Appendix: Government Response
On 23 January 2009, the Treasury Committee published
its First Report of Session 2008-09, Administration and expenditure
of the Chancellor's departments, 2007-08 (HC 35). This memorandum
contains the Government's response to that Report.
The Treasury Group's own resources
1. We note the ongoing underspending against estimate
by the Treasury Group and we are concerned that this may represent
under-delivery or poor estimate preparation. We recommend that
the Government takes steps to ensure that the Treasury presents
an accurate estimate to parliament and delivers against the approved
estimate. (Paragraph 9)
The Government accepts the Committee's recommendation,
in so far that it is continuously seeking to improve its financial
management practices. The Treasury aims to present estimates to
Parliament that are as accurate as possible in the light of information
which is available at the time they are laid. This year the Treasury
has included additional scrutiny and challenge to managers' resource
plans, to ensure that they reflect as accurately as possible the
anticipated costs of their delivery plans, and has revised its
processes for monitoring their delivery against those plans. In
respect of the underspend against estimates in 2007-08, the Committee
will have noted the explanation of variances between estimate
and outturn in Note 3.2 to the HM Treasury Resource Accounts 2007-08
(HC 539), which were not the result of deficiencies in either
delivery or estimate preparation.
2. We recommend that, in its response to this
Report, the Government indicates whether any of the Treasury Group's
End-Year Flexibility will be transferred to other Departments
or how else it might be used. (Paragraph 10)
As outlined in the Department's Annual Report for
2007-08, the Treasury's underspend was in part a result of the
over-achievement of its SR04 efficiency targets. In the light
of continued uncertainty in global financial markets, and the
funding required to support Sir John Chadwick's review of matters
relating to Equitable Life policy holders, the Treasury needs
to retain as much flexibility as possible to respond to changes
in circumstances and priorities that might arise in the remaining
years of the CSR period. The EYF system enables the Treasury to
carry forward spending power into future years. The Government
does not intend to transfer any of the Treasury's EYF to other
Departments, but does require that any drawdown of EYF is taut
and realistic.
3. While we recognise that the quantity of staff
is not the only factor in the delivery of services, we are concerned
that continued headcount reductions in the Treasury Group may
now leave its constituent organisations unable to provide the
required economic support and management during the economic downturn.
We recommend that the Government reconsider any planned further
headcount reductions in the Treasury Group in the light of the
demands on the Group of the economic downturn. (Paragraph 15)
The Government accepts the Committee's recommendation,
and welcomes its ongoing interest in these matters. The Treasury
Group regularly reviews its resource commitments and plans in
the light of changing circumstances and priorities. Since July
2008 this has included an ongoing recruitment of new staff to
work on financial stability issues. Nevertheless, the Treasury
Group has committed to finding significant additional cash-releasing
value-for-money savings over the CSR period, and will seek to
recycle those savings into priority areas where additional resources
are required.
4. The nationalising transactions of 2008-09 raise
some complex accounting questions for the Treasury. In order to
ensure that the Treasury Group's 2008-09 Annual Report and Accounts
can properly be laid before Parliament before the summer adjournment,
we recommend that the Treasury engages early with the National
Audit Office to agree appropriate accounting treatments for the
transactions surrounding the nationalised and part-nationalised
banks. (Paragraph 20)
The Government accepts the Committee's recommendation.
As the Committee has noted in its report (paragraph 18), the Treasury
began engaging with the National Audit Office (NAO) in February
2008 over the accounting treatment of Northern Rock. Throughout
this year there has been close engagement, including regular meetings
and workshops, over a range of accounting issues in respect of
policy announcements made since the finalisation of the 2007-08
Accounts. This constructive engagement has continued as further
developments have been announced.
5. We were disappointed to note that the Treasury
Annual Report was published separately to its Resource Accounts
in July 2008. We recommend that, in order to aid users of the
accounts, the Treasury publishes future Annual Reports and Resource
Accounts in a single, combined document prior to each summer adjournment.
(Paragraph 21)
The Government acknowledges the Committee's recommendation
and accepts that there are benefits to be gained from publishing
a combined document prior to the summer adjournment. Working with
the NAO, the Treasury Group is aiming to produce a combined document
in 2009, and will keep the Committee informed as these plans progress.
6. By nationalising financial institutions, the
Government has taken on responsibility for significant liabilities.
In order for public scrutiny to be effectively performed, the
magnitude and nature of these liabilities must be comprehensively
disclosed. We recommend that the Treasury quantify and disclose
the liabilities involved in the nationalisations and part-nationalisations
of financial institutions. These disclosures should appear in
the Treasury Group Resource Accounts, must be at least as comprehensive
as those made by major banks and should go further then meeting
the minimum acceptable accounting standards. (Paragraph 23)
The Government notes the Committee's recommendation,
and accepts that liabilities should be disclosed where possible.
The Treasury Group's resource accounts will aim to disclose and
quantify liabilities in line with appropriate accounting standards
and practice, and audited by the NAO as a true and fair view.
This year the accounts will also include disclosures required
by Financial Reporting Standard 26 in respect of financial guarantees.
At the time of publication of the 2007-08 Resource
Accounts it had not been possible to quantify certain liabilities,
some of which have now been quantified and others of which will
remain unquantifiable. The Treasury reported on these liabilities
in its Spring Supplementary Estimates, and will continue to provide
updated disclosures through its Accounts and Estimates as they
become available. However, it remains likely that the 2008-09
Resource Accounts will continue to include certain unquantifiable
liabilities.
The Treasury as a central department
7. We recommend that in future years the Treasury
disclose the total bonus payments made to staff in their Resource
Accounts. (Paragraph 24)
The Government accepts the Committee's recommendation.
The Treasury is consulting stakeholders across Government on the
most appropriate way to report staff remuneration in future resource
accounts in preparation for revisions to the Financial Reporting
Manual guidance for future years.
In the meantime, the Treasury Group's Annual Report
and Accounts will include details of the performance payments
made by the Treasury Group, divided by its member organisations,
and on the performance pay awarded to individual members of the
Treasury Board. Performance pay in this context refers to variable
pay which is not consolidated into base pay and is non-pensionable.
