HM Revenue and Customs' 2009 - 10 Accounts - Public Accounts Committee Contents

Examination of Witnesses (Questions 103-248)

Dame Lesley Strathie. Jon Fundrey. Sarah Walker

16 November 2010

  Q103 Chair: Apologies to people who have been squashed in over there. We were just saying that we need a bigger room. This is where the Public Accounts Committee has always met so we shall have to have a think about that.

  Thank you very much for returning for a second session. At the last session—if we can go straight in—you said that there were 18 million cases where you hadn't reconciled from 04-05 to 07-08. The estimate of the outstanding moneys owed to the taxpayer out of those 18 million was £1.4 billion. Last Friday, you wrote to me saying that you had, in effect, written off three out of those four years. What's the estimated loss to the taxpayer?

  Dame Lesley Strathie: First, it is important to remember that the figure of £1.4 billion and the 17.9 million open cases is our best estimate of the notion of collectable revenue at that point. It is not revenue that has been brought to account. It is impossible to know accurately what is in those cases until they are actually worked.

  Chair: I think we all accept it's an estimate.

  Dame Lesley Strathie: It is an estimate, but it is important because it is estimated at a point. The ability to collect deteriorates rapidly every day thereafter. As far as we're concerned, what I've just written to you about concerns 06-07 because the law changed in the Finance Act 2008. That means that the 06-07 cases are time-bound when we get to April 2011. In order to have an enforceable debt, we would have to work the cases and have that debt in play, which really means that, by mid-November, we have had no realistic opportunity of doing so, or the cost of trying to collect that money would outweigh doing so.

  As far as 06-07 is concerned, we estimate that if we had been able to work those cases in April, around £100 million of revenue might have been collected. We estimate now that were we to try to work those cases, within any time at all, the notional revenue forgone would be £25 million.

  Q104 Chair: £500 million?

  Dame Lesley Strathie: £25 million.

  Q105 Chair: Hang on a minute. Can I just take you through some of these figures? There is quite a lot I would like to come back to on that. First, you may have estimated that you could only get £100 million, but what was said last week was that your estimate of the revenue that ought to have been paid over 06-07 was £500 million. Is that right?

  Dame Lesley Strathie: £500 million is the notional revenue, if we had been able to work it at that time back in 06-07.

  Q106 Chair: So, £500 million is the notional amount, which is a lot of money. What you haven't told us about is 04-05 and 05-06. What was the estimated loss to the taxpayer? I understand all the stuff about it being estimates.

  Dame Lesley Strathie: £150 million.

  Q107 Chair: So we have so far lost to the taxpayer, £650 million potential. Is that a yes or no?

  Dame Lesley Strathie: Potential, from this strand of work, yes.

  Q108 Chair: Can I also ask you why you didn't tell us at the hearing in October that you would not be able to pursue 04-05 and 05-06? You knew the details of the Finance Act 2008 then. It was clear in October that we had already run out of the four-year time frame for those two financial years. Why did you lead us to believe in the October hearing that there was still a potential for pursuing those debts, or those underpayments?

  Dame Lesley Strathie: There are two issues here. First—I am not trying to be clever here—we did not actually have the hearing that we came to have. It was indeed I, at the end of the hearing, who drew your attention to the open cases, because they are a statement of public record and have been in every set of accounts since the Department was formed. I was drawing attention to the fact, in response to a question on another matter to do with reconciliation, when one of the Committee Members said, "So when you've done this, that's it up to date", that in fact we still had this huge legacy.

  The earlier years you are referring to effectively went out of date in terms of potential underpayments when the Finance Act 2008 came in.

  Q109 Chair: I understand that, which is why the question is why on earth were we ever led to believe something, in both the NAO Report and in the last session? I certainly sat here thinking there were 18 million people who could have underpaid from '04 through to '08 and you were going to pursue them by 2012. Why did you lead us to believe that when we all knew the Finance Act 2008 was in?

  Dame Lesley Strathie: I don't think I did lead you to believe that. I was required when I did the accounts and laid them, to categorise all that we had, because we hadn't been through any formal clearance process of those cases. We still have to go through them to identify anyone who has overpaid, and that is what we intend to do.

  Q110 Chair: I understand all that, but did you know at the last hearing that because we had run out of time we would not be pursuing the 04-05, 05-06? Did you know that?

  Dame Lesley Strathie: Did I know that we had to have an enforceable debt in place, that realistically the last point for doing that would be around mid-November, and that the cost of pursuing of them would outweigh it? No, I did not.

  Q111 Matthew Hancock: That is for 06-07. What about for 04-05 and 05-06?

  Dame Lesley Strathie: Those were regarded, in relation to any underpayment.

  Q112 Matthew Hancock: I understand that it is important to make sure that we still give overpayments back, but were underpayments still being pursued?

  Chair: They couldn't.

  Q113 Matthew Hancock: At the last hearing, you gave the impression that underpayments were still being pursued from those two years, 04-05 and 05-06. Did you know at the time that they couldn't be pursued?

  Dame Lesley Strathie: No. I did not and I do not think that that is what I explained either. I was very clear that we had cases numbered for each of the years. I was clear that when the previous Government made the decision to introduce that change and bring us into line with other tax authorities, it was recognised that we would be forgoing the potential underpayments for those years. Given that I was not part of the history of this at the time, I wasn't conscious of all the detail, as we worked through the legacy of these open cases to understand what's in them, I understood then that we don't have any potential for underpayments in those years. We will still work those cases when we have the solution to find anybody whom we owe money to.

  Q114 Matthew Hancock: So when did that specific detail come to your attention?

  Dame Lesley Strathie: Probably about two to three weeks ago.

  Q115 Chair: Perhaps Sarah Walker or one of you should have known, and we should have been told, that 04-05 and 05-06 were uncollectable under the Finance Act 2008. I think that is the point that we are making. We are disappointed that that was not made clear to us in evidence. I accept that you might not have known—should you have done? Somebody on the table answering questions to the Committee should have told us that.

  Dame Lesley Strathie: I absolutely accept that we should have known. I would also accept that, when the law was changed and the impact changed, we should have advised the Committee of that.

  Q116 Chair: Can we go to 06-07? Last Thursday or Friday, you wrote to me writing that off. You knew that that was under constraints of time. If you had started work on trying to pursue the people who have underpaid, even as late as June of this year—a few months ago—you might have saved the taxpayer at least £100 million, if not more, given that the total estimated underpayment is £500 million.

  Dame Lesley Strathie: Absolutely, but I implore the Committee to put this in the context of the choices that HMRC has to make in where it deploys its resources against maximising revenue and reducing risk. While we have had to introduce the new system, and while we have had to deal with all the legacy issues, it is important to note those numbers in the context of the £435 billion that we collected and also to note that, in the same time that we forwent that and used our resources on intervention yield, we actually moved from £7 billion to £11 billion in intervention yield. So it is a resource deployment issue.

  Q117 Chair: This is all well and good. I was just thinking as you were replying that my last ministerial job was in the Department for Culture, Media and Sport, and £500 million in that Department would have made a fantastic difference to the arts organisations, and even £100 million would have made an incredible difference, and Government have forgone an estimated £500 million or, on your more conservative estimate, £100 million. I just think that somewhere in your massive system of officials somebody should have said, in June, "Hang on a minute. We've got the Finance Act. We've got to start pursuing the 06-07 underpayers quickly to get that money into Government."

  Dame Lesley Strathie: I absolutely accept that it's a big number. Our job is to maximise the receipts for the Revenue, but I still say that even if we had had those choices—bearing in mind we would have had to work these cases manually, because we are reconciling the later years—we would have had to take people off debt collection and intervention yield, and, as I say, during this same period, through from 05-06 onwards, we have actually increased that by £4 billion. So, £500 million is a big number and £100 million is a big number, but, taking your example of your previous Department, £4 billion would be a big number for the Government not to have on their receipts.

  Q118 Matthew Hancock: Can I come back on this resource question? If you didn't know that you couldn't collect from 04-05 and 05-06, would you not have put fewer resources into trying to collect from 04-05 and 05-06?

  Dame Lesley Strathie: I would always put my resources into trying to collect the most current money, because that is the greatest return for the Revenue.

  Q119 Matthew Hancock: So how many resources did you direct at trying to collect from 04-05 and 05-06 during the period that you did not know that it was not possible?

  Dame Lesley Strathie: None.

  Q120 Matthew Hancock: Good. Just one final thing, you were told only two to three weeks ago that it's not possible for HMRC to collect from 04-05 and 05-06. Who should have told you?

