it with which you disagree?
Mr Gray: Some of the tone and
precise language probably uses words which I would not have put
in exactly those words myself.
Q68 Mr Bacon: Can I just refer you
back to the June 2005 one, because actually the tone of this latest
report, published on 8 October, in that she bends over backwards
to be fair to you and to provide ministers with things that they
can quote. "I am in absolutely no doubt from the discussions
and exchanges that I and my staff have had with HMRC at the most
senior levels that they are continuously seeking to improve their
own performance" and so it goes on. You find loads of quotes
like that, but the point is that the Report from two years ago
said, without questioning the policy in itself, "it raises
wider and more fundamental issues which are not for me but are
for the Government and Parliament to address, such as whether
a financial support system which includes a degree of inbuilt
financial uncertainty can meet the needs of this particular group
of families." That was two years ago, and now she is saying,
in questioning whether it was appropriate to return to the subject
and have another full report like this, that the unfair and inconsistent
application of code of practice 26, the unduly harsh nature of
some of the decisions on recovery that she had seen, the extreme
distress thereby caused to low income families and the fact that
the outcomes of these decisions seem to fly in the face of the
aims of the tax credit policy, were sufficient to warrant a further
Report, and indeed Ann Abraham said on the radio the other day
that although Tax Credits work for a lot of people, there is a
particular group of the poorest people in the UK who are saying
their experience is such that whether or not they are entitled
to it they want nothing more to do with it, it has got them into
debt where they were not previously in debt, it has caused distress,
anxiety and even family break-up, so you have still got quite
a long way to go. I am glad to say I will not read them all out
because it would take too long, but on page 10 there is a whole
litany of things that you are still getting wrong and I will just
identify one. "One of the problems is that HMRC does not
take account of the number of times someone had notified HMRC
of things that might well affect their award, such as a mistake
on their award notice, a change of circumstances, and that HMRC
had failed to act." This is two years after her earlier report
and there is still an awful lot wrong with it, is there not?
Mr Gray: In her latest report
she does also make various remarks about how, for the great majority
of people, the system is operating satisfactorily.
Q69 Mr Bacon: So you did like the
tone.
Mr Gray: As I said to you, I was
rather selective of that aspect. Picking up your specific point
on the way in which we have been dealing with some of the cases
that clearly we have not handled as well as we should have done,
the particular point about the number of times that we have been
notified about a change is one of the very specific issues that
we are looking to amend as we revise code of practice 26, as I
was touching on earlier, and in particular this point that if
we have not acted on the notification to us within a relatively
short defined period then we will amend the practice we have taken
hitherto as to whether we pursue the overpayment. She also welcomes
in this latest report the fact that we are going through this
latest revision of code of practice 26 and the six specific recommendations
that she has made in the latest report will be helpful—
Q70 Mr Bacon: Will you be publishing
a response to those recommendations, or would you send us, so
perhaps we can include it in our Report, your views on those recommendations?
Mr Gray: Whether we will be making
a formal response, which is not normal to an Ombudsman's Report,
we will certainly be responding one way or another to the Report
and obviously I am more than happy to keep the Committee in touch
with that, but this will be in the context of us operating a revised
approach to the implementation.
Q71 Mr Bacon: You are being very
helpful, although your answers are quite long and I have got limited
time. I just want to ask you a quick question about targets and
then move on to something else. You said to the Chairman that
there would be no purpose in setting targets, because I think
you said you needed the data from 2006 which you expected to do
by the end of calendar 2007. When after that can we expect you
to be setting targets?
Mr Gray: I would expect it to
be early in 2008 and to be part of an overall process within our
new spending review settlement.
Q72 Mr Bacon: What do you call early,
the first quarter?
Mr Gray: Probably the first quarter,
but the key date in a sense is the start of the next financial
year, 2008-09, which is the beginning of the new three-year period
over which the generality of our targets will be set.
