HMRC's operation of the PAYE system - Treasury Contents

Examination of Witnesses (Questions 1-123)



  Q1  Chair: Thank you very much for coming at short notice. Given the great deal of press and media interest in this and the widespread concern among millions of taxpayers, I think that that was warranted. What we would like to do today is give HMRC an opportunity to put on the record what seems to have come out in dribs and drabs in media reports to Parliament and give you an opportunity to explain exactly what has gone on and how exactly what appear to be a number of problems are going to be rectified. Therefore, we are today very keen to obtain quite a bit of factual information. Some of it you may not have available, and you could probably send to us afterwards. Before I hand over to colleagues, I have one question for Mr Hartnett. You said on 11 September, "I am deeply sorry that people are facing an unexpected tax bill." What exactly were you apologising for?

Dave Hartnett: My insensitivity in not recognising in the radio interview that people should have had an apology right at the outset from me. I know how to apologise. I have had to do it before. I didn't do it then, and I am deeply sorry about that.

  Q2  Chair: Thank you for that. Were you specifically apologising for mistakes made by HMRC?

  Dave Hartnett: I was specifically apologising for the situation in which individuals found themselves.

  Q3  Chair: Is that any fault of yours?

  Dave Hartnett: I think that we could have done better in helping taxpayers prepare for this. As I said at the time, the reconciliation takes place every year, but we could have done a lot more to explain it.

  Chair: Okay. We'll explore that and how it could have been done better, and how we can prevent this happening again.

  Q4  Michael Fallon: Just for the record, how many people will be affected by overpayments and underpayments?

  Dame Lesley Strathie: Are you addressing that to me?

  Q5  Michael Fallon: One of you must know the answer.

  Dame Lesley Strathie: Sorry, I wasn't clear. Good morning and thank you for the opening remarks, Chair. At the moment, in our latest forecast, we have potentially 1.4 million people who are affected by underpayments of taxation and we have over 2.5 million people who are receiving refunds of taxation.

  Q6  Michael Fallon: So the total is nearly 4 million. Is that right?

  Dame Lesley Strathie: No, sorry, 4.5 million and 1.4 million. Nearly 6 million are affected. My mistake.

  Q7  Michael Fallon: What proportion of those people relate to the last year and to the year before that? What is the breakdown?

  Dame Lesley Strathie: I'm not sure that I can give you the breakdown because the two years' payments are contained in all the figures that we have presented, so that people understand the totality of the two years that are being reconciled.

  Q8  Michael Fallon: Why wasn't a reconciliation done in the first of those two years?

  Dame Lesley Strathie: Reconciliation wasn't done last year because we were moving from the old system, which was on 12 regional databases, to the new national insurance and PAYE systems. There was an integration of a system that has been with us since 1985 and had around 45 million records on it, and we had to bring on the new system. Many of you may remember the problems we had with all of the old data into the new, and multiple annual coding notices being issued. Because of that work, we concentrated absolutely on getting the annual coding fixed and testing all of the NICs part in the next release of the system. Indeed, all of the people involved in managing that process would have the same resources involved in reconciliation. That is why it's two years—and we are moving to automating it rather than it being a manual process.

  Q9  Michael Fallon: Okay, but at that point what was the estimate of the number of people who would be affected by under and overpayments? Was it 6 million or was it a lower figure?

  Dame Lesley Strathie: If we put it in the context of—

  Q10  Michael Fallon: What was the estimate you made at the time?

  Dame Lesley Strathie: We would have estimated it based on the latest year that we had—

  Q11  Michael Fallon: What was the estimate?

  Dame Lesley Strathie: If you would let me answer about the information. Depending on any changes that have taken place, each year produces a different number of cases to be reconciled. If I take the latest year prior to this, we had roughly 11.1 million, or 11.2 million[1] of unreconciled cases, so you then work, as you go through that, in terms of how many would be under and how many would be overpayment—what you will recall as open cases. We base it on that, plus all the other information that is added on. I think that, in all the numbers, we have tried to prepare for the worst-case scenario. In the first batch that we have done in testing all of this, those facing underpayment of tax and therefore due money will be slightly less.

  Q12  Michael Fallon: Sure, but what I am trying to get at is, did you know a year ago that the numbers would be of this order, that this reconciliation exercise would affect nearly 6 million people?

  Dame Lesley Strathie: We knew that every year with PAYE and every payment on account system, there is a reconciliation. It is difficult to say what the number was, but I think this is much less—if we take the two years together, it is less overall in any one year than we would expect. Until we actually took all of those old records from all those years and all of the information in them from the 12 regional databases, it is actually quite difficult. Remember, in the system, we need the employer to tell us the right information, pension providers, payroll providers, customers. It was difficult to know what was going to be different this time.

  Q13  Michael Fallon: Okay. Just for the record, what do you think the total value of these over and underpayments will be?

  Bernadette Kenny: We estimate that 4.3 million taxpayers will receive repayments worth £1.8 billion, with an average overpayment of £400, and at the moment, 1.4 million will be asked for an underpayment worth a total of £2 billion, with an average value of £1,400.

  Q14  Michael Fallon: So the total is £3 billion. Is that right?

  Bernadette Kenny: It is £1.8 billion—

  Michael Fallon: Plus two.

  Bernadette Kenny: Plus two, but they're apples and pears, because one is over and one is under. But yes, that is the total tax effect if you put it that way.

  Michael Fallon: Thank you.

  Q15  Mr Umunna: I would like to ask practical questions about notification of individual interest. May I ask you a general question, Dame Lesley? Is your organisation fit for purpose?

  Dame Lesley Strathie: Yes, HMRC is fit for purpose.

  Q16  Mr Umunna: Can you understand why people watching and listening may think that it is not fit for purpose?

  Dame Lesley Strathie: I can understand, given the number of customers we serve, both individual and business, and when something is portrayed in the media as a mistake, that people lose confidence in my work force. The first thing that I would like to put on record is that this is annual reconciliation. We have huge empathy for people who face underpayments and who will have tax to pay, and we will do all we can to make that as easy as possible. But I want to put it very clearly on record that these are not mistakes of our work force. PAYE—pay-as-you-earn—as a tax broadly works for the vast majority of customers.

  Q17  Mr Umunna: Okay. On the notification of individuals affected by this, how many have been notified that they have been either underpaying or overpaying so far?

  Dame Lesley Strathie: At the moment and at the start of communicating with people and with all of our partners, we are working on a very controlled number to test the entire end-to-end process and customer reaction. We have gone through about 45,000 notifications and the first 14,000 people have cashed their payable orders for the refunds they have received. It is quite unfortunate that we have failed in this story to make the point that 4.5 million people are going to receive a cheque before Christmas.

  Q18  Mr Umunna: So that's 45,000 out of about 4.5 million.

  Dame Lesley Strathie: Yes.

  Q19  Mr Umunna: When do you expect to complete the process of notification? There are a lot of notices to go out.

  Dame Lesley Strathie: We would want, from this exercise, the bulk of those to be out, as I say, before Christmas. The impact of them is from next April. Remember that these are not demands for a payment; these are assessments of the tax that you have paid and the tax that is either overpaid, whereby a cheque follows, or underpaid, which will be coded out during the 2011-12 tax year. Indeed, in cases where there is a substantial underpayment of tax, we would consider coding out for a much longer period.

