Administration and expenditure of the Chancellor's departments, 2008-09 - Treasury Contents

Estimates Memorandum Submitted by HM Revenue and Customs

INTRODUCTION

  The HMRC Main Estimate for 2009-10 seeks the necessary resources and cash to enable the Department to meet its objectives for the coming year. This year, the core Department will be transferring its frontiers activity to the UK Border Agency (subject to the enactment of appropriate legislation). Additionally, the Valuation Office Agency will be taking on work of The Rent Service, which was previously held by the Department for Work and Pensions (DWP).

  The purpose of this memorandum is to provide the select committee with further information on the main issues the Department will be dealing with over the coming year, it emphasises the Department's focus and sets out how HMRC will achieve its strategic objectives. This also includes comparisons with the resources provided in earlier years.

  An explanation of key terms used in the memorandum is provided as an annex.

SUMMARY OF THE MAIN SPENDING FIGURES CONTAINED IN THE ESTIMATE

VOTED PROVISION

  The Main Estimate provides for a:

— total Net Resource Requirement (NRR) of  £16,454,336,000

RfR 1£3,978,435,000

RfR 2£1,000

RfR 3£158,000,000

RfR 4£32,900,000

RfR 5£12,285,000,000

— Net Cash Requirement (NCR) of  £16,407,454,000

BUDGETARY DATA

  The key budgetary figures are:

Resource Departmental Expenditure Limit		£4,258,156,000
	Of which:
	Near-cash	£3,960,122,000
	Administration budget	£4,159,275,000
Capital Departmental Expenditure Limit		£254,714,000
Annually Managed Expenditure (Resource)		£32,045,903,000
Annually Managed Expenditure (Capital)		£370,000,000

EXPLANATION OF SIGNIFICANT CHANGES IN PROVISION COMPARED WITH THE FINAL SPRING SUPPLEMENTARY PROVISION FOR 2008-09

Net resource requirement:	2009-10	£16,454,336,000
	2008-09	£16,113,339,000

  The total net resource sought for 2009-10 is 2.1% higher than the final net provision for 2008-09. The higher overall net resource requirement is due to increases in operational AME expenditure mainly in respect of Child Benefit payments. The 2007 Comprehensive Spending Review settlement for HMRC reduced total DEL by an average annual real reduction of 4.9% on its 2007-08 baseline. This excluded Modernisation Funds which are agreed separately.

Net cash requirement:	2009-10	£16,407,454,000
	2008-09	£16,292,835,000

  The total net cash requirement for 2009-10 is 0.7% higher than the 2008-09 requirement, mostly relating to the AME increases mentioned above. Non-cash requirements cover depreciation (£175 million), cost of capital (£37 million) and provisions (£120 million).

DEL PROVISION:

	2009-10	2008-09	Decrease 2009-10 compared to 2008-09
Resource DEL	£4,258,156,000	£4,492,531,000	(5.2%)
Of which:
Near-cash	£3,960,122,000	£4,186,797,000
Administration budget	£4,159,275,000	£4,392,050,000
Capital DEL	£254,714,000	£301,514,000	(15.5%)

  The comparison between 2008-09 and 2009-10 is affected by a number of additions in 2008-09, including a Modernisation Fund. HMRC were given access to a total of £300 million ring-fenced Modernisation Funds in the CSR settlement, to meet specific costs directly related to reshaping the Department to be better placed for a changing business environment and for the future. The Department has accessed £234.5 million of that fund to date over the last two financial years.

Administration changes—RfR1A

  Funding within RfR1a, which covers the administration costs of HMRC, increased during the two Supplementary Estimates in 2008-09 for the following reasons:

— Modernisation Fund: Draw down of £125 million resource to help with the modernisation and transformation of HMRC; Utilisation of £43.7 million Departmental Unallocated Provision (DUP) to facilitate improvements to key operational activities, which had been held as non-voted DUP as it required Treasury approval before draw down.

  The draw down of additional Modernisation Fund and possibly HMRC's End Year Flexibility stock will be considered during the current year and reflected in a 2009-10 Supplementary where approval is given.

Managing the 4.9% DEL reduction applied in HMRC's 2007 Comprehensive Spending Review settlement

  HMRC successfully delivered and exceeded all of its 2004 Spending Review efficiency targets over the period 2005-06 to 2007-08 to deliver £663 million efficiency savings against a target of £507 million, and a net reduction of 15,332 full-time equivalent posts against a target of 12,500. This over-achievement was planned to enable the Department to deliver its investment and transformational agenda, and to deliver services within its 2007 CSR settlement (reducing 4.9% year-on-year real terms in underlying funding over 2008-09 to 2010-11). This has put the Department in a strong position to build upon and deliver an ongoing efficiency agenda and further embed a culture of efficiency within HMRC.

  During this year's planning round HMRC reviewed the investment programme and agreed a strategic allocation of resources that delivers DSO targets and examined the scope for achieving further Value for Money (VfM) savings.

  It is expected that the border detection work will transfer to the UK Border Agency during 2009-10, subject to the successful conclusion of legislation through Parliament. This is a Machinery of Government change which will require funding to be transferred in a 2009-10 Supplementary, providing that the appropriate legislation is in place.