8. We recommend that the Government ensure the
Treasury is sufficiently resourced to manage its extended responsibilities
arising from the economic downturn, especially those regarding
financial stability. (Paragraph 28)
The Government accepts the Committee's recommendation.
The Government's response to this recommendation is included in
its response to recommendation 3 above.
9. Given the interest in the fully nationalised
institutions of Northern Rock and Bradford & Bingley, and
the Treasury's role in their governance, we recommend that the
Government publishes key performance information for these institutions
within the Treasury Group's own Departmental Report and Resource
Accounts. (Paragraph 30)
Audited financial information on Treasury's investments
is included on a non consolidated basis in the Treasury Group's
resource accounts in the form of extracts from the profit and
loss accounts and balance sheets of each of the organisations
concerned. Future reporting on these institutions will follow
the model established with the reporting on Northern Rock plc
in relevant parts of HM Treasury's Resource Accounts 2007-08 (HC
539), including the detailed additional information reported in
Note 29.
10. We recommend that the Government identify
and publish performance measures for UK Financial Investments
and report against these measures on a six-monthly basis. (Paragraph
32)
The Government acknowledges the Committee's recommendation,
and recognises the responsibility for HM Treasury to report to
Parliament on the value and performance of its investments of
public money that are being managed by UKFI. The Treasury is currently
considering the most appropriate way to fulfil this responsibility,
and will consult the Committee on its proposals later in the year.
UK Financial Investments Ltd (UKFI) will publish
an annual report, which will be laid before Parliament. The first
of these will be published this summer. UKFI's Chief Executive
and Chairman will be available to appear before House Committees.
A framework agreement between HM Treasury and UKFI
has also been agreed and published, and copies are available in
the library of the House. This sets out the relationship between
HM Treasury and UKFI, UKFI's objectives, and the process through
which HMT will monitor UKFI's performance. It also sets out that
HM Treasury will set an Investment Mandate for UKFI, with which
the Company is to comply in the management of the investments,
and that the company should develop a Business Plan.
UKFI's Board will be accountable for delivery of
the objectives set in the Framework Agreement, and for its progress
against the Investment Mandate and its Business Plan. It should
be noted that HM Treasury does not believe it would be beneficial
to set or to publish quantitative performance targets for UKFI,
in terms of the management of its investments, as this would be
tantamount to publishing UKFI's investment strategy, which, by
its nature, would be highly confidential.
UKFI's objective is:
The Company should, in compliance with the Investment
Mandate described in Section 4, develop and execute an investment
strategy for disposing of the Investments in an orderly and active
way through sale, redemption, buy-back or other means within the
context of an overarching objective of protecting and creating
value for the taxpayer as shareholder, paying due regard to the
maintenance of financial stability and to acting in a way that
promotes competition. This objective includes:
(a) consistent with HM Treasury's stated aim
that it should not be a permanent investor in UK financial institutions,
maximising sustainable value for the taxpayer, taking account
of risk;
(b) maintaining financial stability by having
due regard to the impact of its value realisation decisions; and
(c) promoting competition in a way that is consistent
with a UK financial services industry that operates to the benefit
of consumers and respects the commercial decisions of the financial
institutions.
As set out in the Framework Agreement, UKFI's performance
will be monitored by HM Treasury, including through:
quarterly shareholder meetings between the
Chairman of the Company and senior HM Treasury representatives
to provide a forum to review performance against the roles and
objectives set out in the Framework Agreement;
meetings between Directors of the Company and
representatives of HM Treasury to discuss the performance of the
Company; and
quarterly reports for HM Treasury, produced
by the Company, together with their annual report—the latter
will be laid before Parliament.
11. The adoption of International Financial Reporting
Standards will fail if the Treasury does not assert its authority
and aid departments in meeting the agreed milestones. We recommend
that the Government take steps to re-emphasise to all departments
the importance of meeting IFRS implementation deadlines. (Paragraph
37)
The Treasury takes its role seriously in ensuring
that departments are fully aware of the importance of meeting
the IFRS deadlines, and has regular communications with Finance
Directors of departments to ensure that, as far as practicable,
departments remain on track to meet the IFRS implementation timetable.
The Treasury maintains regular contact with departments
to identify issues relating to the transition to IFRS and provides
technical assistance and advice to assist departments in their
successful transition to IFRS accounting.
12. We recommend that the Treasury considers not
only the presentation and authorisation of expenditure but also
the way in which the revised documents might best facilitate parliamentary
scrutiny. (Paragraph 39)
The Government is grateful to the Committee for its
ongoing involvement in, and support for the alignment project.
As the Committee is aware, the Government is committed to simplifying
and rationalising the financial documents presented to Parliament,
to improve transparency and give Parliament the opportunity for
improved scrutiny, in line with the Committee's previous recommendations.
We welcome the opportunity to discuss with the Committee any further
changes that could be made to the documents to facilitate scrutiny.
13. We acknowledge that the requirements of the
alignment project mean that it is not possible for parliament
to maintain control over gross totals. We are concerned that without
adequate levels of information regarding income, parliament's
authority may be diminished. We recommend that the new estimates
provide appropriate levels of information relating to income.
We do not wish to impose an unreasonable administrative burden
on the departments and hope that a pragmatic solution can be adopted.
(Paragraph 41)
The Government welcomes the Committee's helpful and
pragmatic approach to this important issue. Proposals on the move
to net Estimates include a range of safeguards, which will ensure
that Parliament has more, and better, information than at present
about income. Full information about expected income levels will
still be provided in the Estimate. In addition, there will be
restrictions on the categories of income that departments may
retain, to ensure that proper control and accountability is provided.
The work of the Debt Management
Office
14. The increase in planned gilt issuance for
2007-8, announced in Budget 2008 reportedly surprised the
market. We recommend that the Debt Management Office reviews lessons
learnt from this process in order to ensure the market is better
prepared in future. (Paragraph 47)
The DMO liaises very closely with the gilt market
over the formulation and delivery of its financing remit. The
DMO believes that the effective delivery of the gilt remit—course
to raise over £146 billion this financial year—is testament
to the success of this relationship.