  Q20  Mr Umunna: The thing is that this creates considerable uncertainty for many of our constituents. You are looking at about three months and saying that you might complete this before Christmas, which is a wonderful time when people's expenditure shoots through the roof. Is there any way that you can speed this up? I don't know whether it would be possible for HMRC to increase the number of people working there to speed this process up.

  Dame Lesley Strathie: I don't think that the point is about the number of people, because, as I said, this is an automated process. What we are doing, in line with best practice, is testing every element of the technology and the whole end-to-end customer journey and process. Going back to the points that I made earlier about data and the fact that, often, error can come from anybody in the process, we want to make sure that everything works. This is what we would refer to as a very controlled ramp up: we test 15,000 and once we are satisfied that everything works and we manage the customer service that we want to give, we will roll out the rest of it. We will take that decision around 21 September.

  Q21  Mr Umunna: So it is possible that this could be speeded up, provided you have the right systems in place. Some of these reconciliations date from two years ago. How can you be sure that you have the correct addresses for people, given that this is over a long time frame?

  Dame Lesley Strathie: Bearing in mind that pay-as-you-earn is an annual tax and we are rarely in touch, we do rely heavily on employers, payroll providers and pension providers to give us that information. We also rely on individuals to give us that information. In most cases, that works. Generally, the proportion of post we get returned because people are not at that address is in other areas of business where we may have had no reason to write to them for years, but everybody gets an annual coding notice.

  Q22  Mr Umunna: Can I finish up by asking you about interest payments? I must say I find it quite extraordinary that people who have underpaid over this two-year period who don't know they have underpaid may be charged interest. Is that correct?

  Dame Lesley Strathie: Interest is quite complex in the system as it exists at the moment. To start with those who have underpayments of under £2,000, they will immediately be adjusted in future tax codes, and there will be no interest charged. As we stood in the past, for people who had in excess of £2,000 to pay—remember, this is a regular part of process for many people—interest would be payable after around 30 days. I am very pleased to be able to say here—

  Q23Mr Umunna: Sorry, Dame Lesley, hang on just a moment. I can guarantee that most people around this table are going to have people coming into our surgeries saying, "Why should I pay for the mistakes of HMRC?"

  Dame Lesley Strathie: I go back to the issue around mistakes. I will come to interest in a minute, and I will say what we're going to do about it, particularly for those over £2,000. PAYE is a payment on account, and your tax code should represent the best information we have in notification. We adjust your code based on that information. When people have more than one source of employment, then it requires the customer to be involved in that process of knowing the rate of taxation. The reason that interest is normally payable on any debt is that we write to people and give the assessment, and then we give them time to pay. Then, if it's not paid, we would normally put debts of that level into our self-assessment process, and we would charge interest. Ministers have asked us to put in place a new process where, if anyone who receives this form, the P800, has more than £2,000 of tax to pay, the notification will tell them that we will write to them about arrangements to pay and agree with those customers how to pay. Where those people need time to pay, they will not be charged interest.

  Q24Mr Umunna: So the answer I have to give people in my surgeries is, "That's just the way it is if you have to pay more than £2,000"?

  Dame Lesley Strathie: No, I'm saying you won't have to. The notification will ask you about payment and will tell you to get in touch. People will pay that money without interest. If people don't get in touch with us and ignore the debt, then normally, interest would kick in at specific points. What we are urging through this is that people get in touch with us, and if they need time to pay, they won't be charged interest.

  Q25  Chair: You are making a further concession here, aren't you?

  Dame Lesley Strathie: Ministers have asked us to put that process in place.

  Q26  Chair: And you're announcing that now, aren't you?

  Dame Lesley Strathie: I am.

  Q27  Chair: Would you have been announcing it had we not had this fracas?

  Dame Lesley Strathie: I shall invite Mr Hartnett to say anything he wants to say from a tax technical perspective. The issue is that we as the Revenue collectors need to get the money in. The vast majority of people pay their tax and pay it on time. Generally, over the years, interest and penalties have been applied to those people who don't pay their taxes on time, but I think you only have to look at our record in responding to the recession, and the time to pay arrangements we put in place for business to support so many businesses with time to pay. That's a normal part of business when we have exceptional circumstances.

  Q28  Chair: You've just told us that Ministers have asked you to make a concession. When were Ministers first informed that 6 million people were going to be caught up in all this?

  Dame Lesley Strathie: Bernadette, can you answer that please?

  Bernadette Kenny: A formal submission went to Ministers at the end of July this year.

  Q29  Chair: What response did you get?

  Bernadette Kenny: We had a discussion with Ministers. We talked them through the plans we had for managing it.

  Q30  Chair: And they didn't see anything amiss?

  Bernadette Kenny: No.

  Q31  Chair: What contact did you have with them once these notices started going out and the public concern was aroused?

  Dame Lesley Strathie: I don't think you would expect any of us to divulge any of our ministerial conversations. I would start by saying—

  Q32  Chair: I am only asking for information about contact, not what was said. You have already, incidentally, told us what has been said in one of those conversations—

  Dame Lesley Strathie: Yes, I was going to say—

  Chair: Which is the concession.

  Dame Lesley Strathie: The Minister has made a statement and we have had regular conversations about the way this story has been presented in the media. Any conversation that we had with Ministers about what we were doing was about moving the accuracy of the tax system forward, dealing with the well-documented legacy of many years—open cases and problems—and the fact that 4.5 million people were going to receive a refund because they had overpaid.

  Q33  Chair: Maybe I will make the question more specific. Have Ministers had you in to discuss the "Money Box" interview, Mr Hartnett?

  Dave Hartnett: No.

  Q34  Chair: And what conversations have you had with them about that?

  Dave Hartnett: I have personally apologised to Treasury Ministers for the way I handled the opening question of the "Money Box" programme.

  Q35  Chair: Just to be clear, we are saying, aren't we, that if we hadn't held this hearing, there probably wouldn't have been the concession you have announced at it?

  Dame Lesley Strathie: I'll let Mr Hartnett respond to that.

  Dave Hartnett: Chair, can I just say something about self-assessment and then answer your question? I will be very quick. Self-assessment was constructed so that interest ran automatically and there were regulatory penalties. What I mean by that is a flat £100 penalty for certain failures, and there were surcharges. It was constructed like that to provide disincentives for people not to file and, if you like, incentives to file. What came through in advance of the "Money Box" programme, but clearly in the "Money Box" programme and then in subsequent media issues, was that there was a disparity between the treatment of those with less than £2,000 to pay and those with more than £2,000 to pay. We worked hard on that to find a method of returning parity between the two sets of taxpayers. That is why the concession that Lesley described has been introduced, so that basically both can have time to pay, both are in the same position in relation to interest, and only those who will not engage with us and have more than £2,000 to pay will pay interest. They will have to be put in self-assessment if they won't engage with us, because it is the only way to deal with the matter.

  Q36  Chair: So what was the answer to my question? I didn't quite catch it. Would there have been an announcement—the announcement that you have just made today—had we not called you before us?

  Dave Hartnett: I think we would have got to that position in the way we have delivered what I call the controlled ramp-up—the pilot, if you like. We would have got to a very clear understanding of that disparity.

