Session 2010-12
Publications on the internet

To be published as HC 731-iv

House of commons



Treasury SUB-Committee

Administration and effectiveness of HM Revenue and Customs

Wednesday 11 May 2011

Stephen BanYard, Phil Pavitt and Mark HOLDEN

David Gauke MP

Evidence heard in Public Questions 309 - 467



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Oral Evidence

Taken before the Treasury Sub-Committee

on Wednesday 11 May 2011

Members present:

Mr George Mudie (Chair)

Stewart Hosie

Andrea Leadsom

Jesse Norman

Mr David Ruffley

John Thurso

Mr Andrew Tyrie

Mr Chuka Umunna


Examination of Witnesses

Witnesses: Stephen Banyard, Acting Director-General, Personal Tax, HMRC, Phil Pavitt, Chief Information Officer, HMRC, and Mark Holden, Director IMS Change Programme Delivery, gave evidence.

Q309 Chair: Good afternoon. We are a bit depleted in numbers but the fierce ones are here, so be warned; I will try and keep them in order. Mr Holden, you took a job in May 2010 and another job in March 2011. It seems you are shooting through the organisation at some pace, aren’t you?

Mark Holden: I think it was a natural progression. I was asked to expand the role I took on originally, which was quite focused on IT programmes, to encompass the RTI programme.

Q310 Chair: Is it a promotion? Is it more money, for example?

Mark Holden: Yes, it is a promotion.

Q311 Chair: Promotion. You moved away from money there, is it more money?

Mark Holden: No.

Q312 Chair: Good on you. You have been given £100 million to spend on improving the pay as you earn system. How will that £100 million be spent?

Stephen Banyard: We are building a real time information facility to build on to our existing pay as you earn system. Pay as you earn collects the right tax for the majority of people and RTI will build on our existing pay as you earn system. It will bring benefits to particular groups. Employers will see a particular reduction in their admin burden of about a third. It will improve our revenue collection because we will know how much employers have paid to their employees during the year, and therefore how much tax they should remit to us. It will improve the accuracy of pay as you earn for some people. It will help us reduce error and fraud in tax credits by £300 million a year, and it will provide the dynamic information for the universal credit.

Q313 Chair: Are there any more notes on there that you want to read out? Is that it?

Stephen Banyard: That’s the headlines of what it does.

Q314 Chair: When you started that, you did not say "the software", you said "a facility". What do you mean by "facility"?

Stephen Banyard: At the moment, when employers pay their-

Q315 Chair: No, is it physical or is it software?

Stephen Banyard: It is both. It is a physical ability to bring in data more regularly than we do now, so it is a channel of data. It is a place to hold it and it is the software to manage it, and match it, and so forth.

Q316 Chair: What is the division between the two songs, software and hardware?

Stephen Banyard: I am going to ask Mark Holden to comment on that.

Mark Holden: I can’t give you a detailed breakdown of the split because predominantly there will be a lot of hardware that is already built into the infrastructure that we will be using across both our existing service, so the NPS, our existing PAYE service, and also the national infrastructure that is within BACS, so there will be some expansion of that service. A lot of it will be in the configuration and development of the software, but I don’t have the exact split on them.

Q317 Chair: Did you put up a detailed bid with the division between capital and software, physical stuff and hardware? Because £100 million just seems a lot, first of all, and it seems a nice round sum that covers every eventuality. Is that costed as we sit?

Mark Holden: It has the initial outline costings that you would expect at this stage of a programme, and it is split between the development, which includes both hardware and software, and also the business change costs of the organisation.

Q318 Chair: When somebody says "at this stage of the programme" that signals that it is pretty vague.

Stephen Banyard: No-

Q319 Chair: So you could give us it and we could have a look at it, couldn’t we? Who agreed this? Was it the board or the Minister?

Stephen Banyard: It was agreed with the Treasury. We produced a business case for them, which detailed how we thought the money would be spent over the spending review period.

Q320 Chair: I would not mind seeing the details of that because it is a suspiciously large figure. When Dame Lesley appeared before us last year she said real time information is high cost, high risk. A few months later she said that it would be available without problems in 2013. Why the sudden change? Which of you convinced her that it was the right thing to do?

Stephen Banyard: I think we have always thought it was a doable proposition.

Q321 Chair: Do you share a view then that it is high risk, high cost?

Stephen Banyard: There are risks attached to it. I do not believe it is high risk. We wouldn’t have committed to a timetable we did not believe we could meet. We have looked at this in detail and we believe we can do it on the timescale, and we have designed a programme or an implementation that de-risks its introduction. For example, it includes a 12- month pilot in which we and payroll software manufacturers and employers will be able to test the service and learn from it before we go live.

Q322 Chair: Do you agree it is high cost?

Stephen Banyard: I don’t think it is high cost for what we are getting.

Q323 Chair: So Dame Strathie was wrong?

Stephen Banyard: No, she was not wrong.

Chair: She said the opposite of what you have said.

Stephen Banyard: It is relative judgement, isn’t it?

Q324 Chair: Anyway, okay. Right, now we have heard from a former employee about the difficulty middle management have of passing bad news up because they don’t get any reward for passing it up or any thanks. You tend to shoot the messenger. There is some worry that if this is the culture that is here this programme could run into trouble, and it is a key Government programme. Are you certain you are going to deliver this on time, no problem?

Stephen Banyard: We are confident we can deliver it on time. We also go out and talk to our frontline staff. We talk to the staff, we talk to managers, we understand their concerns. We try and build them in.

Q325 Chair: So the unions and the staff members who have given evidence to the opposite are wrong again?

Stephen Banyard: No. We have listened to their concerns. We have tried to build a timetable and an implementation that does reflect the real circumstances we will face.