  Dame Lesley Strathie: Any number of people.

  Q121 Matthew Hancock: Who is responsible for that? Who reports to you? Who should have told you that?

  Dame Lesley Strathie: The Director General for personal tax is the next in the line of accountability to me. There is the Permanent Secretary for Tax, who is my second permanent secretary. We have a central policy function, which maps those changes over a period of time. There are any number of people who should and could have known, and we are very conscious of that. The personal tax part of the business had a plan at the start of the year for working those cases. When we hit the reconciliation exercise, we absolutely had to sort that out and we had to deploy our efforts towards it. I think it is fair to say that somebody lost sight of that somewhere in the window between dealing with the annual coding exercise and my determination to clear all of those cases by 2012. We have started to work through the content of those cases.

  Q122 Ian Swales: There is a real question about how in touch the management are with the ground. This is a transcript of a teleconference between you and your own staff on 21 October: "Our AOs here have been reviewing cases for the years 2004-05 since June." Another comment: "If the cases for 2005-06 don't count because the number of years that we can now review has reduced from six to four, why are we spending so much resource looking at them, when we could perhaps be dealing with more customer correspondence?" Those are from your own staff to you just a few weeks ago. So even your own staff are asking what's going on.

  Dame Lesley Strathie: That is a perfect example of the ability that staff have in the organisation to raise such issues. We did act on the back of that. We have 1,000 telephone lines open every month for the staff to ring me and the rest of the executive team to raise those very issues. We were following three NAO recommendations, and I feel very strongly that if people have overpaid tax, they deserve it back. We have people in various parts of the organisation working on such cases. It was that telephone call, and another issue when the board visited a number of our sites in Birmingham, that prompted us to look at the translation of what we were asking people to do versus what was happening on the ground.

  Q123 Chair: It is absolutely vital that people who have overpaid get their money back, but, equally, people who have underpaid are either going to cost the taxpayer more, because we are going to have to get the revenue from somewhere else, or services will suffer, because there is less money to spend on them. Both sides of that equation matter.

  Dame Lesley Strathie: I accept that, Chair. I still go back to my point that that is a notional amount of money. It is not an amount of money that could ever stand an accountancy test, or come on to our balance sheet and, therefore, be written off. That is quite important.

  Q124 Ian Swales: My next question is about the write-offs. When the original Report was published, The Observer stated that £40 billion had been written off in the past five years. Is that a number that you recognise, £40 billion in tax? The description was, "£40bn it had expected to collect during the past five years."

  Dame Lesley Strathie: I think that the article refers to the tax gap figure. Without the article, I don't know, but the only figure that I recognise for that is our tax gap estimates, which we have published.

  Chair: Your colleague has something.

  Jon Fundrey: In the trust statement for last year, the number given for losses was £6.4 billion.

  Q125 Ian Swales: That is one year. This £40 billion is over a period of five years, but you are saying that £6.4 billion is for one year.

  Jon Fundrey: It was £6.4 billion last year, and £4.6 billion the previous year. I don't have the data available for the previous three years for a five-year history.

  Q126 Ian Swales: I think we established at the previous hearing that both of those figures are more than your entire costs for people and administration, so what do you say to the Chartered Institute of Taxation, which blames all this on repeated staffing cuts? Are you satisfied that you are managing your staff numbers appropriately given the scale of those problems?

  Jon Fundrey: There is an underlying reason for those particular cases. Last year, for example, we undertook an exercise to look at MTIC fraud, and a reasonable proportion is specifically attributable to that. There is also a general background. Some 90% is due to company insolvencies, and in such cases we cannot pursue the debt any further. I think that those are the underlying factors for that loss figure, rather than the staffing issue.

  Dame Lesley Strathie: Could I also respond? It is the tax gap. We have got to remember that the tax gap is the best estimate and we have a strong record in this country. Not every tax authority measures its tax gap. This is the difference between the tax that the policy was designed to deliver and the tax that flows in. That includes all fraud, evasion, organised criminals and everyone who does not pay their tax through evasion or avoidance.

  Q127 Ian Swales: That is the figure that is £40 billion each year, isn't it?

  Dame Lesley Strathie: We publish figures when we believe that they are robust enough to be published. The gap was published at £42 billion and then revised to £38 billion, before increasing by £2 billion to £40 billion. Those are the numbers over the last couple of years.

  Q128 Mrs McGuire: I am frankly astonished that nobody in the Treasury was keeping an eye on the legislative process and the changes that were made to the back-claiming of tax, given that the Inland Revenue, when the boot is on the other foot, will say to an individual taxpayer that ignorance of the regulations is no excuse for underpayment. I have certainly had constituency cases in which quite deep regulations have not been fully understood. What are you now doing to ensure that HMRC looks at legislation that is passing through? I cannot get my head around the fact that a piece of legislation was passed, called the Finance Act, which obviously impacted to a certain extent, if not to a great extent, on HMRC, and nobody clocked the bit about the change in the regulations.

  Dame Lesley Strathie: If I have given that impression, I must correct it, Mrs McGuire. We knew that the Finance Act had changed our ability to do underpayments from six to four years, and brought the taxes in line. The bit that failed in our system was to recognise that the deadline we were working to was not April '11, but realistically November '10. The fact is that you have to have an enforceable debt in place, and that takes more than three months, depending on the response from the customer. It wasn't that we didn't know the change, but that we didn't understand that we ran out of road in mid-November.

  Q129 Chair: Hang on a minute, let's be clear. November '10 is just for 06-07. For 04-06, you'd run out.

  Dame Lesley Strathie: The Finance Act was done knowing that those years were gone. There was no desire to mislead, but simply a recognition that that was in history. We have always declared what is in the system. We would still have to work those cases to find overpayments.

  Q130 Mrs McGuire: But that is almost as bad as not knowing, because you didn't then make a realistic assessment of the impact of that change. To put it in your phrase, you would run out of road by November.

  Dame Lesley Strathie: No, I think when Ministers made the decision to change the law and understood what would be the notional foregone figure for the earlier years, they had every right to expect HMRC to deal with the 06-07 cases. Indeed, there was a plan to work and prioritise the highest value cases. Resources were then diverted to the P2 issue. We owe it to be clear on the record about Ministers' expectations of HMRC at the time when they made that change. We failed to deliver on those.

  Q131 Mrs McGuire: Right. Can I then take us on to 2007-08? What is your best estimate of how much of that tax overpayment will now be recovered?

  Sarah Walker: We don't have a figure yet. We need to work out how we can prioritise the highest value cases and work them on the basis of the best value for money. We are also in the process of discussing with our suppliers an IT solution that will allow us automatically to sort, identify and crystallise the amounts owing, and then put them into tax codes where we can. It is too early to say how much of the 07-08 money we will be able to collect.

  Q132 Mrs McGuire: So when will you run out of road for 07-08?

  Sarah Walker: This time next year.

  Mrs McGuire: So we have a full year for you to do all those things.

  Q133 Ian Swales: Is that achievable?

  Dame Lesley Strathie: We have to understand that we have all these years of legacy issues. We haven't made decisions, and the commissioners haven't taken any decision, on 07-08. We will have to take decisions and ask Ministers to support them. I say that because we genuinely haven't worked through. There is much more notional revenue in those cases and clearly more opportunity to collect, but we have to look at fairness and at the concessions that we have allowed in the 08-09 and 09-10 reconciliation exercise. We raised the threshold for PAYE from £50 to £300. We then have the ECS A19 concessions, according to which, if HMRC had all the information somewhere in its system but failed to deal with it, people can legally challenge whether they pay the debt. We now know what happened in each of those earlier years and what we are doing in the future years, and we have 07-08 in between.

  Q134 Chair: Just to be clear, the estimate is £900 million, which is nearly £1 billion. Given all that, are you telling us that it is likely to be well under 50% of that?

  Dame Lesley Strathie: I am telling you that I don't know the answer, but when looking at deploying resource to get the best return, it is always going to be in the most current cases, because that is where you bring it to account. When we consider 07-08, we will consider how much resource it will take to get how much revenue.

  Q135 Chair: Well let me just put this to you: in 06-07 the original figure was £500 million, of which you said £100 million was possibly collectable, and £25 million was what you got in. If you take that forward into 07-08, £1 billion will end up probably with not more than £50 million. Is that right?