  Q37  Chair: I hope you understand that to the wider public it looks as if you have groped your way to a position that is plausible, explicable and a little fairer, not that you are ramping up to something in some logical controlled way. The fact that you have announced it today does look like a direct response to public pressure to do something that is going to be perceived as, and is, fairer. Am I being unfair in coming to that conclusion?

  Dave Hartnett: I think that may be a little unfair in a sense, Chairman, because we have made it clear recently that we are going to learn from this process, which is why we have taken 45,000 cases before doing others. I think there will be other learning. Another piece of learning is that, in the form that asks for payment, the P800, the notes are not good enough and we are in the process of changing those notes to make them even clearer. We are working with groups who support the vulnerable and low-income taxpayers, particularly to get those notes right. That's just another example.

  Q38  Andrea Leadsom: I would like to go back again to setting the record straight because, Dame Strathie, when you talked about the number of outstanding cases, you also mentioned a number of other outstanding—open—cases. So I wonder if you could just clarify for the record how many cases predate these two-year 6 million cases. Are others still outstanding prior to that date, and what will you be doing about those?

  Dame Lesley Strathie: We have approximately 17.9 million. That's been documented in our accounts and with the previous Committee.

  Q39  Andrea Leadsom: That is in addition to this current 6 million?

  Dame Lesley Strathie: Yes. If we think about PAYE as a process, because the way in which people live their lives and the population has changed, more and more people each year don't simply have one employer and one single source of income. So when reconciliation has taken place, it has always been a manual exercise that has involved trawling through all of these cases. As we introduced the new system, we closed down the old system, and we have that declared number of cases. Once we are through this process and are absolutely satisfied with the reconciliation process, there should not be the creation of those cases in the future or there should be a very small number of them. We are currently working through plans on how we clear each of those cases, and we have an ambition to clear them by 2012.

  Q40  Andrea Leadsom: And that's the 17 million open cases?

  Dame Lesley Strathie: 17.9.

  Q41  Andrea Leadsom: You want to clear them by 2012?

  Dame Lesley Strathie: That's our ambition.

  Q42  Andrea Leadsom: Okay, and will those then be dealt with along similar lines to those Mr Hartnett has just outlined for the 6 million cases?

  Dame Lesley Strathie: I think, suffice it to say, everything we have done through this exercise will feed into the final details of how we handle those cases. We are actually working through that at the moment. We would be happy to keep the Committee informed on that.

  Q43  Andrea Leadsom: Thank you. And of those 17.9 million cases, how old are the oldest ones? What sort of date range are we talking about?

  Dame Lesley Strathie: I think we are mainly talking 2007-08—no sorry, 2006-07.

  Bernadette Kenny: We have open cases going back to 2006-07. Yes, we are essentially talking about 2006-07 with these cases.[2]

  Q44  Andrea Leadsom: So how did that enormous number of cases build up in such a short period of time?

  Dame Lesley Strathie: If I can go back to one of my earlier responses, in the year before that, we were talking about roughly 11.2 million unreconciled cases[3]. PAYE can only pick up on things that we know about at the start of the tax year or are informed about during the year. If something happens towards the end of the tax year, clearly it's not going to reconcile if we are only notified. Employers notify us on an annual basis and therefore when it comes to light that someone has some other source of income, that has to be dealt with and reconciled. Some 17.9 million is a big number. It sounds a very big number, but when you look at it in the volumes we are dealing with—around 40 million cases—roughly 80%-plus of our entire customer base reconciles, because we have all the information for them. There will be and has always been a growing number of cases where it does not reconcile.

  Q45  Andrea Leadsom: So can you give us an idea of what percentage of all taxpayers are affected by now having a reconciliation problem of some sort or other?

  Dame Lesley Strathie: If I go back and start at broadly 80% of people in relation to whom PAYE operates, you can expect at the end of any year total reconciliation. If we take the broadly 6 million that we have—that we've talked about already—and we take all the other cases that are a bit more complex and we work through them, we believe that the vast majority of customers will have a reconciliation at the end of this process.

  Q46  Andrea Leadsom: Can you give me an idea of the percentage of taxpayers who are currently affected and are likely to receive some sort of reconciliation?

  Dame Lesley Strathie: Are you talking about the backlog?

  Andrea Leadsom: I'm talking about in totality. As we sit here today, how many of the taxpayers of this country are going to get a demand for tax or a credit for tax?

  Dame Lesley Strathie: The short answer to that is we don't know because we've not finished the testing and we've not finished the process. As I say, in each wave we are making sure that we are satisfied with the information we've got, and we go through it. But I think that at the moment we're expecting broadly about 15% of people will receive a refund and 3% will have an underpayment.

  Q47  Andrea Leadsom: Okay. Thank you. One last question: what percentage of people, according to your forecast, have themselves made an error leading to this end-of-year reconciliation, and what percentage are errors due to record keeping and so on at HMRC? What percentage is the customer's fault?

  Dame Lesley Strathie: The short answer again is that we don't know because you have to make an assumption that everyone understands the tax that they ought to pay. I will give one example. You have two sources of income, your tax code has been offset against one and the other one has been emergency coded at 20%. Those two things haven't been brought together by any employer or customer in the past, but the totality would move you from one rate of taxation to the other, so there is a non-reconciliation and an underpayment of tax. As to whether that is a customer error, a different answer would probably develop depending who you spoke to. We do get errors, from human beings anywhere in the system. An employer might transcribe a number and there is an automatic feed-in to the system so that will then produce an erroneous calculation, and that is why I say that we need the employer, HMRC and the customer in this loop. What is much better is that this will make everything more accurate, and it also means that we have an individual customer record for every customer, rather than an employer-based record, as in the past.

  Q48  Chair: I can't say that I'm on top of these P800 forms. I just wonder if you could tell us how these notes aren't good enough.

  Dame Lesley Strathie: How they're not—

  Chair: How the P800 is not good enough. You're redoing them, aren't you? The P800s, you said earlier.

  Dave Hartnett: Perhaps I can pick that up. What we have found as we've sent out some is that people have come back to us with questions. Representative bodies have come back to us with questions. Most bodies have seen these before, and in the practical live running more issues have come up. As I was saying, that is what we were hoping to learn out of doing 45,000 cases first—how this would run in live. Those are the sorts of issues—where the wording is not clear, or where people have found it ambiguous.

  Chair: Okay. Perhaps you'd send us the old form and the new one.

  Dave Hartnett: Of course.

  Q49  Mr Umunna: This is where it starts going back to the interest issue. What rate of interest is going to be charged, to the extent that any is applied?

  Dame Lesley Strathie: The standard rate.

  Q50  Stewart Hosie: Mr Hartnett, I would first like to welcome the comments that you made at the beginning—I think that was helpful—and also the comments that, Dame Lesley, you made earlier about having empathy with taxpayers. I am pleased that there is the £300 disregard; that's useful. Will those people who are due to repay less than £300 get a letter telling them that?

  Dame Lesley Strathie: No they won't. They won't receive anything.

  Q51  Stewart Hosie: Do you know approximately how many cases that might be?

  Dame Lesley Strathie: About 900,000.