AME PROVISION:

£000s	2009-10	2008-09	Increase 2009-10 compared to 2008-09
Resource AME	32,045,903	30,278,879	5.8%
Of which voted	12,215,903	11,698,546	4.4%
Capital AME	370,000	297,667	24.3%

  The increase to voted AME provision sought in 2009-10 reflects the following principal changes against HMRC's Requests for Resources (RfRs):

— A reduction in RfR1 of £100 million, which demonstrates: the tailing off of e-filing incentive payments, where requirement is forecast to reduce to zero in 2010-11; and the fact that HMRC is not expecting any AME revaluation costs compared with £20 million for 2008-09;

— An increase of £605m in RfR5 in respect of child benefit costs (£505 million) and Health in Pregnancy Grants (£100 million). The increase in child benefit spend reflects an increase in the rates of child benefit. The Health in Pregnancy Grant was introduced in April 2009 but claims could be applied early in the last quarter of 2008-09; consequently the 2009-10 cost represents a full year.

— The increase to capital AME is mainly related to Child Trust Fund endowments.

  For non-voted, AME increases are related to tax credit payments.

PERFORMANCE

DEPARTMENTAL STRATEGIC OBJECTIVES (DSOS)

Objective 1:  Improve the extent to which individuals and businesses pay the tax due and receive the credits and payments to which they are entitled

  (DSO 1.1)

  To reduce losses by £7 billion over the CSR 07 period. This will require HMRC to close the annual tax gap by at least an additional £4 billion in 2010-11.

  (DSO 1.2)

  To reduce the level of tax credit error and fraud to 5% by 2010-11

  (DSOs 1.3 & 1.4)

  To sustain take-up levels of Child Benefit and Child Tax Credit at current levels and to increase the take up of Working Tax Credit by 2011

Objective 2:  Improve customers' experience of HMRC and contribute to improving the UK business environment

  (DSO 2.1)

  To improve the customer experience that the tax system is simple and even-handed, across all customer groups, by at least 3 percentage points (or up to 90% for any group) by 2011

  (DSO 2.2 & 2.3)

  To reduce the administrative burden which the UK tax administration imposes on UK businesses by at least 10% by 2011

Objective 3:  Reduce the risk of the illicit import and export of material which might harm the UK's physical and social well-being

  (DSO 3.1)

  To maintain the level of disruption of the attempted import and export of illicit drugs, products of animal origin, and other illicit goods

  (DSO 3.2)

  To contribute to Government objectives on counter terrorism by maintaining the level of operational performance in screening traffic entering the UK for radiation.

DSO 3 responsibilities are expected to transfer to the UKBA in due course. However, as the UK's customs authority, HMRC will keep responsibility for the policy on collection of taxes at the border

  Performance against these DSOs will be reported in HMRC's future published Departmental Reports.

DEPARTMENTAL EXPENDITURE LIMIT

  The table below compares outturn from 2005-06 onwards with planned DEL from 2008-09:

£m	OUTTURN			PLANS
	2005-06	2006-07	2007-08	2008-09	2009-10	2010-11
Resource DEL	4,393	4,577	4,361	4,493	4,258	4,153
Of which:
Near cash	4,157	4,326	4,135	4,187	3,960	3,862
Non Cash	236	251	226	306	298	291
Capital DEL	379	305	257	302	255	248
Less Depreciation	-159	-186	-177	-179	-195	-218
TOTAL DEL	4,612	4,696	4,440	4,615	4,318	4,182
*Depreciation which forms part of RDEL is excluded from total DEL since CDEL includes capital spending and to include depreciation of those assets would lead to double counting

  HMRC is managing with a reduced DEL baseline over the Comprehensive Spending Review which is clearly demonstrated above.

DEL END-YEAR FLEXIBILITY

  The 2007-08 EYF stock for HMRC was reported in the Public Expenditure Outturn White Paper 2007-08 (PEOWP) (CM 7419). The breakdown below shows changes since the 2006-07 PEOWP (CM 7156).

£'000	Admin	Other	Total	of which:	Non-cash	Capital
	Resource	Resource		Near-cash
PEOWP
(July 2007)	61,825	63,106	124,931	155,790	-30,859	33,257
Take-up in
Winter	-	1,400	1,400	1,400	-	-
Supplementary
Estimate
Balance of EYF After	61,825	61,706	123,531	154,390	-30,859	33,257
Spring Supplementary	-	-	-	-	-	-
Adjustments TO PEOWP July 2007	1,500	-1,500	-	-30,859	30,859	2,295
PEOWP (July 2008)	63,325	60,206	123,531	123,531	-	35,552
2007-08 Underspend	144,432	-18,050	126,382	62,289	64,093
Reductions For Virement Out of Admin Budgets	-18,050	18,050	-	-	-	-
Reductions for Reserve Claims	-30,000	-	-30,000	-30,000	-	-
Other Adjustments	299	-	299	299	-	-
2008-09 Entitlements	160,006	60,206	220,212	156,119	64,093	66,754

ADMINISTRATION BUDGET

  The administration budget is £4,159 million. A comparison with earlier years (outturn) and plans is set out below.