Q326 Chair: How confident are you that your partner, DWP in this exercise, is included, agreeing and is not confusing or adding to the difficulties in meeting the date? There has been some information reach us that it is hard enough dealing with one Government department, but dealing with two is just impossible. Is that wrong? It has always been my experience.

Stephen Banyard: DWP have a very strong interest in real time information because the universal credit programme has a strong dependency on it. They are therefore interested in it for that reason. It is also important we work well together. They are a key stakeholder so we cannot drive on in isolation to them and we have to produce something that works for us but also works for them. I think it is my job to make sure that they are confident, as it is my job to make sure HMRC is confident. We are doing the right thing and we can do it.

Q327 Mr Tyrie: Just following on from that point; when Lesley Strathie came before us she said that the sharing of RTI information with DWP was an ambition for universal credit. Why won’t you share the information with DWP?

Stephen Banyard: Why would we?

Mr Tyrie: Why won’t you at the moment?

Stephen Banyard: We will. HMRC takes the security of its data very seriously and we share it where there is a legal gateway. We have legal gateways with DWP but, from a public interest point of view, we are collecting data from employers about income, which will be used by us to help deal with people’s tax-

Q328 Mr Tyrie: I understand. You have answered my question. Do you think you are going to be, and have you taken advice on this, liable in law? It is not just a question of fulfilling your legal responsibility or is it that it might cost the Government money because you will get sued if you were to hand information over in a way that could be held to have been deleterious subsequently?

Stephen Banyard: We are subject to normal data security legislation-

Q329 Mr Tyrie: I am asking you whether you have taken advice on whether these legal restrictions have real bite in the sense that you may find yourself generating a bill for the taxpayer.

Stephen Banyard: We take it very seriously. We take proper advice on what we can do and we make sure that we have the legal-

Q330 Mr Tyrie: There is a note coming up for my second question, so why don’t you tell me what the note says, that would be handy.

Stephen Banyard: Shall I bring Phil in?

Phil Pavitt: The advice we have taken also incorporated legislation, the Welfare Reform Bill, which obviously set out the criteria whereby we exchanged the data, and that also took account of any liability, any restrictions, and any ongoing liability that may arise from the use of that data. Just to remind you, we already swap about 13 million pieces of data between us already, those two authorities, on a daily basis, which is also covered by the same restrictions.

Q331 Mr Tyrie: The answer is yes, and if you get this wrong you might find yourself generating a bill as a consequence of people taking legal action against you at some future date.

Stephen Banyard: We would work very closely with DWP to make sure we were not in that situation. We would manage that risk.

Q332 Mr Tyrie: I am just trying to be clear that that risk is there and that you are taking legal advice on it. I am asking you a very simple straight question.

Phil Pavitt: We have taken legal advice.

Q333 Mr Tyrie: You have taken legal advice on it, the answer to that is yes. The reason you are taking legal advice, and part of that legal advice, is the fact that there is a risk of costs accruing because of challenges-

Stephen Banyard: We have taken legal advice to make-

Mr Tyrie: -with a transfer of that information.

Stephen Banyard: We would test all data transfers against our experts in that and to make sure that we do have the legal cover.

Q334 Mr Tyrie: I think I will give up on that point, but I think the answer is pretty close to yes, isn’t it? The answer is yes, there is a risk that you may find yourself footing a bill as a consequence of a legal challenge if you get this wrong.

Stephen Banyard: No, I don’t think there is a risk.

Q335 Mr Tyrie: There is no risk of a legal challenge?

Stephen Banyard: Not in what we are doing, no.

Q336 Mr Tyrie: My question was, if you were to get this wrong would you be vulnerable to a legal challenge that could trigger costs to HMRC?

Stephen Banyard: If we got it wrong then we would be open to challenge, yes. I am not sure what the form of the challenge would be. We are taking great care to make sure we get it right.

Q337 Mr Tyrie: I think behind you I am getting an answer yes, so I am going to go with what I thought I saw from a sedentary position behind you. Let me just move on. Are DWP sharing the footing of the bill for the implementation of this policy?

Stephen Banyard: RTI has its own spending or has its own funding, which came as a side letter to our settlement. It is funded by the Treasury with a vote to HMRC.

Q338 Mr Tyrie: If this all goes turtle up who is carrying the can?

Stephen Banyard: I guess I will.

Q339 Mr Tyrie: You personally at HMRC?

Stephen Banyard: I am the senior responsible officer and HMRC would, yes.

Mr Tyrie: That is very helpful. Thank you, Chairman.

Q340 Stewart Hosie: The introduction of RTI will see an end to the single end-of- year reconciliations and the introduction of multiple in-year reconciliations. There is huge concern that will increase the attendant cost to business and HMRC. Stephen, in your opening remarks you spoke about RTI delivering significant business savings. I am at a loss. Maybe you can explain why you think doing the work multiple times in-year rather than once a year will reap savings for business.

Stephen Banyard: At the moment employers operate payroll systems, which remain automatic every time they make a payment, be it weekly or monthly. They send us the information at the end of the year, having done a reconciliation themselves. That reconciliation is a one-off. It is based on forms. It is about a third of their total burden from operating pay as you earn. We are not asking them to do monthly or weekly reconciliations under RTI. We are simply asking them to send us the information behind their payroll payments. We will be totalling it up and at the end of the year they won’t need to do a reconciliation, or it will be a very light reconciliation.

Q341 Stewart Hosie: You are asking them to do that through the use of BACS, and you have said in the consultation employers with fewer than 50 employees, which from memory is certainly 95%-plus of every business in Scotland, will not be required to do that initially but they will at some point. When do you foresee every business required to use BACS to provide you that information?

Stephen Banyard: We have no plans for every business to use BACS. We recognise that large businesses use the BACS system, and it looks good for them to use it, but for those that don’t we have an internet channel. For the very small employers we are developing an HMRC product that they can use. We do not see additional costs for them from that.