  Q52  Stewart Hosie: The reason I ask about the letter is that there is an extraordinary degree of anxiety out there. Given that there are 6 million people, or thereabouts, who have underpaid or overpaid, would it not make more sense, once you have completed the reconciliation, to write to everybody, whether they are due or not, so that people are not sitting anxiously waiting for a letter that may well never come, because their tax affairs are right up to date? Is that not a possibility?

  Dame Lesley Strathie: We have taken a great deal of action to let everybody know that unless you receive a P800, you have no reason to contact us at all. There is a great deal of anxiety. I deeply regret that. We all regret that. Our aim was to start working with our partners in the media to brief them on our plans for a controlled way and to communicate, not to have a story that suggested that at least 6 million people owed us money.

  Q53  Stewart Hosie: I understand that, and I certainly understand from the Minister's statement last week that the communication will only be by letter, and unless you get one, do not contact the tax office unnecessarily. I understand that, but I am trying to make sure that people in senior positions in the Revenue understand the anxiety out there was such that—instead of people sitting and waiting until Christmas, when the letters are due to finish going out—it might be better to write to everybody, whether they have an underpayment or an overpayment or their affairs are in order. Is that not sensible?

  Dame Lesley Strathie: It may be sensible, but I don't actually think that it is feasible, because we have automated a process and we have the feeds from all the sources of income going into a customer account, and as each of those goes through in the roll-out, it will produce the outcome. If you consider that we are talking about millions of letters, my personal view is that we would confuse, and we would risk more human intervention and greater error.

  Q54  Stewart Hosie: Okay. In terms of the 900,000 who are likely to have the debt disregarded, what will the total amount collected be?

  Bernadette Kenny: The disregard for the 900,000 amounts to £160 million.

  Q55  Stewart Hosie: And the total to be collected is about £2 billion?

  Bernadette Kenny: Collected from?

  Stewart Hosie: From those who have underpaid.

  Dame Lesley Strathie: £2 billion.

  Q56  Stewart Hosie: As a final question, did the Revenue or the Government consider waiving any of this other debt when they came to the £300 disregard figure?

  Dame Lesley Strathie: I think it's important to put the £300 in context. We have a standard disregard of £50 within the PAYE system. When we were looking at the totality of this exercise—as the executive committee and the commissioners of Revenue and Customs were considering this in the planned exercise—we had to look at several factors, including all those people who have already paid the right tax and being fair to the entire tax base. We had to look at the cost-benefit analysis of the cost of collection, and we had to look at our capacity to serve customers who want to talk. Any communication we have with our individual customer base will result in between a third and 40% of customers contacting us for reassurance. That was when we took the decision, supported by Ministers, that £300 was an appropriate balance between the cost of collection versus the revenue that would be lost and customer service. In everything that we do in Revenue and Customs, we look at maximising the revenue flow, but also at the cost of doing that and the customer service that we are aspiring to deliver.

  Q57  Chair: Just to be clear, though, when you said earlier that you had a plan to put this to the media and discuss this problem with them, it isn't just a media failure is it? It is also costing money. We are just hearing how much the mistakes that you've made are costing. Again, how much is your estimate of the cost to the Exchequer of the £300 disregard?

  Dame Lesley Strathie: £160 million.

  Q58  Chair: And how much is the concession that you have announced today costing?

  Dame Lesley Strathie: I don't think we know the answer to that, because it is interest over a period of time.

  Q59  Chair: So you've made a concession without knowing what it is going to cost.

  Dame Lesley Strathie: No, we will know. I just can't tell you that here.[4]

  Q60  Chair: Okay. Perhaps it would be helpful to have an estimate of the cost of managing the fallout from this crisis, because that seems to me something that can reasonably be laid at the door of HMRC.[5]

  Dame Lesley Strathie: Before you move on, I think that Mr Hartnett would like to add to that. I would also like to say that I would not suggest for one minute that the media would consider this a failure. I think that the media have had many column inches from this.

  Q61  John Mann: Well, the media—but I just wanted to be clear about the concession you made. Are Ministers aware of it?

  Dame Lesley Strathie: Are Ministers aware of what?

  Q62  John Mann: Are Ministers aware of the concession you made this morning?

  Dame Lesley Strathie: Yes, Ministers have asked us to put that process in place.

  Q63  John Mann: That came from Ministers. You said, Ms Kenny, that the formal submission to Ministers was made at the end of July. What about the informal one? When were Ministers first aware of this?

  Bernadette Kenny: Some weeks before; I cannot remember exactly how many.

  Q64  John Mann: Some weeks before. Was it early in July, or in June or May?

  Bernadette Kenny: I can't remember.

  Q65  John Mann: Some weeks before, so while Parliament was still sitting Ministers were aware. Were you aware, Dame Lesley, of the nature of the problem? Were you warned about it over the last couple of years?

  Dame Lesley Strathie: Well, I can say that since I arrived in Her Majesty's Revenue and Customs in November '08, the new national insurance and PAYE system is something that I have constantly overseen at each stage.

  Q66  John Mann: But have you been warned by lots of people about this problem looming?

  Dame Lesley Strathie: Those are your words in terms of "problem looming". I was aware that in any year there would be a large number of cases to reconcile. I was aware that we were not able to reconcile last year as we introduced the new system, and that we would work through two years' reconciliation and that the numbers would flow from that. Yes, I fully understood that we had two years' reconciliation to do and we were automating it for the first time.

  Q67  John Mann: Weren't you made aware by staff, particularly when local tax offices were consulted for closure, which I think was in 2008? Weren't you aware then that a lot of representations were made when discussing the closure of local tax offices about the problem of transition to computerised systems of this nature?

  Dame Lesley Strathie: I am trying to draw the linkage between the office closure and the computer system. The computer system that we have, like any implementation, has its teething problems. Not everything has gone right with it, not everything has gone the way that I would have wished. Lots of our staff have been very vocal about particular problems with the IT. I am just trying to make that linkage to the office closures.

  Q68  John Mann: When the office closures were being discussed, and you appointed staff to oversee the consultation of office closures, weren't there lots of submissions that precisely this kind of problem would occur as a consequence of local tax office closures?

  Dame Lesley Strathie: I can't answer that—perhaps one of you can.

  Dave Hartnett: Maybe I could make one comment, and I will try and do it quickly in case it is not helpful. I think that some of the submissions that came to senior management in the Department raised issues about service, but this is a centralised new computer issue, which we have been dealing with centrally.

  John Mann: While closing your local tax offices.

  Dave Hartnett: But I'm not quite clear how the service from the local office was going to help this new centralised process.

  Q69  John Mann: No, let me tell you what the submissions said. I made one, I met your people and I saw very large numbers from my area. They said that the loss of people who had local knowledge of the firms and direct contact—the fact that people could contact their local offices—would lead to this kind of problem. That was my submission to you. That was very many from my area. What I am asking is: knowing that in 2008, why didn't you heed those points? Or perhaps that's a question for politicians.

  Dame Lesley Strathie: I still can't make the linkage between these two issues.

  Q70  John Mann: In that case, because your staff can make the linkage even if you can't, let me ask you about the numbers of staff you have and staff morale. I recall seeing a survey on this Committee in the last Parliament. I suggested to the Minister at the time that you have the lowest morale of any organisation anywhere in Britain. You've been closing offices and reducing staff, and you have very, very low staff morale. You're dysfunctional, aren't you? Is there another organisation with such low staff morale? Isn't this the core problem that your organisation has? You've got previous, haven't you, with the tax credits? Isn't staff morale and bad reorganisation at the core of the problem?

