Administration and expenditure of the Chancellor's departments, 2007-08 - Treasury Contents

6  HM Revenue & Customs


78.  Her Majesty's Revenue and Customs (HMRC) was formed in April 2005 when the Inland Revenue merged with HM Customs and Excise. The Department is responsible for administering the UK tax system, collecting revenue and paying entitlements. In 2007-08 HMRC collected £457bn of revenue and paid entitlements of £30.3bn.[95] In this section we consider developments within HMRC in the year including changes to senior management, the transformation and efficiency programme, data security arrangements, and the management of significant PFI contracts.

Senior management changes

79.  During 2007-08, HMRC experienced substantial changes in the senior management team: the Chief Executive Paul Gray resigned on 20 November 2007 and the Chief Finance Officer, Stuart Cruickshank, left on 31 March 2008.[96] From November 2007, David Hartnett stepped up as Acting Chief Executive and Chairman. Mike Clasper joined as Chairman on 1 August 2008. In November 2008 Lesley Strathie joined as Chief Executive and David Hartnett moved into a new position of Permanent Secretary for Tax. The transition period, from the resignation of the Chief Executive to his successor taking up her post therefore occupied 12 months. Further to these changes, Mr Clasper informed us that a number of additional senior management appointments remained to be made:

we are just about to announce the appointment of a new head of HR and we are in the process of recruiting a new head of finance, so we are putting the top team in place in addition.[97]

80.  We are disappointed that HRMC took 12 months to replace its Chief Executive, thereby deepening the uncertainty felt by staff members already part way through a far reaching review of HMRC's operations. We recommend that the Government ensure a full permanent senior management team is in place in HMRC as soon as possible.

81.  When challenged to defend the tripartite senior management structure, Mr Clasper sought to reassure us that the areas of responsibility were clear:

My role is to lead the board of HMRC … Leslie Strathie … will have the classic responsibilities of an accounting officer. She will have all of the top team of HMRC reporting to her, including direct reports from the lines of business within HMRC: personal tax, corporate tax, tax credits and benefits, and compliance. Dave [Hartnett] will take a role right across the department to ensure that the quality of the tax policy and the practices and the legislation around tax policy are of the highest standard. In order to do that, he will have our central policy unit reporting to him and also the people working in the areas of intelligence, information, and analysis. He will also be responsible for our relationship with the Treasury.[98]

82.  We believe that having a 'Permanent Secretary for Tax' alongside the Chief Executive and Chairman of HMRC may obscure clear lines of accountability. We recommend that HMRC publish and widely circulate clear information on the respective responsibilities of its senior management team, including responsibility for data management.

Payments to outgoing senior managers

83.  Upon departure, both the outgoing Chief Executive and the outgoing Director of Finance received substantial payments. Following his resignation, in the aftermath of the HMRC data loss, Chief Executive Paul Gray received a "lump sum payment at date of leaving of £137,591 and monthly payments totalling £49,292 until attaining the age of 60 on 2 August 2008".[99] Mr Hartnett stated that these payments were made under standard civil service arrangements and were "nothing special".[100]

84.  The circumstances surrounding Mr Cruickshank's departure from his post of Finance Director are less clear. He received a £88,125 cash payment as well as £22,000 of benefits in kind, for loss of office.[101] Our discussion with HMRC officials left us uncertain as to the nature of his departure. Mr Hartnett suggested that Mr Cruickshank's departure was voluntary, suggesting that:

[Mr Cruickshank] wanted to follow a portfolio career in the private sector and we and Stuart reached an agreement, on the basis of which he left.[102]

85.  This leaves unanswered the question of why such a significant payment was made to an individual who left of his own volition. Mr Hartnett explained that:

[Mr Cruickshank] had not indicated clearly when he wanted to go and we believed firmly at that time that we needed a chief finance officer who was absolutely committed to HMRC, not one who was planning another career, having indicated clearly he wanted to go. That is why clearly this was a negotiated arrangement.[103]

86.  In a supplementary submission, HMRC maintained that it was Mr Cruickshank's lack of a clear commitment to leave that prompted their decision to enter in to negotiations and make the £88,125 payment.[104]

87.  We note that HMRC appealed to the need for 'continuity' at the top, yet Stuart Cruickshank's replacement, Phillip Moore, came in on a temporary contract to allow re-appointment under the in-coming Chief Executive. So HMRC paid an individual £88,125 to leave in March 2007 in order to gain continuity in the Finance team, yet deliberately replaced this individual with a temporary contractor.

88.  It is our view that HMRC's explanation of the basis for the payment to Stuart Cruickshank is wholly inadequate. We are further unconvinced that the £88,125 received by Stuart Cruickshank represents good value for the taxpayer. We recommend that the Government ensure that all departments are adhering to best practice regarding ex-gratia payments.