  Dame Lesley Strathie: It's absolutely possible, but it depends on what is in the cases and on their value. If the analysis showed that the average debt was well above £300, we would work out the returns we would get from that. If we do not give any concessions for that year, in the way we have done with others, that will lead to a different result. I am saying that 07-08 is the last of the legacy years that we have to tackle. We have already diverted resource to that and have prioritised it to the highest value.

  Q136 Ian Swales: I will quote figures from the original Report—I know that it is now out of date. Page R20 states that, "early analysis by the Department suggests that around half of all these cases are likely to involve an over or underpayment of tax and in aggregate these may lead to repayments and recoveries of the order of £3.0 billion and £1.4 billion respectively." Some £0.4 billion seems to have gone already. I suppose my question is a straightforward business one: if there is £1 billion out there to be collected, how much would it cost to go and collect it? It is very simple. Some £1 billion of public money is waiting to be collected, and you are saying that it is more important that people do PAYE coding or something like that. Doesn't it seem that we should be going for it, and if it takes temporary resource or systems or whatever, why wouldn't we do that?

  Dame Lesley Strathie: I don't accept that there is £1 billion to go and collect, which is the whole premise. We never know what is in a case until it has been worked. All the numbers in our analysis are based on our best sampling, supported by HMRC and Treasury analysts. The NAO has agreed that, although not perfect, it is the best we have got. As I have already pointed out, the older a debt is, the less chance there is that it will ever be collected, as people just became uncontactable. I cannot accept that that is anything more than a notional sum at this time.

  Q137 Ian Swales: This is something that's baffled me since the first hearing, thinking about it.

If you're doing the work to establish an overpayment, you must be getting to the point in a case where you know what a number is for that person. I would have thought that if you sent a letter at that point to somebody saying, "You owe us £100," you'd actually get most of it, and it would only take a letter. How difficult can it be to collect a certain slice, anyway, of the money that's outstanding? You make it sound like some enormous task, whereas we're talking about PAYE differences of probably a few hundred pounds, in many cases. Okay, yes, some people would have moved, but a lot wouldn't. They'll still be in the same jobs, and they'll still have the same tax codes. How hard can it be to at least get some of it?

  Sarah Walker: These cases are quite difficult to work. By definition, these are the cases that were left over after we'd done the normal processing in these past years, so you do have to do additional work in order to establish—

  Q138 Ian Swales: But my point is, aren't you doing that work anyway in order to establish if they've overpaid? How can you know until you do the work?

  Sarah Walker: No. We're able to do some computer analysis that will separate out the cases that are likely to be overpaid or underpaid.

  Q139 Chair: So you're not prioritising underpayment cases in 2007-08? Are you not prioritising them?

  Sarah Walker: Within underpayment cases, yes, we are.

  Q140 Chair: You've written it all off before. We're now at 2007-08, which Anne has moved us to. If there is nearly £1 billion estimated income to come out of those 2007-08 cases, wouldn't it be logical in that year to prioritise underpayment?

  Sarah Walker: We have a commitment that we will—

  Q141 Chair: Are you prioritising underpayment?

  Sarah Walker: We are not prioritising underpayments over overpayments at the moment, though we—

  Q142 Chair: Are you prioritising overpayments over underpayments in 2007-08?

  Sarah Walker: We are working both at the moment.

  Q143 Stella Creasy: I am trying to get my head around your business model and how you're dealing with these cases, because it feels to me like that's one of the issues here. Can I start by asking you what analysis you've done on the return on investment of each member of staff on the amount that you can recover?

  Dame Lesley Strathie: On the specific area—

  Q144 Stella Creasy: You've made a lot of talk about it. I understand that you have a limited number of people, and that therefore you have to, as you're saying, deploy resources. What work have you done on the return on investment of deploying a member of staff to the recovery that you can do?

  Sarah Walker: We understand that it costs a lot more, in terms of staff costs, to work an older case than it does to work a current case.

  Q145 Stella Creasy: No, in terms of this type of work. You've talked about the trade-off. You mentioned debt collection and intervention work. What work have you done on the return between moving people to do this kind of work?

  Sarah Walker: The return on this kind of work is a lot lower than the intervention yield or debt collection, because you've got to work through a lot of cases in order to find the ones that—

  Q146 Stella Creasy: Okay. How does that compare with the amount of money that you could recover if you were to put people into this work? If we're talking about there being up to £1 billion of money to recover, what's the analysis you've done of the cost of, as Ian has mentioned, bringing in temporary people to work on this, in comparison to the work you can do on debt collection? If you've made that trade-off internally between different forms of collection, what about the different costs to the taxpayer of the money that you don't collect? What work have you done on that?

  Sarah Walker: I'm not sure I've understood. I think it's the same—

  Q147 Stella Creasy: There's a return on investment on the number of people you put into this work, yes?

  Dame Lesley Strathie: We have done that work. I can't lay my hands on the figures at the moment, but we have done the work in terms of what the intervention yield is per person in our compliance effort plus the intervention yield on our debt. If we were to move the resource now to work all these cases manually, given what I've said about notional through to what's actually collected, we would lose considerably more for the Exchequer while we worked on these cases. What we are hoping to do, when we have the technical solution, is to be able to put all the cases through and immediately know the priority order and get them into codes for the next—

  Q148 Stella Creasy: So that would imply that it would actually cost you £1 billion in staffing to recoup £1 billion?

  Dame Lesley Strathie: We'll never recoup £1 billion. I keep saying that. That is just not a figure that is ever going to materialise into returns for the Exchequer, because of the concessions that are already there. If HMRC had all the information and has not used it, the customer has a right to challenge us—

  Q149 Stella Creasy: I appreciate that, but how can you have done that sum? How can you have worked out that it is not in the taxpayer's interest to prioritise other forms of debt intervention if you don't have an accurate figure for the amount that you can recoup?

  Dame Lesley Strathie: We have done the work from a notional sum. If everything had been perfect at the time and everybody had paid their tax at the time, I can work that bit by bit through the organisation to see what the returns are. That is how we arrived at the £25 million from the £500 million, and we need to do the same for each. You have to take when an assessment is made, when it is brought to fruition, how much is not and our ability to do these things.

  Q150 Stella Creasy: So you're saying that out of all the figures that are being bandied around, even if you had the staff, you could recover only £25 million?

  Dame Lesley Strathie: For 06-07, yes.

  Q151 Ian Swales: Why don't you talk about the rules that are in place. One of them you decided yourself in order to make life easier. You cut the number of cases from 1.9 million to half a million by introducing this £300 tolerance—by going from £50 to £300. According to your letter, "The number of underpayment cases was 1.92 million."

  Dame Lesley Strathie: For 06-07.

  Ian Swales: Yes, for 06-07. The letter continues, "If we applied the same £300 tolerance, we estimate the number of underpayments would fall to less than half a million." That's 1.5 million people you've taken out of the system because of a rule that you've put in yourself. You say that that money can't be recovered, but it's your own rule that's making it unrecoverable to make life easier, isn't it? Am I right?

  Dame Lesley Strathie: There is the cost of administration and collection. If you recall, Ministers asked us in the reconciliation exercise to raise that threshold. At one time, the threshold was much higher than £50. It then went back to £50. We had to raise it to £300 for the purposes of that exercise, because of all that we had to get through and on a value-for-money basis. We were then asked—by this Committee as well as by the Treasury Committee—to look at applying the same tolerances. We should bear in mind the fairness of people who thought their tax was reconciled a long time ago suddenly having those bills, and that was my point about 07-08.

  Q152 Matthew Hancock: Can I try asking Stella's question a different way round? Do you think, on the current arrangements, that you will maximise the net tax take—net of costs—given the existing tax structure?

  Dame Lesley Strathie: Sorry, are we talking about 06-07?

  Matthew Hancock: I am talking about 07-08 and all the back payments. You have the gross costs, and there are taxpayers' gross outstanding liabilities to you. Do you think that the current structures and the number of employees, for example, maximise the net tax take—net of the cost of collection?

  Dame Lesley Strathie: For the legacy years?

  Matthew Hancock: Yes. The legacy years right up to last year.

  Dame Lesley Strathie: I am still not clear. I am clear about all the figures that I have given you for 06-07 and the earlier years. I am clear that for 07-08, our notional numbers are much greater, and we are in slightly earlier terrain.

  Q153 Matthew Hancock: Your notional what are much greater?

  Dame Lesley Strathie: The notional revenue is much greater than the—

  Q154 Matthew Hancock: But I am asking about the interaction between your resources and the tax out there that is owed to the public purse. Given the management difficulties, lags and what have you, I would have thought that it would be reasonable to try to get to a position where, if you hired one more person and put them into the programme, you would not get any more net tax after cost. So long as there is stuff out there that it costs less to collect than you get from collecting it, you should be putting more resource into it. I was asking about the net tax take.