  Dame Lesley Strathie: First of all, we recognise that we have very low staff engagement. We recognise the things that our work force are unhappy with. My work force do a very good job, and I would also say that all our engagement work with them in understanding all of that leaves us in no doubt at all, on a segmented basis, with all of our employees, that they put a high value on the work that they do. They are incredibly dedicated to the work they do, and many of them do a very tough job for this country. I think it is pretty demoralising if you look at the amount of change the organisation has had to go through, but at the end of the day, the job has changed. Technology offers much more efficient ways of doing the job. I've already made the point that the old system of people having tax records in different parts of the country, which were employer-based and local, was part of the problem that this new system solves. We now have an individual account for every customer. That allows us to give people more accurate codes. More people will pay the right tax at the right time. That's why I talked about the linkage for the offices. The majority of our customers engage with us through the telephone and through electronic channels. We still provide face-to-face services in all the major towns we are in.

  Q71  John Mann: My final question, then, is: considering your problems on this, and then on tax credits previously, which was an equally big disaster, will you be able to cope in the next four years with fewer staff?

  Dame Lesley Strathie: It is my job as the chief executive to ensure that the organisation has the resources to do the job that's required—to maximise the revenues and deliver that service. The spending review, when that's announced, will tell us what resources we have.

  John Mann: But I'm asking you whether you will be able to cope with fewer staff over the next four years.

  Dame Lesley Strathie: Yes, I believe we will. I believe we will be able to do that.

  Q72  John Mann: Is that shared by Mr Hartnett and Ms Kenny? Do you believe that you will be able to cope with fewer staff, delivering the service so no one has to see or hear of you again—with respect?

  Dave Hartnett: Yes, I agree with Lesley.

  Q73  Mr Mudie: No, but ask the question, John. How would you define not coping? We've had the tax credits. It's still running. We now have this debacle. Do you think you're coping?

  Dame Lesley Strathie: I haven't come briefed to talk to you about tax credits in any numerical sense, but I can say that there is much evidence to show that tax credits are in much better shape than they have been in their long history.

  Mr Mudie: No, that's not the question.

  Dame Lesley Strathie: But tax credits seem to be brought back into the conversation.

  Q74  Mr Mudie: The young mother out there who is facing a big bill and the people who get these letters dropping in don't think you are coping. Are you saying to them that you are? You are saying to us as a Committee that that is your definition of coping.

  Dame Lesley Strathie: I don't think coping is good enough. My ambition for HMRC—

  Mr Mudie: No, but that's words. We're asking specifically whether you think you're coping. Is this coping?

  Dame Lesley Strathie: I think it's actually—

  Q75  Mr Mudie: So the public are going to have to put up with these episodes and you are serene in your job, because that is your definition of coping. What if we have a different definition of coping? What do you do then? That is what we are asking. Apologies are easy—we saw that with the bankers and they have already forgotten about it. You can give an apology and then that's it—finished. But people are being harmed all over the country by this and we look to you and say: "What are you doing?" It is not about staff, you are the managers and you are being very well paid to do the job—more than the Prime Minister, I believe. Do you think that we should put up with this?

  Dame Lesley Strathie: You start with a position. Coping is not my word; the people who work in HMRC do more than cope. If you look at our last published figures, you will see that we bring in £435 billion, and every day we bring in £1.1 billion and pay out £98 million successfully. Yes, there will always be peaks, particularly when people are anxious because there is extra pressure on our contact centres. There will always be peaks as we move resources around between one place and another. I do not believe that there is anyone in HMRC who wants to do anything other than prioritise our work to give the best service that we can within the resources that are made available to us. I go back to the system that we are talking about here. This moves HMRC, and taxation and customer service on quite a long way. But it is difficult to move from the old to the new on something of this volume without having to cope with pressures as you do so.

  Q76Mr Mudie: So this is the service that we, as the British public, can expect. You are content with it. It is okay.

  Dame Lesley Strathie: I have not said that anything is okay.

  Q77  Mr Mudie: Well, what do we do?

  Dame Lesley Strathie: I have said that this will give us the technology, the system and the opportunity to get more tax codes more accurate and more customers paying the right amount of money on account. Any system on account will have to reconcile. What we are trying to do is minimise the number of people who have overpayments or underpayments at the end of that year.

  Q78  John Cryer: Do you have any plans in the pipeline for any job cuts—any reductions in the work force—for HMRC?

  Dame Lesley Strathie: At the moment we are planning for the next spending review, as is every other Government Department. Until the Government announce the outcome of the review, I cannot answer that.

  Q79John Cryer: No, I am talking about right now. Have you got any plans to cut the work force now?

  Dame Lesley Strathie: We have been, for many years, reducing the number of people in our work force. We have also been moving lots of our work force from one area of the business to another as the challenges change.

  Q80  John Cryer: That was not the question. I am asking if there are any plans right now, at HMRC, to reduce the work force? A year from now, will the work force be smaller or bigger than it is now?

  Dame Lesley Strathie: Based on history and on what I know about the system, I would expect it to be smaller rather than larger, but different.

  Q81  John Cryer: I accept that it will be different, but you are saying that it will definitely be smaller.

  Dame Lesley Strathie: I anticipate that, based on everything that I know today.

  Q82  John Cryer: Considering what has happened in the past few months, do you think that the public will have confidence in a smaller work force?

  Dame Lesley Strathie: I cannot speak for the public.

  Q83  John Cryer: We have to.

  Dame Lesley Strathie: Yes, but I cannot. We speak to them and we independently ask them about our service. Although a large number of people may, at any one time, have difficulty in getting through to us first or even second time on our telephones, all of that independent information tells us that the vast majority of customers who deal with HMRC are very satisfied with the service that they get from our work force.

  Q84  John Cryer: That may be the case, but we are talking about a very high proportion of taxpayers who will be affected by what is happening now. A high proportion of those will be facing relative financial difficulties. Apart from the concessions you mentioned, are there any other plans, or are you looking at any other measures that would help those people on low pay who are facing financial difficulties and who are suddenly facing an underpayment?

  Dame Lesley Strathie: We will listen with empathy to anyone who has hardship and look at how best to handle their case, so instead of coding out over the 2011-12 year, we will code out over two or even three years, if that is required. We are also pointing people towards the Department for Work and Pensions. If anyone on an income-related benefit such as pension credit, income-related jobseeker's allowance or employment and support allowance—we have worked closely with DWP on this—finds themselves in an underpayment situation, they should check whether there is any underlying eligibility for welfare benefits. We are working with all the representatives of those customers on how best to deal with them.

  Q85  John Cryer: Okay. I have just been passed helpfully by my colleague the National Audit Office "Report by the Comptroller and Auditor General" for 2009-10. Paragraph 2.8 states: "The new Service also offers efficiency savings. In its business case the Department planned to reduce the number of staff engaged on PAYE processing by the equivalent of 2,034 full time posts. Overall, based on its revised business case, the Department expects to save around £532 million over five years, and to recover its investment of £389 million by 2013." Reducing by more than 2,000 posts is a massive jobs cut, is it not?