Q342 Stewart Hosie: We have BACS for large companies and those small ones who use it, there is a separate internet channel and there is a further means of providing the same information. Before this is even implemented there are three points of failure, three weaknesses, a multiplicity of channels to receive the information. How confident are you this model is going to work?

Stephen Banyard: You portrayed it as a weakness. You could see it as a strength in that what we have is different channels. What we are trying to do is to match what we are doing to the customers, the employers that we are dealing with. We provide a channel for large employers, which is one that they are used to using; we provide a channel for small employers, which they are used to using. We can easily combine the data. We are used to using multiple channels anyway. At the moment large employers send their data to us at the end of the year using a channel called EDI, electronic data interchange. It is a bulk exchange channel. Small employers use the internet. We put that together. Very few employers are exempt from using the internet and they can use paper. We put that in as well. I think you can see multiple channels as a strength, it gives you contingency.

Q343 Stewart Hosie: You are satisfied that with multiple channels and it being as close to real time as it can be, we should set aside any worries about the difficulties HMRC have had recently in terms of managing data, and expect and believe all this information coming in, in a multiplicity of ways, can be operated in a real time basis that we should all have confidence in?

Mark Holden: Could I just help to give some confidence? The existing BACS channel is part of the national banking infrastructure of the UK. This is a highly resilient, highly robust and well known, well understood channel for transmission. The internet channels that we use are the same channels that we use for our self-assessment filing each year, which supports some 7 million to 8 million filing through the year. These are well understood, well managed and have good track records in terms of their delivery and their sustainability. In terms of the concerns around those infrastructures, and our use of them, I think we do have a track record that demonstrates that we can manage those services properly.

Q344 Stewart Hosie: My final question on this then, would it be your intention at some point to move to the single BACS transmission channel so there is uniformity across the board irrespective of business size? Would that be an objective?

Stephen Banyard: We have seen in recent years a greater take up of direct credit by businesses and if that continued we might want to use it, but we have no plans at the moment to encourage people to move. We are simply going into the market, as it is at the moment.

Q345 Andrea Leadsom: Just to press a bit, I think you can probably sense that there is a great deal of scepticism around the room, bearing in mind the enormous problems that HMRC have had in the last few years, and the enormous inconvenience and expense that that has given to taxpayers. What seems to me extraordinary is that we have quotes from David Gauke in HMRC’s remit letter saying, "Real time information is crucial to the delivery of the Government’s welfare reform agenda." Then we have Dame Lesley Strathie saying, "The biggest challenge for RTI is data quality" talking about the problems with VAT numbers being in erroneously, and so on. Yet it does not seem to me that there has been an absolutely massive data cleansing programme. Surely RTI is utterly dependent on the quality of the data input. There is this enormous lack of credibility, I am afraid, about HMRC’s ability to deal with that. Can you just address that head on, and tell us what you are doing to ensure the quality of data?

Stephen Banyard: That is a very good question. The first thing we have been doing is that with our new pay as you earn system we have been working very hard to improve the quality of the data on it. For example, a year ago, when we issued the annual codes, that was the first that the public knew that there were data problems-first the Department knew there were data problems. We have worked very hard over the last year to get the data into much better shape, and before we issued the codes this year we tested every batch, using some of our most experienced staff, and we tested each batch back to the customer record. As a result of that the codes that we have issued this year have been the most accurate and complete set that we have issued for many years.

Q346 Andrea Leadsom: Can you give us a percentage accuracy that you think you have achieved? Do you know what the percentage is?

Stephen Banyard: We believe the percentage accuracy is 98.2% against something like 80% last year. We anticipate being able to move that up, but that is probably the most accurate set of codes that we have issued for many years. We are continuing to implement every stage of NPS as we go through the annual pay as you earn cycle using that very robust testing that we used on the codes, so that over time the NPS data quality will be much improved.

Then we come to RTI. We very much recognise that for RTI to work well, we have to focus on data quality. We set up a separate project, or a project within the programme, to deal with it. We have to work with employers, and we have developed a tool that enables us to look at employers’ performance and we can identify those who are having problems and those who are not. We are going to deploy 50 customer relationship managers to work in partnership with employers to help them and us match our data, and get it right. We are planning additional data cleansing exercises so that we can erase the whole profile of data quality, not only in HMRC but right along the supply chain. In that way we believe we can produce data that is of sufficient quality.

Q347 Andrea Leadsom: Bearing in mind how much rests on it-including the welfare reform plans of this Government, do you feel confident that HMRC is going to be able to deliver that absolutely crucial link in the chain?

Stephen Banyard: Yes, we are, and we will work very hard to make sure we do.

Q348 Andrea Leadsom: Will the multi-year reconciliations following RTI exacerbate data quality issues? I am assuming it would do because any one error gets multiplied in multi-year reconciliations or is that not right?

Stephen Banyard: The multi-year reconciliations was a one-off to enable HMRC to try and catch up last year. The reconciliations hereon will be one year at a time, at the time they should be conducted. Perhaps go back to what I said before. Every part of the pay as you earn cycle, which we are carrying out, we are testing very thoroughly to make sure what we are putting out to the public, what we are calculating, is correct. We are using our most experienced staff to do that.

Q349 Andrea Leadsom: Do you think we should ignore the experience of the past few years in assessing our level of confidence in HMRC’s ability to deliver RTI?

Stephen Banyard: I think you should take the past into account, but you should also take into account the lessons we are learning from the past. It is worth saying-and perhaps may give you some comfort-that whereas the introduction of NPS was a big change, in other words one system completely replaced another, the introduction of RTI is an addition to an existing system, and we don’t have to play it in as a big bang. We can phase the introduction of RTI into pay as you earn, and that is what we plan to do, so that we will first of all pilot it, we will have early adopters, we will phase people on to this system and then we will phase the use of it. Meanwhile, the existing NPS system, which is now bedding down well, will continue to operate pay as you earn.