  Dame Lesley Strathie: For example, I have seen many cases myself, where people were working on them only to discover that the debt was £3.

  Q155 Matthew Hancock: Exactly. That is a net cost, but an anecdote is no answer, because you have to average things out over all the cases. Do you think that you have put the right amount of resources in to maximise the net tax take from this process.

  Dame Lesley Strathie: I believe that if we take more resources and work all of these manually, and we now move significant resource into that work—

  Q156 Matthew Hancock: What about marginal resource? One more resource?

  Dame Lesley Strathie: No. One more is not going to make very much difference at all.

  I am convinced that if we took our staff from elsewhere in the organisation, then we would clearly maximise the return on 07-08. What we would put in jeopardy is maximising the return from much more current work and from much higher dividends.

  Q157 Stephen Barclay: Just on that 07-08 figure, Dame Lesley, how much are you spending on staff to collect that figure? I appreciate that you would not actually get the billion pounds even if you had unlimited staff going after it, but how much are you spending on staff to go after that 07-08 figure?

  Q158 Chair: Or how many people?

  Dame Lesley Strathie: At the moment, we have 250 people working these cases, plus we are working overtime on the cases.

  Q159 Stephen Barclay: How much are they costing—as a ballpark figure?

  Dame Lesley Strathie: I can't give you it.

  Q160 Stephen Barclay: Because I think that what is coming from these questions is how much are we spending? We have 12 months left, before the cut-off deadline for going after that money, which is anything up to a billion; obviously, in practice significantly less will be realised. But in order to go after that money, how much are we actually spending up front over the next 12 months?

  Dame Lesley Strathie: I can tell you that we had 750 resources allocated to this work at the start of the year. We had to divert 500 of those to work on the annual coding notice, which we had to do before we could reconcile, and we have had 250 plus overtime working on the 07-08 figure.

  As I say, I do have the numbers on the staff. This is not unskilled work, so we actually looked at recruiting more people to go on it. But we can only use the resources once and if we take them from higher-value work, the return to the Exchequer will be much lower.

  Q161 Chair: Can we move it on a bit, because otherwise we will get stuck on this? I think it would be helpful, Lesley, if we had a note from you on the number of people in or the amount of money in, and the anticipated tax take-out.

  Can I move you on, because the reason that you had to move people off was that the IT system failed you? So, as I understand it, in the CSR you were given another £100 million to do further modifications to the software. Is that right?

  Dame Lesley Strathie: No. That's for real-time information.

  Q162 Chair: So, is the software—let's leave real-time information aside, because we'll get muddled otherwise—now in a fit state to deliver what you wanted of it?

  Dame Lesley Strathie: Can I just be clear that our issues with the annual coding notice are much more to do with the quality of data going through the system, bearing in mind that we had 12 regional systems and 12 separate databases? Yes, there are software problems and, yes, we are improving our software all the time, but that is not the main issue in the coding notice.

  One issue was that the standard or bar was so high that the level of rejection and duplication caused us issues. So, I use the analogy of a motorway. If you think of lorries or cars coming on to it, the real benefits from the new NPS system is automation. So, we have all the feed-in from employers, payroll providers, customers, others and agencies, and you want to automate as much of that as possible, rather than it all having to be manually worked. At the moment, we have to park that information in lay-bys, while we consider if it is right to go through the system for total automation or if there is more that needs to be done to it. So that is the approach—we know that the annual cycle and all the business events for PAYE mean you have a very defined period in which you can do it.

  Q163 Chair: So when will the data be accurate? When? What time frame are you working to on that?

  Dame Lesley Strathie: We have done about 75% of legacy data, but what I need to make clear is that we can clean up everybody's record and there is now an individual tax record for everybody, whereas we worked in the past on an employer basis, but we rely on everybody to give us the correct information.

  Q164 Chair: When is your bit of it correct? Obviously you rely on people, so when are you clear that your data systems—

  Dame Lesley Strathie: I will only regard it as up to date and where we would want to be by 2012 when we have gone through all of the history and all of the business events for PAYE reconciliation, and tackled our legacy open cases.

  Q165 Chair: Your accuracy rate in 09-10 meant that one in 20 accounts were wrong. In 10-11, are we still going to see one in 20 being wrong?

  Dame Lesley Strathie: Absolutely not, as far as history is concerned. This is an enormous undertaking. Those databases have been there since 1985.

  Q166 Chair: So what will the accuracy level be for 10-11, do you reckon?

  Dame Lesley Strathie: I reckon that we should be well up into the 90s in terms of what we hold in our systems, but this relies on every employer and everybody who works for an employer giving us accurate information. We have to develop in the system an intervention that deals with errors, and I would say that historically HMRC and the Inland Revenue have been very tolerant of the quality of information that comes into the system. Under this system we need to work with 4.5 million businesses and payroll providers to get better standards.

  Q167 Chair: The only point I would make is that one in 20 is not a tolerable level. What you are really saying to us is that by 2012 you might reach a tolerable level. From your point of view, I think this should be 100%. Any bank would expect it to be 100%.

  Dame Lesley Strathie: One thing I would not like us to lose sight of here is the customer benefit. We now have a system where a customer can ring up and be answered by any contact centre agent, who now has their tax record to hand in one system and can handle their issues there and then.

  Chair: But you can do that with a bank.

  Q168 Nick Smith: We know that proactive campaigning works, and in the NAO report—paragraph 3.16—you were planning to extend campaigns to all taxes by October of this year. What is your progress with this?

  Jon Fundrey: Currently about 90% of our debt goes through the campaign approach, and we are intending to increase that still further. There are a couple of recommendations from the NAO that support that. One is to increase our analytical capability, so we are in the process of recruiting a team of analysts to focus on that. There was a slight delay as a result of the recruitment moratorium post the election. We also need to make some IT changes to aid that analysis, and that should be in place by October next year, I believe.

  Q169 Nick Smith: But you said that would be done by October this year, so there is a year delay.

  Jon Fundrey: We have continued to work on the IT solution, but it has been slightly held up by the current moratorium on significant ICT spend. Similarly with the recruitment, but the recruitment is also under way. There has been some delay, but it is currently under way.

  Q170 Nick Smith: So a six-month moratorium has led to a year's delay on recruitment and IT?

  Jon Fundrey: Not necessarily, I think. Presumably, we took a while to put the recruitment in place. I know it is under way at the moment.

  Q171 Mr Bacon: Can I stick on this issue of IT? I take your point about data quality being a central issue, but it can't have helped that the IT management function was not being adequately performed. We know it wasn't being adequately performed because the acting chief information officer, who applied for the job of permanent chief information officer, didn't get the job. We were discussing this last time; you then had to pay him £50,000 a month to stay around for three months. He was succeeded by Phil Pavitt who had been at Transport for London before he came to HMRC. Could you say whether Phil Pavitt or his family gained financially from his undertakings as a senior public servant while he was at Transport for London, for example by employing contractors through a company in which his partner had a financial interest?

  Dame Lesley Strathie: I don't think it is appropriate for me to answer that question, but I am sure that Mr Pavitt and Transport for London would be very happy to answer it.

  Q172 Mr Bacon: Were you aware of the claims made by the London Evening Standard before you appointed Mr Pavitt?

  Dame Lesley Strathie: Yes, I was.

  Q173 Mr Bacon: You were. And what investigations did HMRC carry out to verify that Mr Pavitt had not acted unprofessionally?

  Dame Lesley Strathie: Absolutely everything that was appropriate.

  Q174 Mr Bacon: Did you speak to Transport for London?

  Dame Lesley Strathie: Yes, I did.

  Q175 Mr Bacon: You did. You investigated it with Transport for London.

  Dame Lesley Strathie: I went through everything in connection with all the candidates who I was considering for appointment, and the company of headhunters that was responsible for the recruitment also did due diligence on this.

  Q176 Mr Bacon: Did you pursue the matter with the Metropolitan Police?

  Dame Lesley Strathie: I had no occasion to pursue anything with the Metropolitan Police.

  Q177 Mr Bacon: Were you aware at the time of Mr Pavitt's appointment of the ongoing investigation that the Metropolitan police and internal fraud at Transport for London were undertaking?

  Dame Lesley Strathie: I didn't know anything about the detail of any of that, Mr Bacon.