  Dame Lesley Strathie: Do we have the number of posts we have already reduced?

  Bernadette Kenny: Since 2005, by 12,500[6].

  Q86  John Cryer: So you have already reduced by 12,500. We are in this situation with all these problems, and we are looking at another 2,000 going.

  Dame Lesley Strathie: The nature of getting the revenue in has changed. Over that period, as you mentioned, there has been a huge amount of investment in enablers. We do many parts of the job very differently. We have much greater technology, and our risk-based approach for dealing with compliance, potential non-compliance or evasion. We have just talked about all of the process as automated rather than manual, so the work has changed. I do not think that anyone in this Committee would expect me to increase the costs of delivery rather than seek the most efficient way to deliver.

  Q87  Chair: I hope this does not sound below the belt, but, frankly, when you say, "We speak to our customers," of course they will be writing letters saying, "Yes, but only if we can get through." That is part of the problem.

  Dame Lesley Strathie: I think we have always been very clear and very public with our performance on telephones, and we seek to continue to improve it. Nobody ever talks about the times when performance is going pretty well. We have been watching and monitoring all the performance on our taxes helpline as we test this approach, and 3% to 4% of the calls are from people with P800s. We have a 3% to 4% effect of people who have been worried by the coverage but who do not need to worry; they phone up and that puts on a bit of extra pressure. However, over the last few days, we have answered around 85% of call attempts to our taxes helpline, and we aspire to continue to do that.

  Q88  Chair: Just to be clear, when you talk about low staff engagement, what you mean is low staff morale, is it not?

  Dame Lesley Strathie: Well, we could have a philosophical debate as to whether they are the same thing.

  Q89  Chair: And the truth is that low staff morale is leading to some of your staff acting in an unprofessional manner and talking to journalists and politicians, in breach of their contractual obligations. Are you launching any leak inquiries?

  Dame Lesley Strathie: No. No, I am not. That was one member of staff. Our work force knows and is regularly reminded that that breaks the code of conduct. That was one person giving their views and clearly, if we knew who that person was, we would take the appropriate disciplinary action.

  Q90  David Rutley: The Chairman has talked about the customer experience, and I am pleased that you talked about the work you have been doing on the customer journey, which is obviously pivotal in going forward. There are issues around staff, but I want to focus on the customer for a minute. How would you rate the customer experience based on the journey that you have mapped out, on a rating of one to 10?

  Dame Lesley Strathie: I would have to segment my customers, because the strategy that we have developed in HMRC is—

  Q91  David Rutley: Let me help you. How about focusing on PAYE customers?

  Dame Lesley Strathie: Yes, but if we took PAYE as a process, around 51% of our customers tell us, or we know through our research, that they are willing and able to pay. They can comply with the process and we virtually never hear from them. You then go on to those who need a little help, right through to those who we believe always need help. The approach that we are trying to develop is based on that customer research and customer insight, so that we can focus our resources on those who most need the help, and readjust our resources for them. Hopefully, if we improve our whole process and our products, more people will move from "needs help" to "willing and able". That has to be our ambition.

  Q92  David Rutley: Sorry, but can we focus on my question? As chief executive, how would you rate that customer experience, based on the work that you have done on the customer journey? That work has been done on a proper basis and it must have been scored. Where do you stand right now?

  Dame Lesley Strathie: When we have completed the end of this reconciliation, and we go into next year's annual coding, we will be able to answer that question for the PAYE customers, in terms of numbers and where we are. I think—and this is a personal view—that most people in PAYE accept that their employer will handle their experience, and that their tax code will broadly deliver the right tax.

  Q93  David Rutley: So, are you satisfied? Would you give yourself 10 out of 10?

  Dame Lesley Strathie: No, nothing like 10, but I'm not going to score myself. I would much rather that others did that. For over 80% of the population, it works and most people will not even contact us, or if they do, they are satisfied. For people who have more than one employment in a year, multiple employments at any one time, or complex tax affairs and sources of income, the customer journey is quite difficult.

  Q94  David Rutley: How are you looking to benchmark your performance against external benchmarks, and what benchmarks are you looking to?

  Bernadette Kenny: Every year we conduct customer satisfaction—

  Q95  David Rutley: Sorry, I asked a question about external benchmarks as well. I am happy to hear about customer satisfaction scores, but I also want to understand where you are benchmarking against external benchmarks.

  Bernadette Kenny: We do benchmark, and we have started benchmarking international comparisons, which is something that Mr Hartnett knows more about than me.

  Dame Lesley Strathie: We would be happy to give you a number of benchmarking exercises in PAYE—or income tax, because not every country has a PAYE system, and ours is still the envy of most of the world. We also have benchmarking across a number of operations, but rather than get into numbers that we do not have in front of us today, we can give you a note on all of them.[7]

  Q96  David Rutley: Thank you. My final point is on the customer experience and particularly the communications element. You talked about learning, Mr Hartnett. Across the panel, what learning have you taken from this experience, and how are you going to improve your communication capability or strategy going forward?

  Dave Hartnett: It is very clear that, in general, we need to improve our communication with our customers. One key learning is that we tend to communicate with representative bodies and groups, which works well for us, but there are a huge number of customers. I am sure we are going to think very hard indeed—and have started to—about how we reach a huge number of customers. Representative bodies and others can help us enormously with what we do, but not necessarily to reach large numbers. For me, that is one of the key learnings.

  Chair: Andrea Leadsom, a quick question, and then Jesse Norman.

  Q97  Andrea Leadsom: This whole morning is rather depressing. We have a service that affects every taxpayer in the country, with 25% potentially going to be bitterly disappointed, upset and disturbed by the treatment that they are receiving—people can't get through on the phones and, initially, Mr Hartnett didn't feel there was anything to apologise for. I wonder whether you consider your peers to be other public sector organisations, or should you be looking to the Marks and Spencers or the John Lewises of this world and thinking about what customer services levels are acceptable, rather than what seems to me to be a general acceptance that the public gets what the public gets?

  Dame Lesley Strathie: HMRC and a number of other civil service organisations that I have worked in do indeed look for best practice in the private and public sectors. In our case, in HMRC, lots of our benchmarking is with other tax authorities. I would not like anyone to think that we don't do that. What I would say though—I hope that this does not come across as defensive—is that in any commercial business you will have a customer strategy. You will decide which customers you want to acquire and which customers you are happy to divest yourself of, and you will refresh your strategy based on that. However, we serve everyone, and we don't have a choice about whom we serve.

  Q98  Jesse Norman: Dame Lesley, so far you seem to have been very frank in admitting your empathy for what you describe as your customers and about certain areas of presentation, but you don't seem to have accepted that any mistakes were actually made in terms of the management or administration of the system. Is that your position?

  Dame Lesley Strathie: No, that is absolutely not my position. I have never worked in any organisation that didn't make mistakes. If you look at the size of my work force—still around 70,000 people—there will always be mistakes. I don't think that I will ever live long enough to see human intervention eradicated, either in the employer space or in my own work force.

  Q99  Jesse Norman: Thank you. You have said that you won't be charging interest to people who owe money to the Revenue. Will you be crediting interest to those to whom the Revenue owes money?

