Administration and effectiveness of HMRC – written evidence

Written evidence submitted by Martin Lewis (ex-HMRC employee)

1.) Headlines

This submission is made by a recently retired (June 2010) member of staff of HMRC. It describes the management culture of HMRC and suggests that, unless it is changed, HMRC will struggle to improve on its performance.

In HMC&E in the late 1980’s the "Next Steps" process empowered middle managers and saw them becoming accountable for their decisions. This seems to have by-passed the former Inland Revenue. HMRC is run poorly, on a command and control basis.

2.) Executive Summary

3.) Introduction

I retired from HMRC in June 2010 after 38 years service, the bulk of which was in HM Customs & Excise. I undertook work on Tax Compliance (including VAT and Large Traders) and latterly I contributed to HMRC’s central Research and Analysis capability. I was also an Internal Management Consultant and an elected Trade Union Official, both locally and nationally. That said, this contribution is my own and is neither prompted nor inspired by PCS.

4.) Next Steps

In the late 1980’s the Civil Service underwent reform under the "Next Steps" programme. As a Regional Trade Union Official, what I saw of this in HMC&E was:

· That centrally produced written operating "instructions" to staff became "guidance" to staff and

· Middle managers (SEO to Grade 6) were empowered by this greater freedom and became accountable for their actions and decisions. Managers of all grades could no longer blame "the centre" but had to be able to justify what they did – both upwards (to their own, more senior managers) and downwards (by way of explanation, to their staff.)

This was a significant cultural change in HMC&E. I think this aspect of Next Steps in HMC&E was widely welcomed.

5.) Merger & HMRC

HMRC was formed in 2005. As well as an administrative merger, there was a cultural coming together too. It has evolved into what HMRC is today. Most of the people now at the top of HMRC are either ex-Inland Revenue or from other areas of public service and several from the private sector. My perception is that HMRC’s culture originates in the main from the Inland Revenue.

6.) The culture in HMRC

My firm perception is that senior managers in HMRC (at SCS level) discourage middle managers (at Grade 6 and 7) from providing upward negative feedback to them. Senior managers regard middle managers as responsible for implementing the operational arrangements they are charged with.

Middle managers are discouraged from reporting back to the top "bad news" or news that projects and initiatives are becoming unmanageable or are going awry. Such reports are regarded as "negativity" and will damn career progress.

7.) The outcome of this culture

Thus at the top senior managers are largely unaware of the difficulties, problems, and obstacles that the bulk of the organisation faces. They know little of the scale of unanswered phone calls, and the unopened letters, the data quality of tax payers’ records and perhaps most importantly the nature and quality of the service provided on a daily basis to the taxpaying public.

The role of middle managers is to struggle vainly and to provide the appearance that their targets have been met. They are not expected to provide reasons why targets are not met, they are just expected to get on and meet them.

Staff are disillusioned because their knowledge of the way things really are, does not filter up to the top of the organisation in any meaningful way that would see prompt and effective action being taken. Instead they have to implement more ill-informed initiatives. Their view is that the organisation is becoming more and more dysfunctional and less fitted for purpose.

8.) Evidence of staff’s views and senior managers response to them

Staff surveys show low staff engagement, that staff believe their organisation is poorly managed and that senior managers do not provide leadership. HMRC’s position on the departmental league table is close to the bottom. The CEO (who originates from DWP) reportedly feels this is because middle managers are not communicating her message to staff about the change programme.

Senior managers do run three internal initiatives which enable staff to communicate with them direct:

· There is an email route where questions and answers are published on a staff forum visible to all on the internal Intranet

· There are monthly telephone call-in opportunities, where one or two of the senior managers in turn take calls from staff mainly in their own business stream

· There are "town hall meetings" when senior managers will visit a locality and address a few hundred local staff and hold a question and answer session.

These have become tightly managed events. Rarely will staff feel that issues raised are properly resolved. If they are resolved it will be a narrowly focussed issue with a seemingly straightforward answer. Otherwise it is a recital from the top on the way things have to be. Senior managers say they welcome these events, but that is not the impression one receives when watching them and listening to them.

9. Exceptions

I have described a general culture – one that is stifling, unresponsive and often unpleasant to work in. It also engenders cynicism. But there are exceptional areas, mainly the smaller and more compact and more specialised ones where the headcount allows much more face to face communication. In turn this can allow for a somewhat more enlightened atmosphere.