The reported surprise which occurred at Budget 2008
can be partly attributed to some commentators in the market not
having allowed for the Government's replacement, during 2008-09,
of the Bank of England's loan to Northern Rock plc with direct
Treasury funding in order to comply with the restrictions in the
Treaty Establishing the European Community on central bank financing
of government undertakings.
The DMO firmly believes that it would not have been
appropriate for it to have provided any indication to the market
about the likely size of the future gilt financing requirement
prior to the Budget statement in Parliament, and that market participants
should be left to make their own assessments based on available
public information.
15. We note that the forecast gilt issuance for
2008-09 has increased from £80bn to £146.6bn. These
higher levels of gilt issuance, at a time when other governments
will also need to raise cash, significantly increase the risk
that supply of Government debt might outstrip demand and uncovered
gilt auctions might result. We note the Debt Management Office's
confidence in its ability to cope with the occasional uncovered
auction but we seek assurances that the Government has put in
place contingency plans capable of responding to repeated uncovered
auctions. (Paragraph 49)
The DMO believes that gilts and government assets
more generally remain the preferred risk-free asset for major
UK and international investors and are in strong demand.
The DMO also believes that the current auction system
is working well and has demonstrably succeeded in raising record
amounts of financing for the Government in 2008-09 raising proceeds
slightly over the £146.4 billion target in 2008-09 in 58
auctions.
There was, however, an uncovered auction on 25 March
2009. At that auction, £1,750 billion (nominal) of the 4.25%
Treasury Gilt 2049 was offered. The cover ratio for that auction
was 0.93—so not all of the gilt was sold at the auction
and the residual has been temporarily lodged on the Debt Management
Account pending disposal into the secondary market in due course
in accordance with the DMO's Operational Notice. While disappointing,
it needs to be remembered that uncovered auctions can and do occur
reflecting the pricing dynamics at the specific time of the auction.
Volatility in the market affects auctions but is not under Government
control. Market conditions at the time of the auction were difficult
and gilt market participants' risk appetite more generally is
low in current conditions. An additional factor which may have
constrained the ability of the primary dealers to participate
in that auction was the imminent end-financial year and the balance
sheet restrictions that this implies.
Moreover, the significant increase in the financing
requirement and the number of operations being scheduled do not
of themselves necessarily imply that there will be an increase
in the number of uncovered gilt auctions. The gilt auction held
on 26 March 2009 (i.e. the day following the uncovered auction)
of the 1?% Index-Linked Treasury Gilt 2022 was successful with
a bid to cover ratio of 2.72 indicating strong demand for the
stock on offer. Further, the two previous uncovered auctions
which have occurred since the DMO became UK Government Debt Manager
in April 1998, took place in financial years when gilt sales and
the number of auctions was much lower than now (£14.4 billion
in 8 auctions in 1999-2000 and £26.3 billion in 13 auctions
in 2002-03).
That said, the DMO acknowledges that the prospect
of an uncovered auction occurring again in the future cannot be
ruled out. Uncovered gilt auctions are, however, not necessarily
a result of there being insufficient structural demand for gilts—rather
they can be seen to indicate the lack of investor demand for the
specific gilt being sold on the morning of the auction itself
and/or the inability of the market to establish the clearing price
in a particular auction. The lack of demand may manifest itself
for a variety of market reasons, outside the control of the issuer.
The DMO's Gilt Market Operational Notice[1]
(paragraph 39) describes the procedures that the DMO will follow
in the event of an uncovered auction—with the unsold portion
of stock created and held by the DMO in an official portfolio
for a specified period prior to re-sale. In circumstances where
a series of auctions failed, particularly toward the end of a
financial year and where it is too late either to sell unsold
amounts of previously auctioned gilts (either at a separate tender
or by adding stock to a further auction of the same gilt) finance
would be raised by alternative methods. Where the gilt sales programme
was judged to be unable to raise the required quantum of financing
the Treasury bill programme offers one potential additional source
of finance, but generally, cash could be raised via money market
transactions (cash management operations).
16. The unprecedented increase in gilt issuance
levels in 2008-09 has created pressures for the Debt Management
office staff and such pressure increases the risk of mistakes
being made. We recommend that the Government review the resources
of the DMO in the light of its significantly increased workload.
(Paragraph 51)
The Government accepts the Committee's recommendation.
The Treasury Group regularly reviews its resource commitments
and plans in the light of changing circumstances and priorities,
as set out in the Government's response to recommendation 3 above.
The Treasury Group is allocating the necessary additional resources
to the DMO for 2009-10, and will continue to keep its resources
under review for future years.
Pressures on DMO staff have increased not only as
a result of increases in gilt issuance but also from other activities.
Management and staff spend significant time helping developments
across the Treasury Group. Transaction volumes in the DMO's core
cash management activity have also increased sharply.
New initiatives requiring significant effort in the
past year have included the Special Liquidity Scheme, the Discount
Window Facility, the 2008 and 2009 Guarantee Schemes and the Emissions
Trading Scheme auctions on behalf of DECC. The increased range,
complexity and volume of the DMO's activities require more staff
to manage and control as well as execute. The DMO has increased
staff levels from 86 in October 2008 to 108 in February 2009 (including
temporary staff, some of which are short-term agency and contract
staff working on initiatives such as the Credit Guarantee Scheme).
17. We note that 2008-09 will see a dramatic increase
in the workload of the Debt Management Office and thus an increased
risk of control failure. We recommend that the DMO revisit controls
relating to publications in order to ensure that factual errors
are minimised. (Paragraph 54)
The control regime for publications is kept under
review. Already key publications, including the Quarterly and
Annual Reviews, Guides to gilts and Operational Market Notices
are subject to internal verification in so far as factual disclosures
are concerned (from persons other than those producing the initial
data). Once verification has been competed the document receives
sign-off from a member of the senior management (or a person designated
by senior management).