Q73 Mr Bacon: I just want to move
on to the taxation of small pensions. You may be familiar with
the work of the Low Incomes Tax Reform Group (LITRG) which has
sent us a brief on this because of mistakes made by the Revenue—this
is referred to in paragraph 3.48 and onwards of the Comptroller
and Auditor General's Report where it says in 3.48 that the Department
published guidance to pension providers which: "was not strictly
in line with the PAYE regulations and processes". It goes
on to say that the precise rationale for these instructions are
now unclear and in paragraph 3.51 that: "the Department became
aware of this issue in April 2005 and it changed its incorrect
guidance but it did not explicitly notify the pension providers
of the changes and they generally went unnoticed and were not
implemented. Furthermore, the Department believes that some of
its local offices agreed with pension providers to continue their
previous local agreements when they queried the changed instructions."
Obviously there was a problem that was caused in essence by HMRC
and your proposal to deal with this is to not recover tax prior
to 2006-07. What the Low Incomes Tax Reform Group is concerned
about is that with that approach you can still find people who
do not yet know that they have a liability and who will not find
out that they have a liability until 2008-09 or even 2009-10 when
they could suddenly find possibly a good chunk of the 420,000
pensions they estimate are affected will have this unexpected
and unwelcome liability notified to them. Would it not be possible
for you to do what they suggest, which is ask the pension providers
for the names and addresses of those receiving annual payments
of over £1,000 which would enable you to write to the people
who are at the greatest risk, not in a year's time, so that people
know now if they have a liability and can begin to make some adjustment
for it rather than expecting in two years time them to adjust
to what will by then be quite a big accrued debt?
Mr Gray: I will ask Mike Shipp
to add to this in a minute if I may, but we have explored the
possibility of writing to pension providers and we do not think
that it would be possible actually to get complete coverage in
doing that. The general approach we have taken on this—and
you have summarised some of the history as set out in the NAO's
Report—is that having fully established what the position
is we have decided that it would not be appropriate to go back
and seek to make recovery before the current year end, but having
taken strict legal advice I believe the right cut-off point if
you like is with effect from the current year. I know that the
low income groups had concerns about this and indeed, just as
I was discussing issues with Ann Abraham this week, I spoke with
John Andrews the Chair of the LITRG on this very issue last week.
The particular concern they have is whether by implementing this
year rather than leaving it for another year or two, we might
deprive people of the opportunity to make claims for adjustments
to their Pension Credit entitlement from the DWP.
Q74 Mr Bacon: Yes, and he provides
a worked example.
Mr Gray: We are in conversation
with DWP about that and we think that actually in co-operation
with them we can overcome that problem and that entitlement could
be extended. The problem for me is if, having now fully established
the scale of the problem and clearly identified that there is
tax that should be being collected, which has not been collected
in the past, then I do not think it would be the right thing for
me as the Chairman of HMRC, particularly in light of legal and
other advice I have had, to delay any longer putting matters on
the right foot, and I would imagine the Committee and others might
think it would be inappropriate for me to continue in full knowledge
of the facts our failing to collect tax which is due.
Q75 Mr Bacon: Yes, I understand that
and indeed the Low Incomes Tax Reform Group say that it may be
that HMRC will say that they have to collect the outstanding liabilities
in order to be fair to all taxpayers; who can disagree with that?
The point is that the people who owe the money do not know and
it is because of your earlier errors and you are not about to
tell them for another couple of years. That surely is the point.
Mr Gray: We will be aiming to
tell them in the normal way that happens with all taxpayers, as
soon as possible after the end of the year in question what their
liability is, so as soon as possible after the end of 2007-08
when we have the end of year returns we will be notifying people.
We do not envisage for most people seeking to collect any money
that is due for 2007-08 onwards until we put it in their codings
for 2009-10, so we are not going to suddenly turn round to a lot
of relatively low income pensioners, we are going to play it into
their coding.
Q76 Mr Bacon: But they could have accrued
quite a liability by the time that they know they owe anything,
could they not?
Mr Gray: We are talking here by
definition of relatively small pensions, so I think the likelihood
of somebody building up a very large liability—
Q77 Mr Bacon: I am talking about
relative to their total ability to pay it; it is a long time since
I have been a poor student but I remember what it was like, nearly
no money at all. It is precisely the people on the very low incomes
who find this the most frightening, surely?
Mr Gray: I recognise what they
are facing but we will be seeking to give them that clear notice
in the way that we do. Mike, do you want to add anything on this?