Q350 Mr Umunna: Can I just ask about the IT system through which RTI is going to be delivered, and perhaps if you could just start with clarifying for us whether RTI will be delivered through the Aspire contract led by Capgemini or whether it will have to be delivered through another system? When Dame Lesley came in front of us she said that it was not covered by the Aspire contract. It seems that we have been subsequently informed by yourselves that it is. For the record, could you provide some clarity, please?

Stephen Banyard: Yes, I will ask Phil to come in on that, but I would say that RTI is going to be an integral part of our pay as you earn system, and I would want the people building RTI to be experts in pay as you earn, and Aspire are IT experts in pay as you earn. I would naturally look to them because this is not a greenfield development. This is very much an integral part of pay as you earn.

Phil Pavitt: To clarify what Dame Lesley said, on new systems we can go outside the Aspire contract and there is a laid down reason to do so, which I am happy to explain, should you wish. This is building on what we already have, so falls well within the remit of the Aspire work that we use. We are going through the Aspire mechanism to provide the service called RTI.

Q351 Mr Umunna: Obviously the contract is delivered for a certain cost. Will the costs remain the same with the additional burden of RTI?

Phil Pavitt: The quotes for the service, both the actual build of that service and the ongoing maintenance to that service, is in the business case that was referred to in the opening set of questions, and that then obviously is part of the ongoing fees that we pay for Aspire’s maintenance once the system is in place.

Q352 Mr Umunna: I suppose what I was getting at is, is it cheaper to deliver RTI through the existing Aspire contract as opposed to having a separate contract to deal with that, given the issues with the contract, which I will come on to?

Phil Pavitt: I think the common belief is if it goes through an existing contract is there some form of additional payment or is it not competitive? I know we are referring to RTI, but we are placing IT amendments and changes and new work all the time in HMRC. Each of those is subject to a well articulated and very open rigorous process to get value for money. If we are not happy as the requirer of those services we are allowed to go either outside or look for some check of those services using an external sort of process. Value for money in terms of making sure that it is not just some sort of black box, we have no examinations of costs, that is not the case in this point.

The reason why the Aspire contract is quite valuable to us in this place, of course, is elements of that are acting as a service integrator and what we get for that is, of course, they take end to end responsibility for delivery, they take end to end responsibility for daily management, the commercial responsibility, all of which we would have to do if we let the contracts ourselves-

Mr Umunna: I understand that.

Phil Pavitt: -which is acceptable.

Q353 Mr Umunna: Are you able to guarantee to this Committee that by delivering RTI through the existing Aspire contract you are giving maximum value for money to the taxpayer as compared to, say, delivering it separately? I understand the reasons for delivering it within the integrated contract.

Phil Pavitt: The short answer is yes, and the second answer is that things will change as the project goes on. I am sure things will appear, and they go through the same value for money process, which we have to make public account for, and people can test that or challenge that. But, yes.

Q354 Mr Umunna: Just in relation to the contract, and do correct me if my facts here are wrong, but my understanding is that it was entered into around 2009, beginning of 2010, for an eight-year period; is that correct?

Phil Pavitt: The RTI-

Mr Umunna: The Aspire contract I am talking about now.

Phil Pavitt: The Aspire contract started in 2004 and there have been three subsequent negotiations since that was done. There is a recent negotiation in 2009, which I think may be the one you are referring to.

Q355 Mr Umunna: That is the one I am referring to. Is it right to say that in terms of the way the costs are structured within that contract that there is a reasonably low upfront cost to effect changes but as you get further along into the term of the contract it is more expensive to make changes?

Phil Pavitt: Let me answer that in probably a more generic IT way first of all. I think the older software gets, no matter what your contract, directly contracted, individually contracted, changes to those applications or that hardware is always more expensive. That is not a contractual issue. That is whether you own the IT directly or you own it through an outsource arrangement. Because as it gets older it gets more complicated to manage, the technology gets older or, of course, you have made so many additions to it that to go back and do testing of it, to make sure it is accurate, becomes more complex. I think the life cycle of IT, hardware and software, as it gets older it all gets expensive.

Q356 Mr Umunna: Then why enter into such long-term contracts, particularly given that as a department you are susceptible to change with electoral cycles? I would rather it did not change so often in some cases, but the fact is those are the boundaries within which you are operating, and whenever a new Government enters, no doubt regardless of what party persuasion they are, they are going to cause you a headache because somebody like Mr Gauke will come to you and say, "Oh, I want all these changes made." Therefore why enter into such long-term contracts when you know that you are probably going to have to make a lot of changes and towards the end of these contracts, and given what you say about software, it is quite expensive later on.

Stephen Banyard: We have a very complex IT estate, which runs a very large number of systems so, in a sense, to be able to accommodate new Governments with new ideas, you need a continuity of experience to know what the impact is on the systems you have. My experience as a business manager in HMRC, watching contracts change, as it did from EDS to Aspire, is that however carefully you try and manage that change there is a discontinuity at that point of experience. You do not want to have those breaks any more often than-

Q357 Mr Umunna: In a way that is an argument for never changing your contractor.

Stephen Banyard: No, it is not an argument for never changing. It is an argument for doing it sparingly.

Phil Pavitt: Let me give you some reassurance around the contract itself to deal with the specifics. Longevity of contract is always open to challenge in terms of its value for money, and what we have introduced in the last two negotiations with Aspire is two important elements. First of all we have asked them within the costs we are already paying to renew the hardware and the core applications in the remaining period, which is 2017, of the contract for no additional costs, so we are not caught out by your very question, which is as stuff gets old, it gets more complex to manage and renew and change.