In terms of the website control regime, the DMO has
recruited dedicated resources to manage the website, as part of
the overall records and information management function. Relevant
business units within the DMO are responsible for the content
production and accuracy of documents destined for publication
on the website. Preparation is handled on an internal version
of the website and internal controls applied between the web team
and the business units for approving web publications before they
are transferred onto the external, public website. The DMO is
actively reviewing record and file management processes with consideration
to the further workflow automation that may be introduced.
18. We note that the DMO takes an average time
of 10 minutes to publish the results of its gilt auctions compared
to the 2 minute publication time achieved by other countries.
While the discretionary checks performed by the DMO may account
for some of this disparity, we recommend that the DMO sets a target
for further reducing the delay. (Paragraph 57)
The release time for gilt auctions has continued
to fall in 2008-09, to an average of 7.5 minutes for auctions
in the financial year to-date (and further to 6.3 minutes in Q4
to-date).
Market participants have welcomed the significant
shortening of auction release times, from an average of 20 minutes
in 2006-07 (the last full year before the introduction of electronic
bid capture) and, in general, have not indicated a need to reduce
these much further.
The DMO believes that any further reductions should
not come at the expense of operational accuracy and sufficient
time to exercise due diligence over the results prior to publication.
These considerations are important in order for the DMO to protect
the interests of both the market and the Exchequer. The DMO, therefore,
has no plans for formally setting a shorter target release time
for auction results, but will continue to aim to release auction
results in as short a time as practical, consistent with the above
priorities.
19. We note that a technical breach within the
CRND function of the Debt Management Office occurred in 2007-08.
Any technical breach is a serious matter. We note that in this
instance the DMO has been advised that no adverse consequences
resulted, and that a review of the procedures in place has been
undertaken. We recommend that the DMO undertakes regular reviews
of its control environment to ensure that emerging risks are mitigated
where possible. (paragraph 60)
The breach has been investigated by the DMO, it is
not considered likely to result in any financial repercussions,
nevertheless the controls around this area have been tightened.
The dealers' procedures manual has also been updated
to reflect additional controls with wording clarified to avoid
any future misinterpretation and potential breaches of the terms
of prospectuses.
The DMO's internal control regime is subject to continual
review and development. The DMO Risk Committee meets regularly
to review all operational risks and any exceptions arising.
The Treasury Group's performance
against objectives
20. We are disappointed that after three years
the measurement of performance against the Government's target
to reduce regional inequality remains problematic. We welcome
the work of the Office for National Statistics and recommend that
the Government publishes the results of the work on regional deflators
as soon as it becomes available. (Paragraph 64)
The Allsopp Review outlined a series of recommendations
to improve the accuracy and breadth of regional statistics. In
response, the ONS is working to strengthen regional GVA data,
including production of a real regional GVA series. To improve
and develop regional estimates, the ONS is also involved in an
ongoing quality assurance process of the input data used to calculate
estimates of regional GVA. The ONS will publish their findings
in due course.
21. We recommend that the Treasury reviews its
reporting against its child poverty target in order to ensure
that users of the accounts can easily see performance against
each of the three measures individually. We are concerned that,
despite assurances that the Treasury has "redoubled efforts
to meet the 2010 target", it may be beginning to resign itself
to failure, an attitude which will not help those children still
living in poverty in the UK. (Paragraph 69)
HM Treasury reports against its child poverty target
in annual and autumn reports, including progress against the three
indicators: relative income, absolute income and material deprivation.
The Treasury is grateful for the Committee's comments on the clarity
of its performance reporting, and will take them into consideration
when producing this year's reports.
In the light of the wide range of changes announced
at PBR 2008 coming into effect in the coming months, the PBR announced
that the Government will take stock of progress towards its 2010
and 2020 child poverty target in the Budget.
22. We are concerned by the scale and amount of
CSR2004 Public Service Agreements which have been missed and recommend
that the Government explains why the rate of failure against targets
across departments was so great. (Paragraph 72)
The Government set challenging public service targets
in the 2004 Spending Review. Currently, of those assessed, the
majority of these targets are 'on course', 'met' or 'ahead', while
only 5% have not been met. It should be noted that the majority
of these targets have not yet received final assessment, only
interim assessment. The Government's view is that public services
will be improved more by setting stretching targets than if less
ambitious targets had been set, even though—on a simple
count of targets achieved—a less ambitious approach might
appear to score better.
23. We note that achievement of the Lisbon goals
will not feature in any Public Service Agreement during the CSR
2007 period. We are concerned that this omission will lead to
progress against the Lisbon goals being omitted from Government
reporting. We recommend that the Treasury publish within its Annual
Report an update on progress against the Lisbon goals. (Paragraph
74)
Two years away from the original 2010 deadline, it
is clear that the Lisbon vision will not be realised. More needs
to be done to meet the Lisbon Strategy's main goals of 3 per cent
growth and 70 per cent employment by 2010. However, the current
strategy has set the framework that drives our long-term future
prosperity. Europe is in a better place than in the past to respond
to the current economic downturn.
The Treasury reported on the Lisbon Goals in its
2008 Autumn Performance Report and will continue to provide updates
in its future reports.
24. The 2008-09 financial year is the first year
of delivery against the Departmental Strategic Objectives and
Public Service Agreements arising from the CSR2007. In our review
on administration and expenditure in 2008-9 we will be examining
HM Treasury's performance against these targets. (Paragraph 77)
The Government notes and welcomes the Committee's
ongoing interest in the Treasury's performance against its objectives.
HM Revenue & Customs
25. 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. (Paragraph 80)
The Government acknowledges the Committee's recommendation.
HMRC's Capability Review recommended that the Department should
explore separate roles for a Chief Executive and a Non-Executive
Chairman. Following an open recruitment process, run by the Cabinet
Office, the Prime Minister announced the appointment of Mike Clasper
as the new Chairman of HMRC, who took up post on 1 August 2008.
Lesley Strathie was appointed as HMRC's first Chief
Executive, and Principal Accounting Officer, and took up post
on 10 November 2008. As Lesley took up post, Dave Hartnett (previously
Acting Chief Executive Officer) became the new Permanent Secretary
for Tax.