  Q178 Mr Bacon: Are you saying that you were unaware of the claims of fraud just before Mr Pavitt was appointed?

  Dame Lesley Strathie: I was absolutely aware of allegations that were made. I was also aware that there was no case proven.

  Q179 Mr Bacon: If you didn't talk to both Transport for London and the Metropolitan Police, who were involved in an investigation during the time before Mr Pavitt's appointment, how could you have verified to an acceptable level of satisfaction that there was no case to answer?

  Dame Lesley Strathie: Mr Pavitt himself was very clear on all of that. I also spoke to his boss at Transport for London, and I employed my HR function and the headhunters to do due diligence on that. I am very happy to say that I have absolutely no cause for concern whatsoever.

  Q180 Mr Bacon: How many associates or former associates of Mr Pavitt have been employed on temporary or permanent contracts by HMRC?

  Dame Lesley Strathie: I know of only two people in the organisation who have previously worked in one guise or another with Mr Pavitt, and neither of them is in his direct command.

  Q181 Mr Bacon: If you could amplify that answer in a note, that would be very helpful.

  Dame Lesley Strathie: Absolutely. I would be very happy to do that.

  Q182 Matthew Hancock: I want to come back to the question of data quality. You said that one of the reasons for the delay in improving the situation on underpayments and overpayments is reconciling the data quality. You listed some of the organisations and people who have to give you the data that go into the system, and I entirely recognise the old nature of a lot of the stock of data. What progress are you making on delivering real-time information?

  Dame Lesley Strathie: Advice has gone to Ministers about the basis of the next level of consultation on real-time, so there is quite a way to go on that.

  Q183 Matthew Hancock: And how seriously do you think that will be able to improve the information that you get?

  Dame Lesley Strathie: There are two issues. The first, we have to say, is that real-time is the next big leap, because the sooner we have the information, the sooner it can be corrected or acted on. However, notwithstanding everything I have said about data quality, real-time will never be designed for 100% of the population—that is impossible. I believe that building the technology will be the lesser of all the challenges. I believe that we need to work with businesses for probably about two years and have a plan incrementally to bring them on board this system, if we want to do it well.

  Q184 Matthew Hancock: So why do you think that DWP's approach, which is to bring in real-time information on a much faster basis than that, is appropriate for it, but not for you?

  Dame Lesley Strathie: The DWP will not build in real-time information. It will be relying on HMRC building a real-time information system for PAYE. There will be a reliance on sharing that data.

  Q185 Matthew Hancock: But that is inconsistent with the statement by the Secretary of State for Work and Pensions on the universal benefit, which will be based on real-time information.

  Dame Lesley Strathie: Yes, the universal credit. We will have to share the same information.

  Q186 Matthew Hancock: The DWP will be using real-time payments information in order to deliver the universal credit within two years, but you are saying that over those two years is when you will start to talk to people.

  Dame Lesley Strathie: No. As I said, we have put out advice on the basis on which we would bring this next change on board, and consultation has yet to take place. In fact, Ministers have yet to decide on our advice on that, but the universal credit programme, in its infancy or pre-programme state, will require DWP to extract that information from HMRC. So the speed at which we have to build the technology and start this process is, to a large extent, determined by the welfare reform needs. We would want to do this anyway. We would want to move to real time to make it better, but there is an imperative. We have a big job to do and DWP has a big, hard dependency on HMRC.

  Q187 Matthew Hancock: You said you want to do it eventually. How quickly do you think you will be able to fully integrate real-time information into the PAYE system?

  Sarah Walker: The idea is that the IT for real-time information should be in place by April 2012.

  Q188 Matthew Hancock: In HMRC as well as DWP?

  Sarah Walker: In HMRC. But we won't put all employers straight on to it at that point. There will be a period over which we will gradually bring employers on to it and make sure that it is working and testing it. The information will then be available and can be used by DWP and can be used by the PAYE system. There is then a phased period during which we will start to use that information to change tax codes. So although it will be coming in from employers, the timing with which we make use of it in PAYE will be flexible and phased in.

  Q189 Mrs McGuire: Does that mean that the DWP time frame is predicated on HMRC getting its act together? The Secretary of State says that he has a two-year time frame for introducing something. I am just getting the impression that that cannot be introduced unless HMRC gets the foundation stones laid and the building halfway built.

  Dame Lesley Strathie: I think it is important that I don't answer for DWP any longer.

  Q190 Mrs McGuire: But you have sown a seed of doubt in terms of the time scale.

  Chair: DWP is dependent on HMRC, and HMRC cannot deliver in a time frame to enable DWP to do it within two years.

  Dame Lesley Strathie: No. We are planning to deliver to support universal credit. Let me reassure you. Last week, Sir Leigh Lewis and I chaired the joint work programme, which we have had in place for the last three years because we share systems and customers, and took stock of the whole universal credit and what DWP has to do on the whole of real time and the joint fraud and error strategy, where HMRC is expecting to reduce losses in tax credits by £2 billion a year for each of the years of the spending review. Those three big pieces of work are being overseen by me and the permanent secretary at DWP at the moment. I can't answer what DWP would do if HMRC failed to deliver. I just know that we are hard-wired into the programme and we will work as part of a joint programme.

  Chair: We will watch that with interest. I want to move us on to something else.

  Q191 Nick Smith: Very quickly on that. How will you support employers to provide that information for real time?

  Dame Lesley Strathie: That is exactly my point. This will have to be an incremental programme to bring employers on board. That is the basis on which we go out to consult now.

  Q192 Chair: I'm going to move us on to something else. We understand that you have to keep personal tax information confidential, but the tax affairs of companies, particularly publicly quoted companies, are available, one assumes, to their shareholders. I therefore have a slight question about why we cannot discuss them here. It is a question of principle. I am not trying to trip you up on this one, Lesley. I can understand that you don't want to talk about my tax affairs to the Committee, but I cannot understand why we cannot have an open discussion about the tax affairs of a publicly quoted company in this Committee.

  Dame Lesley Strathie: We went through this with your predecessor.

  Chair: I know you did. I am quoting from a letter he got.

  Dame Lesley Strathie: It is quite important in terms of working with companies to crystallise liabilities and to bring tax in. It is for the companies themselves to discuss whatever they choose to discuss, but it is inappropriate for HMRC—

  Q193 Chair: But they do disclose them to their shareholders, publicly. All companies do.

  Dame Lesley Strathie: But would they disclose the details of the settlement, or would they disclose to their shareholders what the number in their accounts was?

  Q194 Mr Bacon: In the case of Vodafone, it disclosed to its shareholders that following the agreement that it had reached with HMRC it was not expecting to be affected into the future by tax in the particular matter of a controlled foreign corporation. So, it did go beyond the number, didn't it, in the public domain?

  Dame Lesley Strathie: But that's for Vodafone. We did make a statement to which Vodafone gave us permission to add, which I can read if you want, but it has already been in the press.

  Chair: I think that we've all seen that—it's been in the debate. I don't think that it will help us, given that we're running out of time.

  Dame Lesley Strathie: I would just like to reassure the Committee though, that ultimately the commissioners have to make decisions, and I am satisfied as the accounting officer that the proper processes took place here. I think that in the Court of Appeal this was a huge success for HMRC; this is revenue that could potentially have been forgone.

  Chair: You're discussing the individual case there. Ultimately, our understanding is that the accounts could be qualified by the National Audit Office if it found that there was a question mark over whether sufficient revenue was collected from Vodafone.

  Q195 Chris Heaton-Harris: I was wondering whether you could extrapolate "crystallised liability" for me. I thought that if you were a corporation and you did something that was liable for tax you'd probably end up paying it. So, is it just an aspiration of HRMC to get that tax? Do you immediately start in a negotiating position? I'm slightly worried by the phrase "crystallised liability."

  Dame Lesley Strathie: What I was referring to was not the detail of the Vodafone case. The Court of Appeal decision last year confirming the compatibility of a controlled foreign company's rules with EU law was an important success for HMRC. It paved the way for the settlement—that was the point that I was making—and it will pave the way for other settlements.

  Q196 Chair: You can't let us know the details of the Vodafone negotiations, but can you let us know how many companies you're currently discussing—

  Chris Heaton-Harris: Crystallising.

  Chair: Crystallising, sorry—disputed outstanding tax with, where the sum exceeds £250 million?

  Jon Fundrey: We intend to disclose in next year's set of accounts significant litigation in cases that we're going through, and we're working with the NAO on what form of disclosure we can make.