Examples might be the Large Trade Control area and some of the smaller central functions like policy formation. But these are the exception rather than the rule. The general culture described applies to the three large areas where the bulk of the staff work:

· Processing (Customer Operations)

· Call Centres (Customer Contact) and

· Compliance

10. Relevance to the subcommittee’s enquiry

The subcommittee’s focus is on:

· Organisational performance and delivery

· Spending review settlement

· Delivery of Tax compliance aims

· Reform of PAYE

· Future priorities.

11.) Organisational performance and delivery

The twin problems of (1) senior managers not wishing to hear about operational problems and (2) middle managers being discouraged from reporting them up the chain, mean that operational performance is driven by the apparent achievement of middle ranking targets rather than desired strategic outcomes. The department is process driven and not customer focussed

For example,

· In call centres, it is more important to answer and deal with a call quickly than it is to get to the bottom of the issue the taxpayer is raising. Staff are instructed not to deal with visible errors in taxpayer records unless the tax payer asks about them

Operational performance and delivery will continue to be stifled and whilst this "command and control" environment (without upward feedback) continues. Staff need to be empowered and accountable for what they do – then they will be able to do the job properly.

12. Spending review settlement

Whilst I have strong views on this topic, it is not the main focus of this submission. I will leave others to deal with it. That said, a smaller and unreformed HMRC will do even less well than it does now.

13. Delivery of Tax compliance aims

These aims are many and various ranging on the one hand from facilitating cooperative and willing taxpayers to navigate their way around a complex system, to on the other hand detecting and addressing serious and large scale tax avoidance and evasion.

HMRC could do much better at evaluating the many risks it faces and then deploy its staff in accordance with those risks. If it were better at handling routine enquiries from non-risk, so called "low value" customers, it would be able to devote more of its effort to compliance checks on taxpayers who present a great risk and where the tax involved is more.

The bog-standard tax inspector or compliance officer brings in, and has always brought in in additional revenue, from five to ten times the cost of employing him, depending on the nature of his work. And this extra revenue is less often from evasion and avoidance and more often from routine accounting errors which have fallen in the taxpayer’s favour.

Fewer staff collecting less additional tax begins a vicious cycle where the honest tax payers begin to feel less inclined to be honest if his perception grows that "everyone’s at it". The deterrent effect of the compliance effort depends on the taxpayer believing that he and others will get caught.

There has been recent controversy about a tax compliance settlement involving Vodaphone. HMRC needs to recognise the growing expectation of openness and accountability in public life. Whether the sum involved in the case is £bn6, £bn2 or £bn1 these are very large sums of tax. So large are they that they will affect public expenditure cuts. People’s direct tax affairs have traditionally been shrouded in privacy, something which suits the taxpayer and is convenient (but not necessary) for HMRC.

The National Audit Office should satisfy itself that the public policy risks involved in the largest of tax settlements have been recognised and evaluated by HMRC and that it has systems to ensure such risks are mitigated. For example, HMRC should exercise due propriety and take sound legal advice and be able to demonstrate to the NAO that it has done so.

Whilst the NAO is not there to second guess the size of individual taxpayer’s payments to HMRC, it is there to assure Parliament that HMRC has effective systems in place which ensures the right outcome of the largest of tax settlement cases.

14.) Reform of PAYE

My operational experience was not in PAYE, so I do not have a well-informed view. But I note that since retirement I have had to complete more tax returns in the last six months that I have ever done before. The PAYE system regards me as a complex taxpayer just because I have two sources of income - an annuity as well as an occupational pension. I wonder what will happen when I begin to receive a State Retirement Pension too.

15.) Future priorities

Any failing organisation needs to take stock of its strengths and weaknesses and decide what it is in business to do. HMRC has a very wide range of responsibilities required of it by Parliament, ranging from

· Helping the "ordinary Joe" to pay his tax, to

· The enforcement of the minimum wage, to

· The taxation of imported freight, to

· The administration of tax credits, to

· The detection and prosecution of criminal attacks on tax rebate and refund mechanisms and

· The provision of sound, high quality analysis on tax measures to Ministers.

Whilst HMRC is not free to choose what it does, it is responsible for doing what it does properly and to deploy is resources efficiently and effectively and with an eye to risk. So long as senior managers turn a blind eye to many of the risks that its staff (and middle managers) know about, the prospect is bleak.

Cultural reform involving empowerment and accountability is needed and it starts at the top.

November 2010