In addition, HMRC is in the process of completing
its senior management team having recently appointed a Chief People
Officer, Chief Finance Officer and Director General, Business
Tax, and with the forthcoming appointment of a Chief Information
Officer.
26. 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. (Paragraph 82)
The Non-Executive Chairman, Mike Clasper, provides
leadership and direction to the department through the HMRC Board.
In addition, he plays a key role for HMRC by engaging with the
Department's many stakeholders.
The Chief Executive, Lesley Strathie, is accountable
for running HMRC and ensuring delivery of HMRC's Strategic Objectives,
and is the Principal Accounting Officer. The Permanent Secretary
for Tax, Dave Hartnett, is the senior tax professional in HMRC
and has a general oversight of all tax issues but he does not
have line management responsibility within lines of business.
These roles have been widely published on HMRC websites.
27. 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. (Paragraph 88)
The Government notes the Committee's conclusion in
respect of HMRC. However, this was not an ex gratia payment: Mr
Cruickshank had a 3 year fixed term contract. He and HMRC reached
a negotiated settlement and he left the Department. In this particular
instance, HMRC made the payment in line with Treasury guidance,
having assessed that it offered the best value for money for the
public sector, taking into consideration the importance of an
orderly transition in HMRC's Finance team.
Managing Public Money, the Treasury's authoritative
guide to ethics in the use of public funds and the standard reference
for anyone using public money in public sector bodies, sets out
the conditions under which public bodies may make payments outside
statutory or contractual entitlements when staff leave public
service employment. It confirms that such special severance payments
should be exceptional, since they could be considered novel, contentious
or potentially repercussive, and that they always require Treasury
approval in advance. The Treasury takes this responsibility seriously
and adopts a sceptical approach to proposals for such payments,
requiring departments to be able to justify and defend payments
in value for money terms, taking account of legal risks, and to
review their HR systems where any weaknesses are identified.
28. 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. (Paragraph 92)
The Government recognises the need for HMRC to improve
employee engagement. Last year HMRC established a programme of
initiatives to do this. Components included:
improving the visibility of senior leadership
via Town Hall events and Staff phone ins;
working with senior managers through the Leading
the Way group;
piloting different engagement interventions
in key business areas; and
developing the skills and confidence of front
line managers.
For 2009-10 all of HMRC's Directors General have
an objective in their performance contracts to improve employee
engagement. To support the monitoring of achievement, HMRC is
piloting the Civil Service People Survey—a full census survey
that focuses on engagement. More granular analysis of the results
will provide a rich seam of information that will enable HMRC
to target engagement activities in a more focused manner. The
pilot will provide HMRC with a benchmark, and from autumn 2009
HMRC will take part in the annual Civil Service People Survey.
This will provide the opportunity to assess progress and to benchmark
HMRC against other government departments.
In addition to the annual Civil Service People Survey,
HMRC will continue to conduct temperature check surveys of a random
sample of people each month. This will allow monitoring of interventions
to assess their impact, providing an opportunity to change focus
quickly if necessary, to continue to improve engagement across
the department.
29. 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. (Paragraph 95)
The Government acknowledges the Committee's concern.
However, before the change in the deadlines, around 84% of HMRC's
elderly customers usually filed before 30 September. If a return
was filed by that date, HMRC guaranteed to process the return
and let the customer have a tax calculation before the payment
date. The changes introduced pushed this paper deadline back to
31 October, which meant that those customers who want HMRC to
calculate their tax have been given an extra month in which to
file.
HMRC has had extensive discussions with individual
customers who pay tax under self-assessment, and appropriate Voluntary
Sector representatives about the impact of the change in the paper
filing deadline, and how best the groups they represent could
be helped. These discussions formed the basis of HMRC's support
strategy.
Research indicates that many elderly customers are
comfortable using computers, and competence and confidence amongst
that group increases year on year. One of the key SA segments
HMRC targeted for online filing was individual customers who were
older (typically, 55 plus), and had either their own businesses
or consultancies, or had middle or high management experience.
These groups were targeted because they were highly computer literate
and regarded computers as their preferred means of communication
or transactions.
The overall result of the Self Assessment deadline
changes was very encouraging. The number of customers filing online
rose by 50%, and the online channel processed 69% of all SA returns.
88% of SA customers filed their return on time.
There is no indication that any one customer group
has been adversely affected by the changes and filed late in significant
numbers. However, HMRC is looking carefully at the results to
see what further research and support is necessary for vulnerable
groups in future years.
30. We recommend that HMRC disclose information
regarding the financial case for individual office closures in
order to allow better public scrutiny of these decisions. (Paragraph
99)
The Government does not accept the Committee's recommendation.
HMRC has not drawn up 'balance sheet' type business documents
setting out all the costs and savings associated with closing
any particular office, because that is not the basis on which
closure decisions have been made. The main reason for closing
an office is that there is no longer any business need to operate
from there. Specific estate savings and staff costs relating to
individual buildings are not the primary consideration.
To meet government efficiency and customer service
targets HMRC is restructuring all its business across the UK and
generally consolidating in fewer offices. The benefits from the
department's Change Programme will be realised at directorate
or even departmental level in terms of overall efficiency, improvements
in customer service and greater compliance. These benefits cannot
be realistically allocated to specific office buildings.
31. We ask the Government to update the latest
progress made by HMRC against Kieran Poynter's recommendations
regarding information security. (Paragraph 103)
In his published report into the circumstances that
led up to the child benefit data loss, Kieran Poynter stated that
HMRC had implemented 13 of his 45 recommendations which improve
data security in the Department. Since the report's publication
on 25 June 2008 HMRC has implemented a further 10 recommendations,
and work is continuing on the remaining 22.
Of the improvements introduced already:
HMRC has improved staff awareness on data security
and assured itself that the commercial requirements of its contractors
on data security reflect those in HMRC.
HMRC has introduced clear, simple "Golden
Rules" and Data Security Pocket Rule book to all staff; and
mandatory data security training for all 90,000 staff from the
Chairman down.
HMRC has established clearer lines of accountability.
HMRC has introduced improved physical &
technical controls for data movements.