Transformation and efficiency

89.  In 2007-08, the Department continued work on delivering its Departmental Transformation Programme (DTP), set up in 2006-07 to make the Department more efficient and customer-focused. The DTP incorporates a number of work-streams including the Workforce Change programme, the creation of new online self-assessment and PAYE forms, changes in call centre services and the provision of online portals for specific customer groups such as international traders.[105]

90.  In its report on the DPT in July 2008, the NAO noted that staff "morale remains at a low ebb"[106] and that in order to maximise the benefits of the programme the "Department should more actively demonstrate the benefits to staff of the changes".[107] However, staff morale in the HMRC remains low. The low level of staff morale was clearly demonstrated by HMRC's own winter staff survey: some 70% of staff said that they disagreed with the statement "change is managed well in this department";[108] 78% said they thought the Department was changing for the worse;[109] and only 13% said that considering everything they were satisfied with the Department.[110]

91.  In response to these difficulties, David Hartnett accepted that HMRC "have made some mistakes, over time, in introducing some techniques which improve processing but people do not feel that they are in control of the processing".[111] He acknowledged that:

We need people to have a sense of direction. We are in the process of doing that. We need to ensure that they have a clear sense of priorities and that we are not asking them—in some cases at the moment we are asking them but in the future we will not be asking them—to do too many things, so that there is clarity about what really counts. We do need to introduce new IT systems.[112]

92.  We note the National Audit Office's assertion that, in order to maximise the benefits of its Transformation Programme, HMRC must convince staff of its benefits. The low levels of morale within the Department are startling with profound potential impacts on both the Transformation Programme and core service delivery. We will continue to monitor the efforts made by senior management to improve matters. We seek an explanation of how Ministers will monitor and report progress.

Online filing

93.  As part of its programme of transformation, HMRC is committed to increasing the number of tax accounts filed online. In order further to encourage individuals to file online, the deadline for 2007-08 paper self-assessment submissions was brought forward to 31 October 2008.[113] Paper submissions after 31 October are subject to an automatic £100 non-filing penalty charge. The deadline for online filing remained 31 January 2009.[114]

94.   When invited to comment on the possibility of higher numbers of non-filing fees being imposed, particularly on those without access to the internet, Mr Hartnett suggested that:

We have no indication at all—and we are monitoring this very carefully—that any particular element of the population is filing late. We are heavily engaged with the representative bodies for more vulnerable people and we have picked up no intelligence yet of any significant concern that people are not able to cope.[115]

95.  We are concerned that individuals without access to the internet, notably less well off or elderly taxpayers, may face increased levels of non-filing penalty charges following the revision to the paper filing deadline. We recommend that the Government should publish any analysis available to it of the demographic profile of those facing non-filing fees following the 31 October paper filing deadline. If such evidence is not available to the Government then it should be commissioned as a matter of urgency.

Workforce change and HMRC office closures

96.  HMRC's Workforce Change Programme is focused on assessing opportunities for HMRC to reduce the size of its estate.[116] A key tenet of this programme has been increasing centralisation, a consequence of which has been office closures across the country. On 4 December 2008, HMRC announced the results of its review of office clusters across the UK and the closure of 93 offices. HMRC stated that it remained "committed to avoiding compulsory redundancy or moves of home".[117]

97.  In defence of HMRC's decision to close a number of small offices, Mr Clasper suggested that HMRC had "considerable evidence"[118] that smaller offices did not deliver value for money. Mr Clasper noted that

Most of the work can be done from anywhere but you do need the critical mass to do it, and that is where we have had these productivity gains. We do need to save money. If we stop what we are in the middle of, we will only have to restart it at a future date, and in the long run the uncertainty for our staff will continue for a much longer period of time.[119]

98.  The Public and Commercial Services Union (PCS) reported to us that the HMRC was refusing to disclose the costs associated with individual office closures. This, PCS suggested, prevented scrutiny of the cost savings claimed by the Department. [120]

99.  We recommend that HMRC disclose information regarding the financial case for individual office closures in order to allow better public scrutiny of these decisions.

Delivery of efficiency targets

100.  By 31 March 2008, HMRC reported £0.66bn of efficiency savings against a target of £0.51bn and 18,832 headcount reductions against the target of 16,000.[121] Mr Hartnett confirmed that the 2,832 posts reduced over and above the original target would be a "contribution towards the next tranche"[122] of 12,500 headcount reductions as stated in the CSR2007 efficiency saving target.