The second thing is we have a new process, which we call "costs not to exceed", and basically for every change that we make on every new addition we make, we have to retire or remove costs from applications of hardware that are already in there. We are not untypical of many Government departments that often stuff just stays in the estate because the decommissioning cost can be quite high. We have asked Aspire to manage and keep those costs and now we are, through decommissioning, reducing our overall burden, so we have not seen that constant spiral up that we may have seen over the last few years.

Q358 Mr Umunna: Do you find that because of the costs involved in making changes under the contract, under Aspire, you, if you like, hesitate and sometimes decide not to proceed with the implementation of updated and new technologies?

Phil Pavitt: Sometimes understanding the cost is where outsourcing can be very powerful, because sometimes if it is not outsourced the costs are almost not visible to the person commissioning that change. Understanding the precise cost does often ask people to, I guess, take a small check and just make sure they are getting value for money. That is never a bad thing. Does it prevent us doing stuff we have to do? Absolutely not. That is why we have good commercial negotiation and get the right answer.

The change that has been made recently, between now and the end of the contract, will save HMRC over £1 billion from what we intended to pay two years ago. It is a real tangible effect of making sure. There is nothing wrong with understanding the full cost before you launch in. Those companies that have not outsourced-and I come from the private sector, as you know-sometimes when it is in-source, you go ahead and the costs are kind of lost somewhere in the payroll side or internal costs. We do not get the true cost and therefore perhaps you do go ahead with things that perhaps in the end, business case wise, do not cost in. I think you use it positively as well as make sure it does not stop you doing essential stuff.

Q359 Chair: You may have technically answered this, but say I was another computer company and wanted to bid, how do you know I won’t come in with a better offer? How can you convince me that this is not-it started with £2.5 billion or something in 2004, was it?

Phil Pavitt: The actual original contract was just under £4 billion.

Q360 Chair: It went up to £8.5 billion. What does this give Aspire now as the third phase? How much is it, this third phase?

Phil Pavitt: Basically, Aspire is a collection of organisations and we give them annual figures around £700 million, depending on the size of the projects. That then splits across organisations in it. So if you are asking about the Capgemini side, or the Fujitsu side, each of them get an element of it. Is that your question?

Q361 Chair: I might ask you to write to us with this because the Minister is here for the next session, but of the £8.5 billion how much did Aspire get?

Phil Pavitt: The whole contract goes to Aspire.

Q362 Chair: That is what I am saying. Does the £8.5 billion go to Aspire?

Phil Pavitt: It goes to the companies that make up Aspire, yes.

Q363 Chair: I am asking what is the total amount of money that goes to the third phase, this recently negotiated contract?

Phil Pavitt: The £8.5 billion, which is the whole period, we have taken £1 billion off that, so it is the balance between now and 2017. It is easier if I write it down and send it to you, so you can see the breakdown.

Q364 Chair: I hear that is £8.5 billion but when this is finished how much will have been passed to Aspire in money terms? What is this latest extension relating to real time information giving the contractor? Why is it so difficult to tell me that?

Phil Pavitt: But there has been no contract extension. The last contract extension was the 2007 negotiation.

Q365 Chair: You are just using words here. They have, because you have extended their contract, this big job that you have just received £100 million from the Treasury; how much of that is going to go to Aspire? That is what I am asking.

Phil Pavitt: Right, okay.

Stephen Banyard: We are still in contractual negotiations with that, but in a broad sense the IT part of that would be about 70%.

Chair: How much?

Stephen Banyard: About 70%.

Chair: £70 million.

Stephen Banyard: That order of figure.

Q366 Chair: What is the figure? Just finish off the question for me, which was how can you persuade the Committee that you could not have had someone else to come in to even undercut, because the basis of them getting the privileged position at the moment is they received it so many years ago at a low price, and it has been well worthwhile to put that low price in first, hasn’t it? So with this big contract coming through you would think the market would be fighting to come in.

Phil Pavitt: I think there are a couple of answers to that. The first thing is whether those organisations who would like to undercut or be part of any bid for work for HMRC have the skills and the track record to do the work. That is the first point. There are 204 organisations in the Aspire organisation. We call it an ecosystem, the supply side of it, which covers virtually all the worldwide known application hardware organisations. Any company can join that ecosystem, there is a way of getting into it, but many of the people in that group who we don’t do business with are there in case they have the skill set we need. So other people can join it.

Organisations come to us direct and say, "Do you know what, we are not in the ecosystem, we are great at doing this and we have a mechanism for handling that." They are able to that, it is very open. We ask them to join the ecosystem so they are part of that Aspire construction that you referred to.

Stephen Banyard: We also have rigorous negotiations and we benchmark the costs against other suppliers.

Chair: We keep hearing, Mr Banyard, about vigorous negotiations on all things like Vodafone contracts and other people. It is a phrase bandied about with HMRC apparently. So there you are. Come on, we will finish with you because we have the Minister standing. Thank you very much, gentlemen.

Examination of Witness

Witness: David Gauke MP, Exchequer Secretary, gave evidence.

Chair: Welcome, Minister. I am sorry to keep you waiting.

David Gauke: Not at all.

Q367 Andrea Leadsom: Last November, Minister, you sent HMRC its new remit letter introducing yourself as being the Minister responsible, and that is why you were writing the letter not the Chancellor. So my first question is one of measurability, as in how should we, as the Treasury Select Committee, be considering your performance as the Minister responsible for HMRC?

David Gauke: I suppose a way of answering that is to explain how I look at HMRC and the way in which I assess HMRC’s performance. There are a number of aspects of what HMRC has to do, and their contribution towards reducing the deficit. First, of course, is getting the tax in and their capability there, including what is achieved through compliance yield. Within that context, of course, the spending review involved £917 million over the course of the spending review period, which is to be invested for increasing that yield.