Therefore, HMRC remains on target to implement all
45 recommendations by 25 June 2011 using its best endeavours,
and meeting the requirements of the Information Commissioner's
Office (ICO) enforcement notice.
32. 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. (Paragraph 107)
The Government shares the Committee's concerns at
the levels of internal fraud reported by HMRC. The Committee can
be reassured that HMRC is committed to the highest levels of integrity
and will not tolerate any action by its staff that puts at risk
the public's trust in the department. HMRC has robust procedures
in place to identify all types of fraud and pro-actively tackles
threats of this nature against the organisation, and it is always
updating its procedures to improve its ability to prevent fraud.
In particular:
HMRC has a dedicated Internal Governance (IG)
team to seek out attempted internal fraud. HMRC has security,
detection and reporting mechanisms and an Anti Fraud Assurance
Team (AFAT), which undertakes pro-active monitoring of activity
on HMRC Corporate systems and the Internet to identify, detect
and deter inappropriate use.
HMRC often works with Police forces, Serious
Organised Crime Agency (SOCA) and Revenue and Customs Prosecution
Office (RCPO)
HMRC staff found to have committed fraud can
expect to face prosecution and dismissal.
HMRC's IG has a dedicated intelligence team
to co-ordinate, assess and disseminate information to prevent
fraud from occurring; and a prevention team to take forward a
programme of work educating and raising awareness of the risk
of internal fraud and learning lessons.
While the Government aims to reduce levels of fraud,
they need to be placed in context: HMRC is a large organisation,
employing approximately 90,000 staff; those prosecuted for fraud
constitute a very small percentage of this number.
The Government is currently considering the most
appropriate benchmark measure against which to report levels of
fraud in the future.
33. 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. (Paragraph 110)
The Government does not accept the Committee's recommendation.
The performance of major projects within departments, no matter
how they are procured, is clearly an important issue. There are
already scrutiny and support mechanisms in place and it would
be unhelpful to place specific additional reporting burdens on
departments.
34. We recommend that HMRC reviews the contracts
with its IT provider in the light of the very serious errors that
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. (Paragraph 114)
The Government notes the Committee's recommendation.
All children born since 1 September 2002, who are the subject
of a child benefit award, are eligible for the Child Trust Fund
(CTF), as long as they live in the UK and are not subject to immigration
control. The government provides an initial contribution of £250,
and children in lower income families are entitled to a top-up
(supplementary) contribution of a further £250. Recipients
in this category are identified from the tax credits system.
In April 2008, HMRC identified that some CTF supplementary
payments had not been made for children born in tax year 2006-07,
affecting around 50,000 claimants.
The root cause was identified as a coding error in
the renewal function of the tax credits IT system. This error
was introduced as part of the October 2006 software release which
became effective in April 2007. The function failed to match some
eligible cases, which resulted in them not being selected for
notification to the CTF system for the supplementary payment.
HMRC's main outsourced IT contract (Aspire) is with
Capgemini. This already includes a series of provisions for redress
in the circumstances of poor performance. These include:
service credits where agreed Key Performance
Indicators are not met;
mandated liquidated damages where projects
are delivered late; and
the retention of supplier margin until quality
of delivery is proven.
In addition there is an overarching contractual right
for HMRC to seek damages in respect of all loss or damage caused
to the Department by the default of the supplier.
It is the Department's normal practice to use some
or all of these provisions whenever poor supplier performance
is identified.
In the case of the missed CTF payments identified
in April 2008, negotiations were concluded on 12 June 2008 and
an appropriate financial compensation agreed, covering the full
costs associated with that error, and all of those missed payments
have now been made.
35. 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. (Paragraph 117)
The Government welcomes the Committee's acknowledgement
of the issues in this recommendation. Open cases currently occur
because either the pay and tax details of an individual are not
posted to their record, or if they are posted, the correct amount
of tax has not been paid and the case has not 'balanced'. When
the PAYE Service is implemented, the concept of 'open cases' will
cease.
The PAYE Service will deliver a single record for
an individual that contains details of all their employments during
the year. At the end of the year employers or pension providers
send us a form P14 for everyone they have employed or paid a pension
to during the year. The pay and tax details will be posted on
the individual's record and the PAYE Service will automatically
'reconcile' the case.
The case will either be 'balanced', or there will
be an underpayment or an overpayment. In a relatively small number
of cases, where the record is missing some information and requires
clerical review, a work item will be created.
HMRC is currently finalising its performance framework,
key performance indicators and targets for 2009 10 and will take
the Committee's recommendation into account as it does so.
The work of the Valuation Office
Agency
36. Low staff morale is a risk to the quality
of service delivery. We note that staff satisfaction in the Valuation
Office Agency is worryingly low. We will continue to monitor management's
performance in improving staff morale and safeguarding the delivery
of services. (Paragraph 121)
The Government acknowledges the Committee's concerns
over the level of staff satisfaction within the Valuation Office
Agency. VOA management attaches considerable importance to staff
morale. The November 2007 survey, showing staff satisfaction falling
from 68% in February 2007 to 53% in November 2007, came at a time
when many staff were very unhappy at the 2007 pay offer, and had
just heard about a change programme, which included office rationalisation
plans. Satisfaction had already improved to 58% by June 2008.
The June 2008 survey also had a positive response
in terms of staff commitment, with 70% of people agreeing that
'wherever possible they would go the extra mile to help the VOA
achieve its targets'. In terms of morale, the proportion of VOA
staff whose morale is 'good' or 'very good' is 45%, some 10 percentage
points higher than the norm for central Government.
The VOA's independent Investors in People assessment
in October 2008 identified a number of relevant areas of good
practice including:
"The various initiatives in place which
are geared towards continuous improvement, and the positive way
in which the greater majority have responded to these."
"The good sense of teamwork that exists
and the greater willingness now for people to be flexible in relation
to their areas of work."
The VOA will continue to build on these and the other
positive initiatives identified.
37. We note the Valuation Office Agency's recognition
that its communication with businesses affected by the revaluation
of statutory ports had been deficient. We hope that the Agency
can apply the lesson learnt from this situation to all future
revaluations. (Paragraph 127)
The Government acknowledges the Committee's comments.
