The administration and effectiveness of HM Revenue and Customs

Supplementary written evidence submitted by HM Revenue & Customs

1. The Spring Supplementary Estimate includes an increase of £12.5million Resource DEL to fund the use of debt collection agencies in tackling £500million of tax debt.

a. Why is this debt collection work not being undertaken by HMRC staff?

HMRC successfully piloted using DCAs in 2009-10. The pilot demonstrated that DCAs can be used cost effectively and securely to collect debt on HMRC's behalf and without compromise to HMRC's high quality standards. We have published our Evaluation report on the pilot - available at: http://www.h mrc.gov . uk/about/cap-cap-i)ilot.odf

Following the pilot, the Chancellor announced in the June emergency budget that HMRC would be using DCAs in 2010-11 to provide additional debt recovery capacity. This will accelerate the collection of lower value tax debts and generating up to an additional £140 million from debts that might otherwise be written off. Using DCAs allows our own staff to focus on higher risk and more complex debts.

b. What type of debts will debt collection agencies be used for?

A wide range of debts will be passed to DCAs. This will involve a range of types, sizes and ages of debt, and include both individual and business debtors.

c. Are the debt collection agencies buying the debt from HMRC, or just collecting it on behalf of HMRC?

As a matter of course HMRC continues to develop and improve its understanding of the debt market; but for the current exercise we are not selling debt - at all stages of the process the debts involved remain HMRC's.

d. How will HMRC ensure that appropriate methods are used by the debt collection agencies when undertaking this work?

We require the DCAs to comply with strict codes of conduct and the contracts we have with them require that they maintain HMRC standards in relation to customer service, security and professionalism. A robust audit and assurance process is in place.

e. What rate of recovery do you expect these debt collection agencies to achieve, how does this compare to the rate achieved previously when this work was undertaken by HMRC staff, and what is the cost comparison between doing the work in-house and contracting it out to debt collection agencies?

Earlier pilot did not provide reliable evidence of relative cost effectiveness of HMRC in-house versus outsourced debt collection. This year we want to see what additional receipts HMRC receives as a result of using DCAs and what

more we can learn from their best practice. We want to establish how we can optimise the use of DCAs, for example, in handling particular types and values of debt, so that HMRC specialist debt staff are focused and used in the most cost effective way. And we want to understand more about how HMRC benchmarks against other debt collection operations in terms of cost and performance.

2. The. Supplementary Estimate also includes a reclassification of £35m DEL funding from Capital to Resource, to correct alignment of the HMRC's share of the austerity savings recorded at the Main Estimate.

a. What Capital projects are no longer going ahead to enable this switch of funding from Capital to Resource?

b. What effect will this reduction in Capital expenditure have on HMRC's operations?

No Capital projects have been stopped to enable the switch from Capital to Resource. Our investment appraisal process is ongoing throughout all our Capital projects and has identified areas where savings can be made with no material impact on planned performance.

c. The reclassification increases HMRC's administration budget. Why is this being increased, and how will this impact on the Spending Review target of delivering a real term reduction in HMRC's administration budget of 33 per cent by 2014-15?

In the early summer of 2010 we were asked to make a cut of £125m as part of
the Coalition Government's Austerity initiative. While we made an initial
assessment of how that cut might fall across Capital and Resource funds, it was agreed that we could revisit that split during the year. As a result of the capital reduction referred to in the first part of question 2, we revised the split and the increase in the admin budget is the adjustment made to reflect the correct apportionment of the austerity cut.

As part of the SR process, there was a reclassification of how spending should be classified between admin and programme. The amounts in admin spending in 2010/11 therefore have no direct link with future classification of spending and this adjustment will have no impact on the 33% admin savings HMRC is committed to over the SR10 period.

3. Resource AME is to increase by £35m to cover the impairment of assets following the cessation of the Child Trust Fund, Health in Pregnancy Grant and Saving Gateway schemes.

a. Which assets are being impaired, what is their current net book
value and is this a one-off impairment?

The assets impaired are the systems, software and servers that supported the Child Trust Fund; Health in Pregnancy Grant; and Saving Gateway functions.

The pre-impairment net book value as at 31 December was £44.7million with the residual value after impairment of £3.3 million. The residual value in HMRC's accounts reflects the fact that existing funds will remain in place until the child reaches 18 and that payments can still be made. The system will be used to track the value of payments into the funds until there are no more live records, at which point it can be finally written down to a zero value on HMRC's balance sheet.

b. Are the costs of impairment taken into account in the costings for
the cessation of these schemes given in the last budget?

The costings for the cessation for the Child Trust Fund, Health in Pregnancy Grant and Saving Gateway schemes included in the last budget were based on savings from reduced payments. Impairments of assets are non-cash movements and were not included in these costings as they do not affect public borrowing.

4. In May 2010 the Coalition Government announced a scaling back

of payments due to Child Trust Funds from 1st August 2010, with all
payments stopping from 1 Jan 2011. Why does the Spring Supplementary Estimate require an additional £105m to fund Child Trust Fund endowments?

In the Main Estimate, we included the baselined amounts for Child Trust Fund. The additional £105m in the Spring Supplementary Estimate has been calculated using the latest forecasts for demand.

We will continue to manage Child Trust Fund endowments for some time, and the additional £105m in the Spring Supplementary Estimate is required to enable us meet our commitments for 2010/11. The Coalition Government announced a scaling back of payments from 1st August 2010 and that no new entitlements to payments would arise from 3rd January 2011. However, for vouchers already issued, payments will still be made on the receipt of a Child Benefit Claim and the vouchers have a 12 month expiry date on them and can be deposited at any time during that period. Furthermore, additional government payments made to children in low-income families will be made when the family's tax credit award for that year is finalised.

5. The increase In net cash requirement includes an additional £307m because of a decrease In creditors. Why has this change occurred, and does it indicate a deliberate change in HMRC's policy regarding the payment of creditors?

The decrease in creditors arose mainly from a reduction in accrued or trade creditors; policy changes in Child Trust Fund; and payment of accrued expenditure in relation to early departure costs for staff. There has been no change in HMRC's policy regarding the payment of creditors. It remains to pay within 10 days of the invoice, unless contractual obligations establish a shorter period. In 2009/10, we achieved this in 94% of cases.

6. The net cash requirement has also increased by £129.6m because of the use of provisions, compared to a previous cash requirement for this of £34m. Which provisions are being used, and why has this use risen so markedly?

The expected use of provisions is in respect of: Child Trust Fund provisions made to provide for future obligations that arise from entitlement at birth but yet to be claimed £118.8m; Health in Pregnancy Grant provision at point of entitlement but no claim yet submitted £10.6m; and the balance of £34.3m is primarily in respect of staff departures in earlier financial years, which occurred prior to the normal retirement age. The original amount of E34.1 m was established at the Spending Review 2007 and this is the figure that has been included in the main Estimate. It has been the practice to adjust and amend the cash funding in the Spring Supplementary Estimate to meet this obligation when the expected outcome was more clearly defined.

January 2011

Prepared 15th June 2011