Partly it is looking at the customer service, which is clearly something I am sure we will come to in detail where there is a need for improvement. Partly it is about meeting the financial targets they have been set in the sense of controlling their costs and finding efficiency savings, and in part it is their contribution to what Government is doing across the piece and, in that context, clearly RTI, which you have been examining in some detail, has an important role to play in helping the Government achieve its welfare objectives.

Q368 Andrea Leadsom: Obviously you will be very aware that this Committee has been quite scathing about some of the performance of HMRC, so can you talk to us a bit about your role vis-à-vis HMRC? How accountable are you for its performance?

David Gauke: I don’t have an operational role. HMRC is an unusual organisation as far as its governance is concerned, in that it is a non-ministerial department, and there are good reasons for that. For example, I think there are good reasons why Ministers are not involved in matters relating to specific taxpayers. It is part of the traditions that we have in this country that Ministers, politicians, cannot be getting involved. One looks at some of the circumstances that have happened in other countries and historically in the US, for example, where political opponents have had their tax affairs scrutinised, perhaps more heavily than they would otherwise have been, going back to the ’30s and so on.

It is a non-ministerial department, but I have a close relationship with HMRC in the sense that I have meetings with senior HMRC officials on a very, very frequent and regular basis, whether that be Lesley Strathie, whether it be Mike Clasper, whether it be Dave Hartnett, whether it be any of the director-generals. In recent months I think it is fairly unusual for me not to have had a meeting with Stephen Banyard most weeks, and sometimes several times a week.

My job is, to some extent, similar to what the Treasury Select Committee has to do, in that my role is to scrutinise. It is not to operate, direct, but it is to scrutinise and question and press and push and ensure that the concerns that we, as a Government, have about HMRC’s performance are conveyed and that HMRC and the Treasury can work closely together in achieving the Government’s objectives.

Q369 Andrea Leadsom: You have said that you are determined HMRC will be a far better department by the end of this Parliament. How will you assess its performance? Do you have yardsticks so there are certain targets that you have agreed personally with the department?

David Gauke: I think there is a range of indicators that one can look at, that we as a Government have highlighted. Partly there is the compliance yield, and I have talked about the additional investment in the spending review, and HMRC have said to us that they believe that that will enable them to increase compliance yield by £7 billion a year by the end of the period, and I clearly want to hold them to account to that.

In the area of customer service, I regularly ask for the latest details on the contact centre performance. For example, I take a close interest in post and how quickly HMRC is able to turn around post, and in the number of open cases, which, for example, have been very significant in recent years and are coming down. That is not an exhaustive list, but those are some of the statistics that I think have been particularly important over the last few months, and I take a close interest in ensuring that we move in the right direction on that.

I should also add that on a regular basis the Finance Officer, Simon Bowles, and I sit down and we walk through the various indicators of HMRC’s performance, including sickness absences, tax yield-all aspects of what HMRC are measured by-to see what trends are emerging, whether they be positive or negative. As I say, we do that regularly so that I can be kept abreast of any movements, any changes, whether good or bad.

Q370 Andrea Leadsom: Do you see an improving trend? Do you think your ambition of it being far better by the end of the Parliament will be realised?

David Gauke: There are certainly signs for optimism. I don’t want to be Panglossian here. There is still considerable room for improvement in contact centre performances. But to give one example, in the first four weeks of the last financial year, so in April 2010, I think it was the case that only 38% of calls were getting through. That is a particularly bad performance even by HMRC contact centre performances, but that was the figure this time last year. It is currently just below 68%. That is not a stellar performance but clearly that is a significant improvement. But that has to be sustainable and that has to be achieved over the long term. But there are some reasons to be optimistic about that.

The number of open cases has been up 17 million or so, but that number is coming down very substantially and I know this Committee has been told that by the end of 2012 we should have eliminated, if you like, the historical open cases and just be dealing with the cases from the relevant year.

The post backlog and how long it takes to turn round letters is something that a lot of parliamentary colleagues are concerned about. Again, there are signs of significant improvement on that but too often promises can be made-and this is not just about HMRC-and expectations can be raised. The important thing is delivering on that. The expectations are positive. The expectation is there will be an improvement by the end of this Parliament, indeed before the end of the Parliament, but clearly we need to deliver on that. I say "we" collectively; the Government and HMRC needs to deliver on that and my role is to ensure that it happens.

Q371 Andrea Leadsom: You set four objectives for HMRC over the spending review period. At least two of them are potentially rather contradictory-cost reduction and improving revenues. We have received quite a lot of evidence that suggests that the reduction in staff and the constant cuts mentality going on in HMRC is having a knock-on effect in reducing their ability to improve revenues. Do you think that that is true and is there something that you are intending to do about that?

David Gauke: I think both can be achieved. I don’t think they are necessarily contradictory and, indeed, the history of HMRC over recent years suggests that it is perfectly possible to do that. The compliance yield over recent years has increased from £7 billion to £11 billion at a period of time when resources have been restricted through greater use of technology, more advanced techniques, and so on. We are going to be strengthening the capacity on compliance because we are directing resources there. I think we can increase the yield.

There is also scope for savings, and to come back to personal tax for a moment, there was a time when 17 million open cases would have to be dealt with manually-clearly a very expensive process. Now, following the implementation of the NPS system, it is more in the region of 3 million cases that need to be dealt with manually-still a significant demand on resources but clearly less of a demand than having to deal with 17 million cases. So there are opportunities for efficiency savings, and some of that can be used to reduce costs, some of that can be resources that can be redeployed to increase yield and, indeed, the number of staff in the compliance and enforcement area is likely to increase over the spending review period after a period of time in which it has fallen, but nonetheless been able to not only maintain but improve its performance.

Q372 Mr Tyrie: You have opened up a discussion of the compliance yield, Minister. What criteria are you using to decide how much to spend on tax collection?