  Q197 Chair: How many? Can you tell us? They might not be in litigation. I never know. You might be negotiating outside litigation. How many companies are there that HMRC views at present as owing more than £250 million, and with which you're in discussions through to litigation. How many?

  Jon Fundrey: I don't have that information to hand. I'm not sure that it would be appropriate for us to start disclosing the nature of that kind of case, but we are certainly—

  Chair: No, we're asking for numbers. We're asking for numbers.

  Jon Fundrey: But we certainly intend to disclose in next year's accounts cases of more than £50 million that we're currently going—

  Q198 Chair: Well, can you let us have that figure now? No one is saying, "Vodafone, Vodafone, Vodafone," but they are asking, "With how many companies are you in negotiation?"

  Dame Lesley Strathie: I can offer the Committee a note in relation to that. We will give you the information that we can in terms of litigation strategy and the cases that we have in the pipeline. We'll give you as much information as we can.

  Q199 Chair: And can you also give us the information as to the quantity?

  Dame Lesley Strathie: Yes.

  Q200 Chair: Can I ask you one final question? Do you think that it's appropriate that someone who left HMRC in 2007 should, within a couple of years, be negotiating with an ex-colleague to settle a dispute about debt? As the boss of HMRC, are you happy with that situation?

  Dame Lesley Strathie: I'm not sure what you're referring to.

  Mr Bacon: John Connors. He was an HMRC director, and he now works for Vodafone on tax matters and was negotiating with HMRC about Vodafone's tax liability, was he not?

  Q201 Chair: Do you think that that's appropriate?

  Dame Lesley Strathie: I don't know anything about that and it would be inappropriate for me to comment. I am very happy, if there are any issues on process, to take them back to the commissioners who dealt with this, and to our legal team.

  Q202 Chair: I don't think I am asking you a question completely out of the way. I don't know a lot about it either. I just read what I read in the press. What hit me in the face was that in my view it is completely inappropriate to have a negotiation of quite a sizeable potential outstanding debt between somebody who was working for HMRC, who has now gone to work for the company, negotiating with an ex-colleague within two years. Ministers wouldn't be allowed to do that.

  Dame Lesley Strathie: All I can say is there has been a lot in printed media on this that is inaccurate. I can't comment on that.

  Amyas Morse: Before you pass on, the Chair very kindly paraphrased something that I said quite carefully, qualifiedly, earlier on. Since you said it on the record, Chair, I can't let it go by. What I said was that there might be a case for qualifying on grounds of irregularity if it was seen that a decision had been made unreasonably. I did warn that I thought that that wasn't very likely. I think I am repeating myself fairly accurately. Thank you.

  Q203 Mr Bacon: Dame Lesley, may I just pursue this point? You raised the issue of the Court of Appeal case and the fact that that was a great success for HMRC, because it meant that your approach was compatible with European law and you could therefore continue to pursue people whom you deemed had a liability. Your litigation and settlement strategy is clear on that. Where you have a strong case you should seek full value from the settlement or take the matter to litigation. Where you have disputes that are of an all-or-nothing character—that is to say, it is merely a question of whether the law applies or not—such disputes should be settled on all-or-nothing terms. It goes on to say, "Do not split the difference or offer any discount for an agreement not to litigate."

  Your own controlled foreign corporation specialists believed in the case of Vodafone that the absolute minimum that HMRC should settle for was £2.4 billion. You have referred a number of times to the issue of process. The process that concerns me and may concern others is that, instead of the HMRC's specialist in controlled foreign corporation law being consulted on the terms of a deal, it is done in private between your permanent secretary for tax, Mr Hartnett, and the company concerned—in this case, Vodafone—without the proper checks and balances that you would expect to see, or to ensure that the right advice from within HMRC, from those who knew about the details of controlled foreign corporation law was taken. That is the problem.

  Dame Lesley Strathie: I don't confirm any of that, Mr Bacon. I think it is quite important and I don't believe that any decision was taken in private. There comes a point when the commissioners have to decide what the right course of action is in the circumstances that they are in. The director general for business tax was the accountable commissioner in the first instance here, and the business tax senior management team. The permanent secretary for tax is the second commissioner. Then we have counsel, overseen by our senior legal team. It would be absolutely wrong to suggest in any way that the permanent secretary for tax did some deal in private.

  Q204 Mr Bacon: If I may continue for a minute. Going back to your point about processes, the issue is whether the people who knew what they were talking about with HMRC were consulted on the terms of the deal. That is a process point. It is a fact that the people who knew what they were talking about were not consulted on the terms of the deal.

  Dame Lesley Strathie: You are now getting into detail. I would only say in a general manner: there is a huge tendency when people have worked on something for a very long time to hope that they will finally have their day in court. There are many cases that have gone back for years and years, where they have still delivered nothing. Eventually they are part of a settlement strategy.

  Q205 Mr Bacon: Going back to your point, it is your settlement strategy that I was reading. It says: "Such disputes should be settled on all or nothing terms." It is your settlement strategy that says on avoidance cases, "If our legal advice is strong, do not accept settlements for less than 100% of the tax and interest due."

  Dame Lesley Strathie: But wouldn't that suggest to you that there was a number that was the tax liability due? That's the last word that I'm going to say on the subject, or I am absolutely in danger of breaking taxpayer confidentiality.

  Q206 Mr Bacon: I wanted to ask you about David Cruickshank from Deloitte. Who brought him in—HMRC, or Vodafone?

  Dame Lesley Strathie: You read that in the papers. Again, I said you shouldn't believe everything that you read in the press, Mr Bacon.

  Q207 Mr Bacon: Who brought him in?

  Dame Lesley Strathie: I don't know that anybody brought him in.

  Q208 Mr Bacon: It was Mr Hartnett who brought him in, wasn't it?

  Dame Lesley Strathie: I don't know that he was brought in.

  Q209 Ian Swales: My question is an extension of that one. It is to do with the control mechanisms. Who authorises such arrangements, especially the ones that fall between the public assessment, if you like, or the clear assessment that the staff would make, and litigation? In other words, what about those cases that fall in between? Incidentally, the Chair was asking for some data. I think it would be important to try and divide that between those cases greater than £250 million, where we think that there is litigation, and those greater than £250 million where we are in the period between assessment and potential litigation.

  My real question is about the control system. Who can agree to those huge sums of money going up or down? What is the management control?

  Dame Lesley Strathie: This is for the director general, business tax, and the senior management team. There then has to be another commissioner and we have to have legal advice. There is a considerable amount of process before we would ever get to an end result.

  Q210 Ian Swales: So if you were in a discussion about potentially settling a case—I am not talking about this case, it could be any case—and a figure of £100 million was being bandied around at a meeting, who would ultimately say, "Okay, settle for that £100 million"? Would it happen before the settlement was made?

  Dame Lesley Strathie: I wouldn't use those words. If we are having a hypothetical case, then you are striving for the liability. What is the proven liability? Then you might settle for 100% of it.

  Q211 Ian Swales: That would be the normal process. So you are saying that there are no cases that are settled differently? What Mr Bacon read out is the process—it is the liability or it is litigation. Is that the case?

  Dame Lesley Strathie: Our job is to prove the liability, to serve that assessment and to collect the money.

  Q212 Mrs McGuire: Do you feel that sometimes, the bigger the organisation and the bigger the company, the more opportunity they have to negotiate? My experience in some situations has been that HMRC is pretty unforgiving when it comes to smaller organisations and companies in pulling back tax or national insurance.

  Dame Lesley Strathie: I think we have the same job to do for every customer—large or small business, or individual. I think that global taxation, particularly for foreign companies, is very complex. A huge amount of our work is in nailing down what we believe the law was intended to do and what applies for the UK to protect the UK tax base, versus what other people would contend. That is the huge challenge. Our job is to protect the United Kingdom's tax base. Clearly, companies will have other drivers.

  Q213 Mrs McGuire: So you don't think that those who have privileged access, whether they are dealing with a national taxation issue or an international one, have greater opportunities to come to an arrangement, whereas smaller companies that find themselves in difficulty find it almost impossible to negotiate with HMRC in how they pay back money?

  Dame Lesley Strathie: We have absolutely proven, with the introduction of the business payment support service during the recession, that provided people came to us and told us that they had a difficulty, we would put in place time-to-pay arrangements. We have demonstrated that, and we have greater compliance. We are keeping the business payment support service, now that we are out of recession, because it allowed many more companies to come into a compliance regime and be given time to pay. The return on that has been very high.