  Dame Lesley Strathie: Yes, we will[8].

—  A repayment of income tax for the tax year 2008-09 that is issued after 31 January 2010 will include repayment interest from 1 February 2010.

—  A repayment of income tax for the tax year 2009-10 that is issued after 31 January 2011 will include repayment interest from 1 February 2011.

For reference, the relevant legislation is section 824(3)(aa)(i) Income and Corporation Taxes Act 1988.

  Q100  Jesse Norman: Good. When you talked about the July notification that you made to Ministers, I must say that that rather stretches credulity, because you are asking us to accept that there were two years of lack of reconciliation and it was only well into the second year that you became aware—with, potentially, 20 million to 23 million reconciliations outstanding—that there could be a problem with overpayments or underpayments. Is that really the case, or was it not earlier than that that you were aware or informed by junior people?

  Dame Lesley Strathie: First and foremost, I think that Mrs Kenny answered the question, in terms of when we submitted our plans to Ministers. That is the date in August that we should all be mindful of—that is when we were clear about our best estimates and best forecasts, and about the testing that we had. Clearly, any other conversations before that time were in the same way that we would keep Ministers informed of how we are developing this process. I don't think anyone was surprised, given that the old system, in a normal year, produces something like 10 million, 11 million or 12 million reconciliations—there is no surprise in that. There will always be reconciliation. I have to stress here, HMRC is a non-ministerial Department. It is the collector. The commissioners have to work through a lot of this detail, take to Ministers what we propose to do and then take on ministerial steers. The August date of doing that is the most relevant date here.

  Q101  Jesse Norman: So, it would be fair to say that you expected that there might be a problem arising from the additional year of a lack of reconciliations. There was an informal problem that you could see coming up, but it was only in August that it was deemed sufficiently large to bring to Ministers.

  Dame Lesley Strathie: No, I'm not saying that at all. Bear in mind that we have moved to a new Government and new Ministers, with an entire induction process that we have to go through, on each of our issues. PAYE, which brings in virtually half the revenue—PAYE and national insurance—is one part of our business. We have a duty to keep our Ministers informed as we work through processes.

  Q102  Jesse Norman: Thank you. Finally, you said that people would be pushed into self-assessment as a result of the over and underpayments. How many do you think will be pushed into self-assessment who would not have been in self-assessment before?

  Dave Hartnett: A very tiny number, Mr Norman, and hopefully entirely made up of those who will not contact us or co-operate with us.

  Q103  John Mann: Chair, may I clarify? Ms Kenny said written, late July, and verbal, earlier July; and we are now being told, August.

  Jesse Norman: There is the further question of whether the previous Government were advised of anything at all.

  Dame Lesley Strathie: Previous Government Ministers were advised.

  Jesse Norman: Previous Government Ministers were advised. That's important, I think.

  Dame Lesley Strathie: Just so I'm clear, they were advised that the 2008-09 reconciliation wouldn't be done—that is the point that I'm stressing. This is the fact that there were two years, and the combination of two years coming out is what inflates some of the numbers. I want to be clear.

  Q104  Jesse Norman: So not advised about over or underpayments?

  Dame Lesley Strathie: Only that we hadn't reconciled. Anybody dealing with this system knows that reconciliation will produce over and underpayments; that is the nature of the system. That doesn't change what it feels like for the person who is asked to pay back tax or is anxious, but that is the system we have.

  Q105  Mr Love: The story you've told in your evidence so far today has been that this should have been a good news story—you have a computer upgrade, improving accuracy, and you've got to send cheques to 4.3 million people—yet it has come out very differently. Have you thought about how it went so badly wrong?

  Dame Lesley Strathie: Yes, I have. It's not very often that HMRC gets positive press coverage. We expect the media to do what they do with anything we brief them on. We absolutely hoped that the benefit of alerting people that the process was going to start, that it was being tested and that the first letters would start to arrive in September, and then saying, "Here's the rest of the story and the facts and figures," would ensure that everyone knew when the letters started that the process had started, what the time frame looked like and how many people we were hoping to get a payable order to in refund before Christmas. That is not what happened, but it is not because we did not work with our stakeholders or because we didn't produce the facts and the numbers to the best of our ability.

  Q106  Mr Love: If I put together Mr Hartnett's somewhat insensitive—I think that he's accepted that—comments and your repetition this morning that this was, to put it crudely, a bog-standard reconciliation like you do every year, would you accept that you had a delayed response to what was going on in the media?

  Dame Lesley Strathie: Yes.

  Q107  Mr Love: You thought it was going to be an ordinary year and it turned out to be an extraordinary year, and you were very slow in coming to that conclusion.

  Dame Lesley Strathie: I think that's fair. Given the fact that the story played out the way it did and the fact that so many people are anxious, we just have to accept that we didn't get it right and we need to learn from that.

  Q108  Mr Love: Part of the learning process—you've covered quite a lot of this—is having closer and more prompt relations with your customers, but much of this is mediated through the media, and newspapers in particular. What have you learnt? We know that the backdrop to this is that news about tax is never good news. There is a programme on the radio at the moment, "Evan Loves Tax", which I think is meant to be humorous. Taking all that into account, don't you think that you need to boost your ability to try to at least modulate the messages coming across through the media?

  Dame Lesley Strathie: I think it's absolutely our duty to get the facts out and to give the best service that we can. We'll never be able to control the media. That's not our job. Our job is to get on with delivering the service. We do need to work harder at informing our customers. We have to balance that against the cost of postage and print, and we also have to balance back to the numbers I mentioned before, where any communication from HMRC generates a 33% or 40% response from the customer. Even when it says, "You don't need to phone us. Everything is okay," people have a tendency, particularly if they have time, to ring up, just to be sure. So I think this is an ongoing challenge for the organisation—not just for PAYE customers but for all our customers.

  Q109  Mr Love: Mr Hartnett, when you were tackled on what you had learned and how you would go about it, you said that you needed to learn but you hadn't really come to any conclusions yet. Can you give us a better idea of what you think that you will do differently next time? Perhaps more important in terms of this inquiry, what are you doing at the moment? You've already made the £300 concession. You've announced another concession. Can we expect further concessions, or are you going to tackle it in a different way and try to ensure that your customers are at least kept informed about what's happening?

  Dave Hartnett: I don't know whether there will be more concessions.

  Q110  Mr Love: You're not planning any?

  Dave Hartnett: Well, no, but let me say a couple more things. What I do know is that we are absolutely determined to learn from each and every issue that arises in the process of handling the 45,000 cases now. We'll learn particularly from our customers, but we'll learn from those who are helping and supporting them, too. We're actually learning from some of the things in the media as well. When we get to the rest of the cases, there may well be changes to process and in other ways. That's important for us.

  Mr Love: Can I just ask one final question?

  Chair: One quick question.

  Q111  Mr Love: You indicated earlier that a very large number of people still have outstanding reconciliations going back much further. It's not a good news story, because tax, as we say, is perhaps not instantly recognisable as a good news story, but you have a new computer system that should be able to reconcile much more accurately. What are you going to do to make sure that, as a minimum, people understand that they are going to get more accurate and up-to-date reconciliations than they are currently getting?