The VOA recognises that a number of businesses feel they were
not kept adequately informed during the course of the ports review,
nor advised sufficiently early of the likely impact, and has promptly
introduced measures to improve communications in the event of
any future such reviews.
It has put in place special fast track arrangements
related to the handling of enquiries and appeals from ratepayers
where there is a significant backdated liability for rates. It
has also established processes to identify changes to port properties
more quickly where the rating lists may require amendment. These
include improved communication with the port operators and with
the affected businesses.
For the forthcoming general Revaluation of all business
properties, taking effect from 1 April 2010, the VOA will be publishing
draft rating lists in the autumn of 2009. At the same time summary
valuations will be sent to individual businesses, explaining the
basis of the proposed new assessments so that ratepayers have
advance notice. This information will also be available on its
website. In any accompanying publicity, the VOA will encourage
ratepayers to check the information and to raise queries with
the VOA, so that any necessary amendments can be made before the
2010 lists take effect.
38. We note that Port Occupier's are facing bills
for backdated business rates that do not take account of payments
they have already made to Port Operators towards rates. We recommend
that the Government take steps to ensure that the financial liabilities
faced by Port Occupiers take such payments into account. (Paragraph
131)
The Government does not accept the Committee's recommendation.
The cumulative rateable value of the port operators has reduced
from £128 million to £84 million as a result of the
review, reducing the ports' rates liability. However, the Government
cannot directly intervene between the port operators and occupying
businesses, as any terms concerning liabilities for rates under
operator licences or agreements are a private contractual matter
between the operator and the occupier.
Ministers are meeting representatives of some of
the port operators to discuss the issues involved.
39. Port businesses are facing backdated charges
because the Valuation Office Agency failed to identify discrepancies
in the ratings at the time of the 2005 revaluation. This mistake
was compounded by the VOA's failure to communicate changes promptly
and effectively with Port businesses. (Paragraph 136)
The Government does not accept that the backdated
charges are a result of VOA's failure to identify separate occupations
within the ports at the 2005 Revaluation. The original assessments
in the 2005 List were produced in good faith on the basis of information
provided by the port operators and their professional advisers
during 2003-2004, who were consulted by VOA as part of the process
of compiling the new rating lists for the 2005 Revaluation.
Where the port operators identified separate occupiers
within their hereditaments, these were separately rated. The VOA
had no grounds on which to conclude that its decisions were mistaken,
or to consider that parts of the ports operators' holdings were
in fact separately occupied. It was only as the 2005 rating lists
were compiled that, through routine rating work in the port of
Southampton, it was established that further properties should
be separately assessed. Action was therefore taken by the VOA
to amend the list, but this action was strongly disputed by the
other parties, and legal and valuation argument followed: only
once that appeal had been withdrawn (in April 2006, immediately
prior to a hearing by the independent Valuation Tribunal), was
the VOA able to satisfy itself of the correct approach in relation
to certain types of port occupation.
This led the VOA to pursue detailed enquiries of
the operators of all 55 major ports in England and Wales in order
to ensure consistency and fairness in the entries in the rating
lists. The VOA wrote to all port operators in May 2006, as soon
as the review of ports was under way, with an explicit request
to the operators—who were the only organisations in possession
of the full list of occupiers—to let those occupiers know
of the existence of the review.
It is now clear that some operators did this and
others did not. In some ports, including Hull, the VOA wrote direct
to a number of occupiers in late 2006. Some port businesses have
been more co operative than others in providing full details of
their occupational terms to the VOA. This information is crucial
in establishing the rateable occupier. Nonetheless, the VOA has,
with hindsight, acknowledged that its communications with the
separate businesses within the ports could have been more broadly
based.
40. The Government's proposal to extend payment
terms for port businesses comes too late for those firms that
have already ceased to operate in the face of the huge rates bills
presented. It is probable that, even with an eight-year period
to pay, the backdated and prospectively increased rates bills
may make many firms technically insolvent. We recommend that,
in recognition of the fact that the Valuation Office Agency is
to blame for the situation faced by the port firms, the Government
take steps to mitigate further the difficult position faced by
port businesses. (Paragraph 139)
The Government does not recognise that the Valuation
Office Agency is to blame for the situation faced by port businesses
in what is a complicated rating issue. The original assessments
in the 2005 Lists were produced in good faith on the basis of
information supplied by the port operators, and discussed between
them, their professional advisers, and the VOA, as outlined in
the Government's response to Recommendation 39 above.
The separate assessments resulting from the ports
review are a result of additional information coming to the VOA's
notice, largely as a result of its own enquiries, and with varying
degrees of co-operation from the parties concerned. Whilst completion
of this process took longer than was desirable, the circumstances
of occupation of land and buildings by the individual port businesses
varied widely.
The Government has considered options to mitigate
the position faced by some port businesses. The Valuation Office
Agency has not been given any discretion under the established
legislation on backdating rate liability, which ensures that businesses
who are correctly assessed in the Rating Lists, from the date
they are compiled, are not disadvantaged when compared to others
which, for whatever reason, should have been, but were not, assessed
for rates.
The Government has also looked carefully at the option
to prescribe the rateable value at the levels published in the
April 2005 list. However, it is very difficult to see how exercising
such powers would assist businesses at ports, since:
the businesses within ports would still be
rated separately from the port operator as they should be and,
in some instances, were prior to 1 April 2005;
the businesses within ports would still be
faced with three years' backdated liability payable immediately
on top of the liability for this year and the liability which
will shortly fall due for next year; and
the power is not itself retrospective, so it
would not be possible to prescribe a value for a day before the
order prescribing the value was made, yet in order to deliver
some benefit to the businesses, it would be necessary to prescribe
a value which generated results below the market rental value—which
is the basis of assessment for rating purposes.