David Gauke: It might be helpful if I say a little about how the spending review settlement was worked out, and to some extent it predates the change of Government, but in the usual conversations that happen in the run-up to a general election between Shadow Ministers and senior officials, I put to HMRC our view that we felt that if there was a strong business case for investing in particular areas to increase the yield we would be more than willing to look at those arguments. This occurred in March of last year and, if you like, I set HMRC a set of questions about where they feel they could prioritise resources, and so on.

Following the general election, and in the months running up to the spending review settlement, these areas were worked on by HMRC. Essentially, they came initially to me and then of course to the other Treasury Ministers, in particular, the Chief Secretary, with specific proposals about areas where, with some additional spending, they thought there was a very clear business case that additional resources could be brought in.

We always said to HMRC that they could not be exempt from the pressures that existed as part of the spending review, and HMRC always accepted that. They came forward with a proposal saying, "This is what we think we can do to reduce costs and this is what we can do to reinvest in a way that would increase the yield". I think it would be fair to say that pretty well the HMRC bid was accepted by the Government. The Treasury kicked the tyres very hard and examined all the detailed proposals that were contained within it, which broke down to, "Well, this particular programme we think would cost X and produce Y." We examined the various proposals and, by in large, the HMRC bid was accepted, and that is why we reached the settlement that we did.

Q373 Mr Tyrie: If you don’t mind I will ask the same question pretty much again, which is: what are the criteria that you are using or that HMRC came to you with in order to make that judgement? Why not add another few billion to this investment? What are the criteria for deciding what that investment number is?

David Gauke: They took a view as to the amount of investment in specific areas that they felt could make a real difference, where they felt they could quantify it. For example, in the compliance areas, there were particular programmes that they wanted to implement, one of which, if I can use an illustration, was the campaigns that HMRC have launched and are launching aimed at particular sectors. They assessed the optimum number of campaigns that they could launch and where they would have the biggest impact with a yield that was identifiable and clear.

Q374 Mr Tyrie: Let’s try having a go at this question from a slightly different angle, for each pound spent how much across the board are you getting back? For each marginal extra pound spent.

David Gauke: Over the course of the spending review period, the overall figure is £917 million, which it is believed will yield an additional £18 billion. So it is quite a significant return.

Q375 Mr Tyrie: That is 20 to one. Let me rephrase my original questions. What led you to conclude that 20 to one was the right ratio?

David Gauke: The view from HMRC-it should be made clear that within the 20 to one ratio some particular proposals were more and some were less-was that with further investment the level of uncertainty increased, and their confidence on the yield diminished significantly. So these were the particular proposals that they felt confident would yield a good return.

Q376 Mr Tyrie: The first criterion is uncertainty increases in a non-linear fashion, there is always some uncertainty, but it starts to rise very sharply. Are there any other criterion?

David Gauke: Clearly, not unconnected, the scale of the yield was important and I think there needed to be clear additionality.

Q377 Mr Tyrie: There clearly is additionality at 20 to one; if you are spending an extra £1 million at 20 to one, most businesses would leap at it, wouldn’t they?

David Gauke: But in the sense of not just throwing money, let’s just have extra money that we are throwing-

Q378 Mr Tyrie: You are going to pick up 19 to one, aren’t you, for the marginal pound?

David Gauke: That is what we hope and expect, yes.

Q379 Mr Tyrie: Could I suggest that the Government come forward with some slightly more carefully thought through criteria for deciding where on that trade-off it wants to park itself? It seems to me to be the crucial number for deciding how much is spent in HMRC. To be frank, I haven’t had a clear feel from you about what yardsticks you are using to decide whether that number should be 20 to one, 18 to one, or 22 to one. All I have heard so far is there is a non-linear performance with respect to certainty of the yield at the margin above 20 to one. I understand of course this is an average, but above 20 to one on average.

David Gauke: It is important to say there was not a, "Right, if it is above 20 to one you are in and if you are below-" that is not how we worked. HMRC came forward with a range of proposals-

Mr Tyrie: We have had that. We have that firmly on the record from Mr Banyard.

David Gauke: -and they took an estimate of risk and what their capacity was. As I say, there weren’t proposals that were a little bit lower that we rejected.

Q380 Mr Tyrie: May I tentatively suggest, as a member of this Sub-Committee, that you take a look at at least one other criterion very carefully, which is the whole economy effect. An increase in investment in compliance yield will also generate an increase in compliance costs for businesses. What we need to be looking at here is not just a narrow yield question for HMRC but a much broader question, which is the overall effect on economic activity caused by changes in tax collection policy. I throw that out as a thought; I am not going to ask you to answer it. But, if I may say so, what is clear to me on the basis of this exchange is that this is an area that has not yet been thought through very carefully by the new coalition Government, and I think it would be helpful to have some clear yardsticks to guide us on where on that ratio the Government wants to take policy.

David Gauke: All I would say in response to that is that I think the particular programmes that we identified are well targeted and, for the vast bulk of it, this is about addressing criminal behaviour. I think it is right and incumbent upon us as a Government, at a time when we have to reduce the deficit, to take seriously tax evasion and other criminal attacks. A lot of this is to deal with cyber crime and so on. As to your point about the burden of-

Q381 Mr Tyrie: Just before we move off that first point, are you therefore saying that this is not an uncertainty question, beyond this 20 to one ratio, that the rest of the yield is really evasion?

David Gauke: A large chunk of the £7 billion a year by the end of the spending review period will be to do with evasion. Some of it is to do with avoidance, but a large chunk of it will be to do with evasion. I will-

Q382 Mr Tyrie: Minister, I think this whole area needs a lot of thinking through. Why don’t you come back to us in due course with some concrete suggestions for what those criteria might be?

Staff morale is at rock bottom. In fact, the latest indicators from the autumn of 2010 survey suggest that it has become even worse, and this is with a very high response rate of over two-thirds. Do you think that it is the responsibility of Ministers to address this question?