  We have also demonstrated it in the PAYE reconciliation, where people had debts of more than £2,000. Provided that they come to us on receipt of that assessment we will give them up to three years to pay. We are applying the same for individuals and business customers. I don't believe that anybody, just because they're a large corporate, has the opportunity to come to an arrangement so far as liability is concerned. Any arrangement is around time to pay.

  Jon Fundrey: To give you some sense of scale, we have in place 371,000 time-to-pay arrangements covering £6.4 billion[1], and 90% of them are paying.

  Chair: Will you say that again?

  Jon Fundrey: We currently have 371,000 businesses in our time-to-pay arrangements, covering £6.4 billion. They have time to pay, but we are also collecting in excess of 90% of that at the current rate. I am using those figures to demonstrate that we also look after the other end of the market.

  Q214 Mr Bacon: Dame Lesley, you said that your job was to prove liability. Indeed, you had a Court of Appeal case that helped you in that. My belief is that having got that case on your side, you did not pursue things as strongly as you should have done.

  Dame Lesley Strathie: On what basis do you say make that assertion?

  Q215 Mr Bacon: On the basis that your CFC specialists believed that you could get more money than you did. My question is about forward agreements on tax treatment. They are unlawful, aren't they?

  Dame Lesley Strathie: I'm sorry, but I am not a tax specialist.

  Q216 Mr Bacon: You can't tell me if forward agreements on tax are unlawful?

  Dame Lesley Strathie: No, but I would be very happy to find the information for you.

  Q217 Mr Bacon: Sarah Walker, can you tell me if forward agreements on tax are unlawful?

  Sarah Walker: I think you are talking about the sort of arrangement that Mr al-Fayed had?

  Q218 Mr Bacon: Yes, that kind of arrangement.

  Sarah Walker: Those were found to be unlawful.

  Q219 Mr Bacon: Why are you still doing them with other companies?

  Sarah Walker: That's not my area; I am sorry I can't answer that.

  Mr Bacon: Mr Fundrey?

  Jon Fundrey: Also not my area.

  Q220 Mr Bacon: Vodafone said in its press release that it is not likely that CFC liabilities will arise in future, as a consequence of the likely reform of CFC rules due to the facts established in the agreement. My question is how can they arise now?

  Dame Lesley Strathie: Perhaps you should ask Vodafone what it meant by its statement.

  Mr Bacon: Perhaps we will.

  Q221 Stephen Barclay: Following on from that, where there is a legal process, who has the authority to vary it? We heard from Richard about the Department's guidelines. Who has the authority to vary them? Does it require your authority?

  Dame Lesley Strathie: I go back to the point about the commissioners. There are six commissioners in Revenue and Customs, and they cover different areas, but on any decision there will be a minimum of two commissioners. We will ensure independence and governance of that. I would never personally be involved in any of these decisions. It would come up the line with the permanent secretary for tax.

  Q222 Stephen Barclay: Sure, but we had an exchange at our last meeting about the vagaries of how accountability works and the role of the accounting officer. I want to clarify whether, as the accountable officer, you have to agree to variations.

  Dame Lesley Strathie: My job as principal accounting officer is to account for decisions that are made and who made them. It is not for me to make those decisions. Why would I? I'm not a tax professional.

  Q223 Stephen Barclay: So you don't have to sign them off?

  Dame Lesley Strathie: No.

  Q224 Stephen Barclay: And how do you get oversight of potential conflicts of interest?

  Dame Lesley Strathie: Well, I very much hope, first and foremost, that if there was a conflict it would be self-declared and, if not, that our legal team and our governance would pick that up.

  Q225 Stephen Barclay: Right. That's not something you would actually look at. You rely on people self-declaring conflicts of interest.

  Dame Lesley Strathie: I have told you already that I have no role in the settlement of tax cases. Therefore, my job is to make sure that there is a process and that the process is governed. I expect the NAO to oversee that process also. I expect anyone in the permanent secretary or tax line to be working with the NAO on any of our approaches for that. In an organisation the size of mine, I can't do everything personally.

  Q226 Stephen Barclay: I appreciate that. One final thing. In terms of these firms always being major employers, one would understand there being other factors considered in terms of whether to pursue an aggressive strategy. Are you satisfied that this case was judged solely on the legal issues in dispute?

  Dame Lesley Strathie: I have absolutely no reason to doubt that proper process was followed in this case.

  Q227 Chair: It was followed?

  Dame Lesley Strathie: Yes. I have no reason to doubt that at all.

  Q228 Stephen Barclay: Were there no discussions with the company about impacts on jobs or other factors?

  Dame Lesley Strathie: I am not privy to that. I am protected from the taxpayer's confidentiality as well—just as Ministers are. The detail and the discussions are not something that I am privy to.

  Q229 Chair: I am going to move us on. There are two other issues we need to take—I don't know if Members want to raise them. One is debt, which is a much better story you have to tell in your Report. I just wanted to know—we have talked a little about the campaigns and things—in the original NAO Report, you agreed that there would be an October deadline, so you would be able to use campaigns right across all types of debt. Have you stuck to that?

  Jon Fundrey: As I referred to earlier, we have currently got 90% of our debt activity going, following through the campaign approach. The further work on the analytics, etc., and the IT capability that we were referring to earlier—we will continue to enhance that. We anticipate the IT capability being in place from October 2011.

  Q230 Chair: Okay. Have you done any evaluation? Everyone thinks this system works. Have you done any evaluation to look at whether it is really cost-effective?

  Jon Fundrey: Yes, we have, and it is proving to be.

   Chair: Is the rest of the Committee happy on the debt issue? Anyone want to ask anything on tax credits?

  Q231 Jackie Doyle-Price: If you look at the NAO Report, it shows that at the beginning there was quite a lot of overpayment, which you gradually got down. Obviously, those overpayments need to be recovered. The story on that isn't quite so good. I suppose that brings us back to where we started in terms of chasing unpaid taxes. Could you perhaps tell us a little about how you are going to tackle that outstanding overpayment issue?

  Jon Fundrey: Perhaps I can cover that and then Sarah can fill in a bit.

  Tax credit debt has a different characteristic really to the other debt that we face—it is typically small, with 55% of it currently under £500, for example, so it is a lot more resource intensive to pursue. We have successfully trialled debt collection agencies in a number of areas. It would be our intention to use those in the future—looking at tax credit debt as well. Tax credit debt is quite well recovered when we recover it from ongoing payments. Where it is prohibitive under the legislation—for example, when doing it across awards, because we can only recover in a particular award—we have a number of issues on tax credit debt. But the current strategy, which is to focus on the renewals process and bring forward the work, is actually starting to show dividends in terms of preventing the debt occurring at the back end of the process.

  Q232 Chair: Can I just ask something arising out of that? On the PAYE underpayment, you write off anything under £300—why are you not doing that on tax credit?

  Dame Lesley Strathie: The PAYE threshold is a temporary rise, first and foremost. A lot of tax credit debt has indeed been written off. Our strategy on tax credit debt is to pursue payment where payment can be made, so we have written off debt in hardship cases.

  Q233 Chair: I'll tell you why I ask the question. From my constituency case load, my view is that, on the whole, it is poor people who may mistakenly not tell you in time of a change in circumstance, or you may not have adjusted their tax credits in the appropriate time. On the whole, it is people who can't afford to pay back £200 or £300. It seems to be outrageous, if I may say so, Dame Lesley, that people who pay PAYE get their debt written off if it is under £300, but people who are on tax credit debt, who are the poorest, still may have to meet that repayment. It seems to me to be inequitable.

  Dame Lesley Strathie: Some people would argue about whether they are the poorest or not. The issue remains the same: we don't write off debt while there is an opportunity to pursue it. On tax credit debt, we accept that some of it is very old and we have written off considerable amounts of it. We will write off more debt. The balance we have to strike in terms of what's fair, is between those who repay their debts and those who don't. But, in general, we have fewer levers open to us in collecting this debt. We know the older debt becomes, the less likely that is. As we've gone through cleansing the debt generally, we've tackled tax credit debt. We have written off quite a large amount. Equally, we have talked to a lot of customers who have responded to the campaign. The average debt is less than £500.

  Jon Fundrey: We wrote off £146 million last year. If we extrapolate that forward, it's likely to be in the order of £460 million this year.

  Q234 Mrs McGuire: What general principles did you put in place to write off that £146 million?

  Jon Fundrey: Underpinning that is a view of collectability. Also there are circumstances in which we might actually be at fault, and we are therefore correcting that. There's a whole varied list of reasons.