Mr Shipp: Yes. It is relevant
to what the Committee understands that we have given due consideration
to how do we tackle this problem, and in order to do it in the
way that the LITRG recommends would have required us to place
upon all the pension providers effectively a voluntary requirement
to give us data that they have got from their records, and that
would have involved quite a burden on them, 6,000 pension providers,
and we would then have needed to have compared that data to our
tax records, taking into account the other income the pension
has provided. One of the considerations that we were very conscious
of and our lawyers were very conscious of was embarking on a process
that was inevitably going to lead to an uneven effect on the pensioners;
by that I mean there is little we could do to force the pension
providers to give us that data so we would in effect be potentially
going to those pensioners where their provider has given us the
data whereas others would remain uncontacted by us because their
pension provider had not given us that data. The lawyers were
very assiduous in advising us that we need to be mindful of the
impact on the pensioners themselves in just the way that you describe.
So there were some practicality considerations here as well as
even-handedness considerations.
Mr Bacon: I have run out of time, thank
you for those answers.
Q78 Angela Browning: Mr Gray, could
we look first at appendix A in Ann Abraham's latest report on
page 46? It has been referred to this afternoon but I just think
it is worth noting that although the overall number of cases referred
to the Ombudsman may have dropped, the number of cases upheld
is extremely high, and particularly when you look at the number
of cases in the year 06/07 that relate to overpayment there is
an increase year on year to those cases that involved overpayment.
Clearly, therefore, the overpayment problem is not being tackled
and, also, the fact that the Ombudsman is upholding such a high
percentage of those cases in the last year, 74%, leads me to believe,
particularly from my own constituency experience, that you really
are not tackling the overpayment problem. Can you give us just
some feel this afternoon of how you are going to address this?
Mr Gray: I accept, as I said earlier,
that the proportion of cases being upheld is too high—although
it has dropped a bit it is still above the parliamentary average,
and actually I regard the parliamentary average as far too high.
The great majority of the cases that have gone through the various
stages and got to the Ombudsman and settled by the Ombudsman relate
to the early years of the operation of the system—I do not
know if that is reflected in your own constituency experience—so
to some extent the data we are getting recorded here, even though
they are 06/07 cases as far as the Ombudsman is concerned, on
average they are likely to be 04/05 cases in terms of when whatever
difficulties have arisen arose. We are looking a little bit kind
of through the rear window here, but what we are seeking to do
and have been doing over the last two years is to put in place
very significant improvements in the way in which we are administering
the whole system and the overpayments. We have put in place since
those first two years a large number of initiatives to seek to
improve the flow of information that we give to claimants, for
example by redesigning award notices, and a whole range of other
things to try to make it easier for claimants to operate within
the parameters of the system. The fact that overpayments are still
a very large and increasing proportion of the caseload of the
Ombudsman highlights the fact that a lot of the difficulties we
had in the first year or two of the system we have substantially
got on top of, but as I say I will not be satisfied if, in a year
or two, I am in front of the Committee and we are still in a position
in which such a large proportion of the cases going to the Ombudsman
are being upheld because, clearly—and I have said this to
your colleagues on the Public Administration Select Committee
before now—an appropriate proportion of cases to be upheld
by any independent adjudicator or ombudsman if it is higher than
20% or 30% then that says to me that there are issues that we
still need to tackle within our systems.
Q79 Angela Browning: Of course, most
of these cases referred to Ann Abraham have been cases that have
been referred by Members of Parliament, so we have already, in
handling casework and problems from our constituents, availed
ourselves of the MPs' helpline, which is a dedicated phone number
which we can refer our casework to, so in terms of being able
to fast track a constituency case we are, I assume, getting a
Rolls Royce service in trying to resolve the problems, yet still
Members of Parliament are the people who are referring these cases
to the Ombudsman. Why do you think that is?
Mr Gray: Because in those number
of cases clearly you are not persuaded and when the Ombudsman
has looked at a similar proportion of the cases she has not been
persuaded that we handled them appropriately. Again, at the risk
of sounding complacent, which I am not, the fact that we are talking
here about a couple of hundred cases—which is clearly 200
cases too many, I do not want to under-estimate that—since
we are dealing with 300,000 disputes of overpayments each year,
the great majority of which are not getting this to this stage
and are being satisfactorily dealt with, means we are dealing
with a small proportion that are not being done properly. So it
is a small proportion but we need to do even better.
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