Fraud and data security

101.  By the nature of the work it performs HMRC holds large volumes of personal financial and non-financial information. The Department faces risks of abuse of this data by both staff members and outside forces. HMRC reports that nine personal-data-related incidents were formally reported to the Information Commissioner's Office in 2007-08.[123] The most significant of these was the loss of the child benefit data of 25 million people.

102.  In the aftermath of the child benefit data loss, Kieran Poynter was commissioned to perform an independent review of information security in HMRC.[124] His report made 45 recommendations, 13 of which the Department had fully implemented by June 2008.[125]

103.  We ask the Government to update the latest progress made by HMRC against Kieran Poynter's recommendations regarding information security.

104.  Data losses may be accidental but information security must also address the issue of fraud. The Report from the Comptroller and Auditor General noted the risk of fraud by HMRC staff, stating that:

The Department has to address the risk that its staff or Department for Work and Pensions (DWP) Jobcentre Plus staff, who also have access to the tax credits system, may abuse their access rights to provide information which could be used by organised fraudsters to make false claims. The Department's Anti Fraud Assurance Team (AFAT) has identified six cases of suspicious access to tax credits data by DWP staff since October 2006. In response, the DWP has worked closely with the Department throughout the year to investigate these cases of suspicious access, ensuring that appropriate measures are taken with staff and to address any identified control weaknesses.[126]

105.  Mary Aiston, Director of Governance and Security for HMRC, assured us that access controls had been reviewed since the data loss in 2007 and "long discussions"[127] had been held with DWP to ensure that appropriate controls were in place. She further informed us that:

In a recent example, where we have provided access to another government body that has a legitimate and legal reason to use it, we are also introducing monitoring so that our internal auditors can monitor access by their staff, which will also help in the fight against internal fraud.[128]

106.  There have been reports in the press of up to £2.3m of fraud being committed by HMRC staff members.[129] When we asked about these allegations, Mary Aiston suggested:

Any fraud incident is one too many but the figures reflect our seriousness in identifying when it is happening, tracking it down, and pursuing it with the full rigour of the law. In addition to tackling cases such as these where there is evidence of fraud, we also have quite a big programme of work aimed at fraud prevention, so that we stop this sort of thing happening in the first place.[130]

107.  We are extremely concerned by the level of fraud within HMRC. We will continue to monitor the steps taken to improve controls. To assist us in this we recommend a disclosure of immediate past known fraud levels to provide a benchmark.

Managing PFI contracts

108.  Our review of HMRC's performance in 2007-08 highlights a number of areas in which PFI contractors appear to be delivering substandard outputs, notably in the areas of buildings maintenance and IT provision.

109.  With regard to buildings maintenance, we noted that accidents in the quarter up to March 2008 numbered 151, an increase of over 30% on the previous year.[131] The Department appealed to previously inadequate recording systems and they assured us that there had not been "a material increase in accidents".[132] The Department informed us that they had become more demanding of the PFI provider of building maintenance, Mapeley. Mr Hartnett told us:

We are constantly in discussions … with Mapeley about service and about health and safety issues, and have become more demanding — as demanding as we should have been in the past, but more demanding now.[133]

110.  We recommend that the Government ensure the performance against agreed targets by PFI contractors is published within Departmental Annual Reports in order to enable clearer scrutiny of these recipients of public funds.

111.  In respect of IT provision, the review of HMRC's performance in 2007-08 highlighted two areas of failing: non-payment to Child Trust Fund recipients; and the widespread systems crash of 31 January 2008.

112.  We were disappointed to note the disclosure in the HMRC accounts[134] that 50,000 children born in 2006-07, and eligible for the additional £250 Child Trust Fund payment, had not received these payments as at the end of 2008-09, an error which amounts to £12.5m unpaid endowments. In July 2008, then Economic Secretary to the Treasury, Kitty Ussher, told us that a further 80,000 children had not received payments due to them.[135] Mr Hartnett assured us that the Department had engaged with its IT suppliers to "fix that and to look generally at the system of software for the Child Trust Fund".[136] He further noted that:

We [HMRC] have already received some compensation for IT issues. We are heavily engaged with our IT contractor about performance issues and tomorrow I will be asking to see the chief executive again because there is something else that we are concerned about.[137]

113.  The second major failure for HMRC was the system crash on 31 January 2008 which affected those trying to meet the deadline for tax submissions for the 2006-07 tax year. Mr Hartnett offered an explanation for this failure:

We got to the bottom of the January 2008 systems crash. The system had had its platform changed without really adequate examination of the risk of that. It will not surprise you that we have done some very vigorous discussions with our IT provider around that issue and we have examined the whole of that system again to make sure, we believe, that it will not happen again. [138]

114.  We recommend that HMRC reviews the contracts with its IT provider in the light of the very serious errors which have recently occurred and seeks financial compensation where appropriate. We regard it as wholly unsatisfactory that people entitled to Child Trust Fund payments should not have received them owing to the poor performance of an IT contractor. We seek assurances that the contracts drawn up with the PFI companies adequately allow for appropriate compensation to the taxpayer in the event of serious performance shortcomings.