  Q235 Mrs McGuire: How do you distinguish between fraud and error? I think that this is what the Chair was also alluding to. There are some individuals who, if they receive notification from HMRC that this is what they're getting in terms of tax credit, take it as gospel—maybe they shouldn't but, frankly, often they do. They can find themselves, at the back end of the year, with an outstanding debt. Frankly, some of the debts I've seen in child tax credit are significantly more than £500, mainly, although not exclusively, through no fault of the individual concerned. How do you distinguish between what is a genuine error and someone trying to play the system? Do you give them the same sort of sympathy we have been talking about over the last wee while in relation to larger companies?

  Sarah Walker: There are a couple of things happening here. There is genuine error, where somebody has given us some wrong information.

  Jackie Doyle-Price: Or you interpret it wrongly.

  Sarah Walker: I want to go through this, if I may. Somebody may give us—either by mistake or sometimes deliberately—wrong information that we've based an award on. There are other cases where an overpayment arises not because someone has made a mistake, but because they haven't notified us of a change that is relevant to their award, so that at the end of the year they've had too much money because we weren't aware of a change in their circumstance. Where there is an error—there might be an error by HMRC clearly in calculating the award—we don't expect people to be able to understand exactly the calculation of their awards because that can be very complex. Where there is an HMRC error that they couldn't reasonably have been able to spot, we don't expect them to pay back any overpayment that results from that. But it is the nature of the tax credit system that there will be overpayments and underpayments because it is a system of payments on account, which need to be corrected at the end of the year.

  Q236 Mrs McGuire: Will your new system be more sensitive to those changes? Will the new IT—PAYE—system be more sensitive to some of the changes?

  Sarah Walker: Tax credits aren't paid through that.

  Mrs McGuire: Sorry. My fault.

  Dame Lesley Strathie: It will eventually be replaced by universal credit.

  Mrs McGuire: I was thinking of situations that I have had to deal with where, for administrative ease, the local authority has paid six weeks' salary to school dinners personnel and others who are off school for six weeks. That knocks the whole tax credit system to pot. They effectively get a six-week payment in one salary month, instead of it being scheduled out. Fortunately, we have managed to sort that out with the local authority, but not without a lot of anguish among people who receive credits.

  Q237 Ian Swales: I have a question on this. On error and fraud, figure 11 of the Report talks about roughly 9% and £2 billion of overpayments. That has actually got worse since the two years before. You have a target for that to be 5% by March 2011, which is only four months away. How is it going?

  Dame Lesley Strathie: Any of the figures that are in the public domain at the moment, because of the time lag in this, are from before the error and fraud strategy was introduced. You will have to wait some time before you know. However, we are confident that the proxy measures and the interventions that we have brought on board will get us on track. What has been yielded by the work that we have done over the last year and the current year makes us believe that we can reduce losses by something in the region of £2 billion in each year of the spending review. The increase is directly related to much more money being spent on the tax credit system, more families being helped and more generosity in the system than previously.

  Q238 Ian Swales: So what percentage is it? Obviously, as you say, it takes time before you know, but you must have some management information. What running rate do you think you are at now in terms of error and fraud in the system?

  Dame Lesley Strathie: I have to be careful here because we do not have figures that are in the public domain yet. As soon as I say something in this Committee, it will become a statistic. Looking at the past, we were probably in the region of identifying £200 million in this area. I believe that, last year, the figures will probably show about £750 million. I believe that by the time we get to this year it will be about £1.4 billion. I am confident that all of the work we are doing is delivering on proxy management measures.

  Q239 Ian Swales: Sorry, what was that stream of figures?

  Dame Lesley Strathie: Those were the amounts of money that we are actually protecting and identifying. We've moved from "pay now, check later" to "check now, pay later". We are trying to take out error and potential fraud at the front end of the system.

  John Thorpe: Can I help the Committee? That stream of numbers is set out in paragraph 4.17 of the Report.

  Q240 Matthew Hancock: I think we can all agree that the tax credit system has at times been shambolic. We don't need to go over that. In terms of the future, you have prepared a tax credits tactical delivery plan to reduce tax credit debt. It says that by March 2011, you should reduce the debt by £200 million to £4.3 billion. Are you going to hit that?

  Dame Lesley Strathie: Sorry, could you tell me which paragraph that is in?

  Matthew Hancock: Paragraph 4.32 on page R47 states: "In 2009-10, the Department prepared a Tax Credits Debt Tactical Delivery Plan, which was designed to reduce tax credits debt. The plan included objectives to reduce the amount of tax credits debt by £0.2 billion to £4.3 billion by March 2011".

  Dame Lesley Strathie: In the first four months of 2010-11, we estimate that we prevented another £17 million in overpayments entering the system.

Q241 Matthew Hancock: Hold on. The question is about debt; it isn't about overpayments.

  Dame Lesley Strathie: We wrote off £146 million in 2009-10 and plan to write off a further £461 million in 2010-11.

  Q242 Matthew Hancock: I'm reading again: "The plan included objectives to reduce the amount of tax credits debt by £0.2 billion to £4.3 billion by March 2011". Is that on track?

  Dame Lesley Strathie: That is on track, yes[2].

  Q243 Matthew Hancock: Great. The second question is that given the history of this and the difficulties, including with the people who you deal with in the tax credit system, do you think, looking to the long-term future, that this problem will go away when the system is completely reformed?

  Dame Lesley Strathie: Tax credit as we know it, the White Paper says, will disappear. DWP will be administering all of the welfare system apart from child benefit, as I understand it, for the moment. What I'm not clear on is the time frame. Clearly there will be an introduction of universal credit, but massive programmes like this generally have a long roll-out.

  Chair: Richard will ask a question, then I think we'll draw to a close.

  Q244 Mr Bacon: One quick one. Could you say how many forms P800—these are the statements of reconciliation for overpayment and underpayment of income tax—HMRC has issued in the last five years? You may write with a note if you want. How many have you issued in the last five years, and how many are you anticipating issuing between the beginning of September and Christmas this year?

  Dame Lesley Strathie: I'll certainly be able to tell you what we have already issued in the reconciliation exercise for two years and what we anticipate by the end of the year. I shall have to go back and research what the old system could tell us.

  Q245 Jackie Doyle-Price: Just to clarify and be explicit, of the reduction in debt by £0.2 billion, what proportion of that has been achieved by writing off uneconomic debts?

  Dame Lesley Strathie: On the forecast by 2010-11?

  Jackie Doyle-Price: Yes.

  Dame Lesley Strathie: Of course, I can't tell you exactly what we're going to do in the future. We have a target. Are you asking me what we've done this year so far?

  Q246 Jackie Doyle-Price: You've said to the Committee that you're on course to meet that target by reducing the amount of debt by £0.2 billion. I just want to be clear in my mind how much of that's been achieved by writing off uneconomic debt, as opposed to collection.

  Jon Fundrey: As I said earlier, last year we wrote off £146 million. If we continue going forward this year, our forecast is that we'll be writing off approximately £460 million.

  Q247 Chair: I just wanted to conclude with this observation. I think this has been a difficult year, which is why we've had to have two sessions as we've talked about your accounts. I want to put something to you, Dame Lesley. You've had your first two years in post. A lot of this stuff is legacy that you've inherited, and I think we all understand that. As you move forward into the next year—when we come to do this exercise next year—are you confident that having sorted out the PAYE, you will be in a better position to tell us a better story, or are there other things looming on the horizon which could prove disastrous for the taxpayer or for individuals?

  Dame Lesley Strathie: I absolutely believe that we'll be in a better place when we lay the accounts this year, but to go back to what I said, clearing all the legacy issues will take us through to 2012. We'll be giving you a progress report. I absolutely need to be clear that we record in our Annual Report on accounts and my statement of internal control any other legacy issues that we have.

  Q248 Chair: And there's nothing there on the horizon—we're halfway through this year now—that is going to prove yet another disaster area?

  Dame Lesley Strathie: We've focused very much on PAYE. It is an incredibly important system—it is the aorta, and it delivers the money through business, so it's incredibly important—but we are a huge organisation that still manages to bring in £435 billion a year and protect much more. There are many successes that the Department has, as well as the challenges it has from the past.

  Chair: Thank you very much indeed.

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1   Between November 2008 and September 2010, HMRC granted 371,000 'time to pay' arrangements, covering £6.4bn. Back

2   The Tax Credit debt balance was £4.5bn at 31.3.10, but we expect it to be higher by 31.3.11. The current forecast is £4.8bn Back

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Prepared 1 February 2011