However, none of the other 1.7 million properties
on the Business Rating lists is valued other than on the statutory
basis of market rental value, and there is no clear rationale
for special treatment. In particular, there is no basis on which
a low rateable value could be established. The Government does
not consider that it would be either fair or consistent for special
rules to be applied to the rating treatment of properties now
separately assessed. All commercial properties are liable for
business rates and should all be assessed in the same way, to
ensure that the burden of contributions to funding local government
is shared fairly amongst businesses around the country.
As the Government has consistently said, in the current
economic conditions it is concerned about the impact of certain
backdated rates liability, and there is a general case to assist
businesses receiving large unexpected backdated liabilities that
have to be paid immediately, as the position for over 500 port
occupiers has demonstrated.
As the Committee will be aware, the Chancellor of
the Exchequer announced in the 2008 Pre-Budget Report that the
Government will legislate to give businesses more time to pay
in certain circumstances. Legislation has been laid before Parliament
so that businesses facing such bills in those circumstances will
not be required to pay their backdated liability within the financial
year at present, and will be able to do so in equal interest-free
instalments over 8 years.
Although the recent review of ports and the subsequent
separate assessment of a number of new properties within ports
highlighted the issue of the impact of backdated liability, the
legislative changes implemented will apply to all ratepayers occupying
properties that meet the criteria, including those in ports who
meet the criteria, to benefit from a schedule of payments for
backdated liability.
Further details of the process—including the
qualifying criteria—are set out in the Business Rates Information
Letter 2/2009[2] now issued
to all English billing authorities. A copy of that Letter is enclosed
with this Memorandum. This information allows local authorities
and ratepayers to prepare to make payments by instalments over
8 years.
The Government considers that the steps it has taken
to allow these extended payment terms to ratepayers with certain
unexpected backdated rating liabilities are an appropriate means
of ensuring that those who are liable for rates can pay them,
without imposing an excessive demand in a single year.
Historic trends from the 2000 lists indicate that
3,073 new assessments were added to the rating lists in 2004 05
with a back dated adjustment to their ratings assessment of at
least 33 months, of which it is estimated that at least half could
have been properties qualifying for the schedule of payments scheme.
Based upon this historic trend the Government estimates that 1,500
properties could therefore benefit from a schedule of payment
in the next year, although some businesses will choose to pay
in full and not wish to take advantage of the scheme.
In accordance with legislation capping the annual
increase at the September 2008 Retail Prices Index, business rates
will increase by 5% from 1 April 2009. The Chancellor announced
on 31 March 2009 that businesses will now be able to pay a 2%
annual increase in 2009-10 and the remaining 3% over the following
two years. This measure will help businesses to smooth out rates
payments over the next few years and will include those businesses
coming out of transitional relief or otherwise facing changes
in their level of business rates in 2009-10. This measure will
help port businesses, on top of the extended payment terms for
backdated bills, in the same way as other businesses.
With regard to insolvency, advice from the Government's
Insolvency Service indicates that, for any business, solvency
will depend both on the level of assets and liabilities, and on
the directors' reasonable expectations of being able to meet their
liabilities as they fall due in the future. The financial affairs
of each company will differ and how the backdated liability affects
them will to a large extent depend upon their existing financial
state. Business rates liability is not, in and of itself, an over
riding reason for a company to become insolvent: under accounting
rules, the debt would indeed have to be 'booked' immediately but,
where an arrangement has been made to pay by instalments, companies
can discount the liability, which will mitigate the impact to
some extent by effectively reducing the amount shown on the balance
sheet.
The work of the Government Actuary's
Department
41. We are concerned that the Government Actuary's
Department's estimated net expenditure position deviates so far
from its actual outturn. We do not accept that the Department
is justified in building in 'headroom' of some £2.8m (38%).
We recommend that GAD reviews its supply estimate process and
improves budgeting to ensure the validity of forecasts and estimates
laid before parliament. (Paragraph 145)
The Government accepts the Committee's recommendation.
GAD will review its supply estimate and budgeting processes.
42. We are concerned to note that prior to 2007-08
the Government Actuary's Department were operating a bonus system
which made no reference at all to performance. We recommend that
the Government ensures that bonus payments are performance-based
and of a reasonable scale. (Paragraph 148)
The Government acknowledges the Committee's concerns,
but wishes to clarify the operation of GAD's former bonus arrangements.
The bonus system put in place by GAD from 1999 did include a reference
to performance: only staff with a performance appraisal marking
of 3 or above, on a scale of 1 to 7, received a bonus—although
all staff with a marking between 3 and 7 received the same level
of bonus.
In 2007 GAD refined the system to allocate different
levels of bonus to each level of performance from 3 to 7. GAD
has confirmed that all bonus payments are made on a reasonable
scale.
43. We note the controversy surrounding the valuation
of miners' pensions and recommend that the Government Actuary's
Department issues a statement addressing the risk of future liabilities
being faced by the ultimate guarantor of these schemes, the UK
taxpayer. (Paragraph 151)
The Government accepts the Committee's recommendation.
GAD will shortly begin the valuation of the miners' pension scheme
and will issue a statement as part of the publication of the valuation
report.
44. We note the Government Actuary's equanimity
regarding the impact of Equitable Life on the reputation of Government
Actuary's Department. We hope that GAD have learnt lessons from
its involvement in Equitable Life and will reflect on the findings
of the Health Service Ombudsman. (Paragraph 154)
The Government notes the Committee's comments. GAD
has recognised that Equitable Life clearly had an impact on its
reputation, but the Parliamentary and Health Service Ombudsman's
report of 2008 (which considered events in the period preceding
December 2001) has had no further impact on reputation, as indicated
by the Government Actuary in his evidence to the Committee. The
Government Actuary's clear aim is to restore the reputation of
the department in government and GAD acknowledges that this can
only happen if the mistakes of the past are avoided for the future,
not just in relation to Equitable Life, but also in relation to
other matters, as set out in GAD's strategy, and in consequence
of the 2005 Morris Review of the Actuarial Profession.[3]
1 Operational Notice, Debt management Office, www.dmo.gov.uk/ Back
2
www.local.communities.gov.uk/finance/busrats/bus2009.htm Back
3
Morris Review of the Actuarial Profession 2005, HM Treasury, www.hm-treasury.gov.uk/ Back
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