Performance of HMRC IT systems

115.  When HMRC's IT system is unable to cope and clerical intervention is required, an 'open case' is created.[139] We note that the number of "open" tax cases reported by HMRC is 16.2 million, a figure 5.7 million in excess of the Department's own target of 10.5 million by the end of 2007-08.[140] In attempting to justify so high a number, Mr Clasper told us that:

The current systems were built a long, long time ago on a regional basis. Because they were built on a regional basis and the systems do not talk to each other—and this is not recent history; this goes back decades—then people who have multiple sources of income might well be in two different regional offices which cannot be correlated by the automatic system. That creates the open cases. That has been going on for a long, long time. The problem, as David has just highlighted, is people's employment patterns have changed: they change jobs more often; people have multiple pensions, for example. We basically have our legacy systems for structural issue. We are going to solve it by combining all of the systems and making them talk to each other. The only piece of the problem that has been created by what you might describe as the failure but I would have termed a prudent delay, is the fact that the new system has been delayed a year in coming into operation … We would have less of a backlog if we had been able to execute the new system on time.[141]

116.  Mr Clasper further assured us that "Once we have got the new system in place, we need to develop a plan to clear that backlog and we have to do it in a way in which we do not add to any pressures on the staff that would result in the motivation issues that we talked of earlier".[142]

117.  We note that the introduction of HMRC's new IT system has been delayed by a year. We accept that postponing the 'go live' date until testing is complete is prudent. HMRC should publish the performance targets for the new system in terms of reduced open cases and other measures so that we may better monitor its effectiveness.

95   HM Revenue & Customs, Departmental Report 2008, Cm 7402, July 2008, p 8 Back

96   HM Revenue & Customs, 2007-08 Accounts, HC 674, July 2008, p 28 Back

97   Q 374 Back

98   Q 370 Back

99   HM Revenue & Customs, 2007-08 Accounts, HC 674, July 2008, p 28 Back

100   Q 381 Back

101   Ev 79 Back

102   Q 382 Back

103   Q 392 Back

104   Ev 79 Back

105   HM Revenue & Customs, Departmental Report 2008, Cm 7402, July 2008, p 29 Back

106   National Audit Office, HM Revenue and Customs Transformation Programme, July 2008, p 6 Back

107   HM Revenue & Customs, Departmental Report 2008, Cm 7402, July 2008, p 10 Back

108   Ibid., p 4 Back

109   Ibid., p 4 Back

110   Ibid., p 2 Back

111   Q 441 Back

112   Q 441 Back

113   HM Revenue & Customs, Departmental Report 2008, Cm 7402, July 2008, p 42 Back

114   HM Revenue & Customs, 'Tax return Deadlines and Penalties',  Back

115   Q 454 Back

116   HM Revenue & Customs, Departmental Report 2008, Cm 7402, July 2008, p 30 Back

117   Ibid. Back

118   Q 444 Back

119   Q 444 Back

120   Ev 68 Back

121   HM Revenue & Customs, Departmental Report 2008, Cm 7402, July 2008, p 70 Back

122   Q 426 Back

123   HM Revenue & Customs, Departmental Report 2008, Cm 7402, July 2008, p 16 Back

124   Kieran Poynter, Review of information security in HM Revenue and Customs, Final Report, June 2008 Back

125   HM Revenue & Customs, Departmental Report 2008, Cm 7402, July 2008, p 26 Back

126   HM Revenue & Customs, 2007-08 Accounts, HC 674, July 2008, p R16, para 2.22, Back

127   Q 451 Back

128   IbidBack

129   The Observer, 12 October 2008 Back

130   Q 450 Back

131   Treasury Sub-Committee, Estate Management in the Chancellor's Departments, HC 852-I, June 2008, Ev 43 Back

132   Q 447 Back

133   Q 448 Back

134   HM Revenue & Customs, 2007-08 Accounts, HC 674, July 2008, page 8, para 6.28-9 Back

135   Oral evidence taken before the Treasury Sub-Committee on 14 May 2008, Ev 19 Back

136   Q 418 Back

137   Q 420 Back

138   Q 458 Back

139   HM Revenue & Customs, 2007-08 Accounts, HC 674, July 2008, p 7, para 6.21 Back

140   Ibid. p 7, para 6.21 Back

141   Q 435 Back

142   Q 437 Back

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