  Dame Lesley Strathie: As we go through the end of this process, we will be able to create the numbers of how many people have reconciled tax records. Our aspiration, going back to the open cases that we've mentioned—a very long legacy—is that we clear those over the period, hopefully to 2012. That will mean reprioritising resources. My ambition for the organisation is that we will then have an individual customer record for every customer and we will know exactly what their code is, based on that information. The job we have to do then is to identify those customers who are going to continue to potentially have taxable changes—for example, if someone gets a company car late into the year, or if someone takes on another directorship and so on. There are lots of occasions when people with the more complex tax affairs will still have to regard this as payment on account. We need everyone to understand that PAYE is a payment-on-account tax. For people with very straightforward tax, it should reconcile, and more of them will reconcile now. We also need to educate those people with more complex tax affairs, or people where we get error in the system, or people who don't tell us everything about their tax affairs. Now that it all comes into one system, they will continue to expect us to reconcile and ask for any underpayment or refund the tax.

  Q112  Chair: Just to be clear, will the concession announced today be extended to the outstanding reconciliations dating back to 2006-07—the 18 million?

  Dame Lesley Strathie: We're working through the plans for how we will do that, bearing in mind that those are not in the system, but a legacy issue. As I said earlier, everything we do in this process and everything we learn from this and the concessions, we will feed into our proposals that we take to Ministers. I am happy to keep the Committee informed on that.

  Chair: So the answer is, "We don't know yet."

  Dame Lesley Strathie: We don't know yet, no.

  Dave Hartnett: May I just add a quick point? On the legacy issue, there will be reconciliations to be done that won't necessarily generate overpayments or underpayments. A good number of those cases won't involve that.

  Q113  Chair: I think it would be very helpful if you set out for us on a piece of paper the reconciliations going back for each year, for as many years for which you have data, prior to the introduction of the computer system, to show what effect the computer system is having on those numbers. Could you do that for us?

  Dame Lesley Strathie: Yes.[9]

  Q114  Michael Fallon: In five years' time, will this Committee still be hearing about millions and millions of reconciliations? Given that modern Britain now works in such different ways, with multiple sources of income and changes during the year, do you see a day when you will move to more of an in-time system that reflects the way in which people work?

  Dame Lesley Strathie: It is fairly clear that the route out of reconciliation, or high-volume reconciliation, would be a real-time system. Moving to a real-time system is high cost, high risk and will not be without difficulty. To give you an example—one that sounds extreme, I know—if I was a cleaner who had three different jobs, moved between three different employers and was paid by the hour, but who was in the tax system, it would be quite a challenge to get real-time data. We will always have to balance the benefits to the masses who have their tax deducted at source, and at the right amount, against the number of people who would otherwise have to pay at the end of the system. There are other ways of doing it. The IRS in America has universal filing so that everyone has to file at the end of it. If we were to do that, it would put another 34 million people into having to file tax returns. In that system, and in most systems like it, they tend to over-deduct, so everyone overpays, and that in itself would be a transitional issue. I do not know what the picture will be in five years' time. I do know that what we've got will actually get rid of lots of the problems of the past.

  Chair: Two colleagues want to come in very quickly, and we'll start with Stewart Hosie.

  Q115  Stewart Hosie: Taking you back to what you said about people who may have significant underpayments to repay, you said that the tax code could be adjusted for up to three years to facilitate spread payment. The Minister said something similar in his statement last week, but he gave the impression that there was a technical limit to your system that allowed it to be reclaimed over only three years. Is there any reason why a large repayment couldn't be spread over more than three years if that was in the Revenue's interest and if that was the only way it could be repaid?

  Dave Hartnett: We are confident that it can be spread over three years. We are looking to see whether it can be spread out more. It was built to recover over a period of up to three years.

  Q116  Stewart Hosie: Should someone have a very large repayment and changed circumstances, can you give me some kind of confirmation that the Revenue would somehow facilitate that over a longer period of time, if it was necessary?

  Dave Hartnett: We have time-to-pay arrangements that we would make work in the circumstances. I'm giving you that assurance.

  Q117  Mr Mudie: When this was discussed in the House, the Minister agreed to ask you, in view of all the publicity and anxiety over the issue, to institute a special phone line for the public and for MPs. Has he asked you, and what was your response?

  Dame Lesley Strathie: The Minister indeed asked us to do that, and we have. I am happy to say that I tested it at 8 o'clock this morning and it is up and running.

  Q118  Mr Mudie: Will you give us the number, because you are on television?

  Dame Lesley Strathie: I do not think that it is a great idea to dedicate the line to MPs and then issue the number in a public Committee, but the Minister is writing to everybody with the number and we have plans in place to do that.

  Q119  Mr Mudie: You are doing one for MPs, but what about the general public?

  Dame Lesley Strathie: Sorry, we already have a dedicated line for PAYE.

  Q120  Mr Mudie: So, you are not doing anything special? Is this the only tax credit that people cannot get through to talk about?

  Dame Lesley Strathie: No, that is what I am saying. We have a taxes line, and we monitor the PAYE calls day by day. Sorry, I thought you were asking for the number for the MPs' hotline.

  Q121  Mr Mudie: So there is a line for the public. Has that line been in operation in the past—is there nothing extra? Do you think it will cope?

  Dame Lesley Strathie: What is extra is that we have a single line for PAYE, rather than having multiple numbers, as we had in the past—I think that we had 139 telephone numbers.

  Q122  Mr Mudie: What is that number?

  Dame Lesley Strathie: I do not have it with me, but we are not keeping it secret. Plenty of people are ringing it.[10]

  Q123  Mr Mudie: They have kept it secret from you.

  Dame Lesley Strathie: I might need to ring it.

  Chair: You have been asked whether there is any more in the woodwork that will come out in five years' time—that was Michael Fallon's question—but you can be sure that, even if stuff comes out in five weeks' time, we will want to see you again, but I hope that you have stabilised the problem. In the meantime, we will consider whether to conduct an inquiry into how HMRC might be improved in the medium term. The PAYE issue and the gradual decline in the effectiveness of PAYE in a world of multiple earnings is a big question, and you have described the lead solution to it—a real-time system—as high risk, which does not fill the Committee with confidence that there will not be further serious cock-ups. We asked you today for some written information, too, and we look forward to receiving that as soon as possible. Thank you very much for coming at short notice. The Committee and I appreciate that.

1   Note by witness: HMRC cleared 11.2 million cases in 2007-08. Back

2   Note by witness: The number of open cases at present for years earlier than 2006-07 (from 2003-04 inclusive) is approximately 4.1 million. Back

3   Note by witness: See footnote 1. Back

4   Ev 15 Back

5   Ev 16 Back

6   Note by witness: The figure quoted at Q85 of 12,500 relates to HMRC's SR04 net FTE headcount reduction target over the period 1 April 2004 to 31 March 2008. Since 1 April 2004 the net reduction of FTE staff for the Department is 25,270 (excluding the transfer of 4,641 FTEs to the UKBA), as at 31 August 2010. Back

7   Ev 16 Back

8   Note by witness: Interest will be credited to those to whom HMRC owes money in line with the current law. Repayment interest is included with a repayment of income tax where the repayment is made after 31 January following the tax year in which the overpayment arose. To illustrate this for the two years concerned: Back

9   Ev 17 Back

10   Ev 17 Back

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