£m	2005-06	2006-07	2007-08	2008-09	2009-10	2010-11
PLANS	4,449	4,523	4,442	4,392	4,159	4,056
OUTTURN	4,246	4,499	4,295

  During 2005-06 an underspend was generated mainly as a result of the de-scoping and deferral of some projects following a review of our change portfolio. The resulting savings added to HMRC's stock of End Year Flexibility (EYF).

  For 2006-07 there was a small voted underspend. An excess level of receipts was added to this, which led to a surplus of over £20 million.

  The 2007-08 underspend of around £145 million mainly relates to Departmental Transformation Project and general administrative underspends, including paybill.

MACHINERY OF GOVERNMENT CHANGES

  On 1 April 2009 the functions of The Rent Service (TRS), an executive agency of DWP, will be transferred to the Valuation Office Agency (VOA). This involves a transfer of resources of £22 million. From this date the VOA will therefore be responsible for providing valuation and other services in connection with the Local Housing Allowance, Housing Benefit and Fair Rents.

  It is expected that the border detection work will transfer to the UK Border Agency during 2009-10, subject to the successful conclusion of legislation through Parliament. As the required legislation has not yet been approved this will require funding to be transferred in a 2009-10 Supplementary.

PROVISIONS AND CONTINGENT LIABILITIES

  None of our contingent liabilities fall into the categories specified for reporting to Parliament.

  Provisions have been made to meet obligations for the early departure of staff as the Department has a liability to meet pension liabilities until staff reach the age of 60.

  Provisions have been made to meet obligations under Child Trust Fund legislation which arises as a direct result of child birth. These obligations require payment of an element which is dependant upon income linked to Tax Credits, a provision is made for this uncertain value.

  Other provisions include the cost of legal cases where there is a probability that the court action will be lost and costs awarded against the Department; and accommodation related liabilities where dilapidation clauses exist.

  Health in Pregnancy Grant (HiPG) is a new provision and the opening balance for April 2009 reflects the establishment of the provision to cover the payments due to commence from 6 April 2009. The provision is based on the eligibility of those able to claim the grant.

Provisions for liabilities and charges	HiPG	Early Departure	Child Trust Fund	Other	Total
	£000	£000	£000	£000	£000
Position as at 1 April 2009
Balance at 1 April 2009	40,600	136,000	80,600	4,600	261,800
Provided in year in main estimate	14,300	4,000	148,700	500	167,500
Provision expected to be used in year	40,000	32,700	89,800	500	163,000
Expected unwinding of discount		2,000	-	-	2,000
Estimated closing balance	14,900	109,300	139,600	4,600	264,300

APPROVAL OF MEMORANDUM

  This memorandum has been prepared with reference to guidance in the Estimates Manual provided by HM Treasury and that found on the House of Commons, Scrutiny Unit website. The information in this memorandum has been approved by the Chief Executive of HMRC, Lesley Strathie.

GLOSSARY OF KEY TERMS

  Appropriations-in-aid—income received by a department which it is authorised to retain (rather than surrender to the Consolidated Fund) to finance related expenditure. Such income is voted by Parliament in Estimates and accounted for in departmental resource accounts.

  Administration Budget—a Treasury control on the resources consumed directly by departments in providing those services which are not directly associated with frontline service delivery. Includes such things as: civil service pay, resource expenditure on accommodation, utilities and services. The Administration Budget is part of Resource DEL.

  Annually Managed Expenditure (AME)—a Treasury budgetary control for spending that is generally difficult to control, large as a proportion of the department's budget, and volatile in nature

  Departmental Expenditure Limit (DEL)—a Treasury budgetary control for spending that is within the department's direct control and which can therefore be planned over an extended (Spending Review) period (such as the costs of its own administration, payments to third parties, etc).

  Departmental Unallocated Provision (DUP)—a part, usually between 1% and 1.5% of a department's total DEL that is not allocated to particular spending, but held back by the department to meet unforeseen pressures.

  End Year Flexibility (EYF)—a mechanism whereby departments are allowed to carry forward unspent DEL provision into later years.

  Estimates—a statement of how much money government needs in the coming financial year, and for what purposes, by which Parliamentary authority is sought for the planned level of expenditure and receipts in a department.

  Estimates Memorandum—an explanation to the relevant departments select committee setting out the links to other spending controls and the contents of a department's Estimate.

  Near-cash—resource expenditure that has a related cash implication, even though the timing of the cash payment may be slightly different. For example, expenditure on gas or electricity supply is incurred as the fuel is used, though the cash payment might be made in arrears on a quarterly basis.

  Non-cash—costs where there are no cash transactions but which are included in the body's accounts (or taken into account in charging for a service to establish the true cost of all resources used.

  Request for Resources (RfR)—a function based description of the organisational level of the department. These can vary between one or more RfR and should be objective—based, referring to the purpose for which the functions being carried out by the department are intended to meet.

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Prepared 9 March 2010