David Gauke: The issue of staff morale is clearly one of the major concerns that exists within HMRC, and it is a question I discuss with senior figures within HMRC on a very regular basis. In my role as the relevant Minister for HMRC, clearly it is significant to me. I visit a lot of HMRC officers and I am struck-this is not an original observation, I know others have said this as well, but I think it is true-that the staff I meet are very committed to their job, very engaged in what they do, very determined to do their job to the best of their ability, but clearly the relationship staff have with HMRC as an organisation is a very bruised one, and I think that is very long-standing. This is not something new, although it probably did not help that the numbers from last autumn were more or less done at the same time as the overpayments/underpayments story was running very hard in the press. There is a big challenge for senior management within HMRC, and indeed middle management within HMRC, to try to turn that round. There’s too much of an attitude of, "HMRC is them and not us" among the staff and that is something that we-whether me, as the Minister, or the Chairman or the Chief Executive or the board as a whole or, as I say, other levels of management-have a real challenge to try to turn that around.

Q383 Mr Tyrie: I will just have one more go at asking that question. You are quite right that senior management in HMRC have an important role to play, middle management in HMRC have an important role to play. My question was-let me put it slightly differently-to what extent is this your responsibility and to what extent is this a management responsibility? Again, what are the yardsticks for determining the demarcation between those two?

David Gauke: It is clearly principally the responsibility of the senior management, and within my remit letter there is a particular target on staff morale, but staff morale feeds into meeting some of those other targets which are important. I will do everything that I can to support senior management in improving those staff engagement scores. You ask how we measure this. I think those staff engagement scores are clearly the starting point and the principal means of measuring it. My role is to support senior management in trying to do that. I would just add one other thing. I am conscious that there is some fair criticism of HMRC, but there is also some unfair criticism of HMRC and, as a Minister, I try as hard as possible to choose my words carefully and not fall into the trap of kicking HMRC and HMRC staff when they don’t deserve it, because the vast majority of HMRC staff are trying to do their best and are really committed to doing a good job.

Q384 Mr Tyrie: As you know, Minister, I have said as much in the House and I strongly support the sentiment of your last point. May I just add one more thought for your consideration? Isn’t the lion’s share of the responsibility ultimately for Ministers, because it is Ministers who set the policy that creates the environment in which possible or impossible targets are then given to staff and, if you agree with that, don’t you think it might be helpful if you were to let us know at any time if senior staff have come to you to say, "The policy you are asking us to implement is a contributory factor to the drop in morale"? To the low morale, I should say, because it can’t drop much further.

David Gauke: It is possible for policy decisions to have an impact on morale, but I don’t think in all honesty that the issues of staff morale that currently exist are as a consequence of policy decisions that have been taken, at least for some time. I think there are historical legacy matters, and we may talk a little about the impact that some of the decisions that were taken in the mid-2000s had on HMRC as an organisation. But I take your point and it is perfectly possible that decisions taken by Ministers could have an impact on morale, but I don’t think in all honesty that is the cause of the position we are in at the moment.

Q385 Andrea Leadsom: That does seem to me implausible, if you will forgive me, because there is no doubt that it is Government policy decisions over the last 10 years towards HMRC that has in large part created the low morale. It surely must be. Most of the problems in HMRC date back the merger of Her Majesty’s Revenue and Customs and Excise and the massive changes in IT systems, the move towards automation, the reductions in staff, the cost-cutting. As we all know, in all walks of life, any one of those is a big contributor to lowering morale. Those are all political decisions, so it seems amazing that you don’t think that policy decisions have a hand to play in the low morale.

David Gauke: No, that is not quite what I was saying. Let’s take the merger. Logically, it is sensible for Revenue and Customs to be one organisation rather than two.

Andrea Leadsom: I am not really challenging the decision, just the impact.

David Gauke: That merger clearly gave rise to a lot of questions and was not implemented as well as it might have been. In drawing the line between policy and operational decisions, in that particular context I would say that was largely the operational decisions. Another one of the challenges that HMRC had to deal with was the implementation of tax credits. Now, there I think policy decisions had a very disruptive effect on HMRC and as a consequence a lot of resources were directed to clearing that mess up and taken away from elsewhere, and that had the impact on open cases within the personal tax system. So there is a relationship there.

Q386 Andrea Leadsom: Presumably Government had a hand in deciding not to reconcile open cases in 2010, which led to this enormous backlog.

David Gauke: Indeed, yes. That obviously predated this Government, but yes, there would have been a decision that Ministers were at the very least aware of. It is not a hard and fast line. The particular problem that we have at the moment is that there is a legacy of a lot of problems with an organisation through the mid-2000s that has taken a long time to build up trust and recover from. There is a big responsibility for management to try to address that, and it is probably easier for management to sort the problem out than it is for Ministers to sort it out. Maybe I should put it this way: Ministers can make the matter worse, but I am not sure that Ministers can make things better.

Andrea Leadsom: Yes, that is possibly true.

Q387 Chair: I raised this with Dame Lesley, and I thought she was putting the Minister-no, I won’t say that, but I think your answers to the question leave the problem unsolved. I am sitting here, and it was my Government who started the regular cuts in HMRC, and your Government are continuing them, and it seems from this side of the table from the evidence we have collected that some of the problems will not be solved unless there is more resources. We have something in from the Public Accounts Committee on call centres, so we might deal with it later, but the answer from the Department is that they accept there is a problem, but they need more resources. Now, if you won’t take responsibility for it, it is the senior management’s responsibility, but they are happy to continue. Year after year HMRC come to Committees in the House and accept there are problems, but they are always going to deal with them in the future, and they never do. Ministers go time after time, so nobody is going to. If the thing continues, they either ask you, Minister, for more money to deal with it, or if they are not asking you for more money to deal with it, it is clearly signalling there is no intention to deal with it, they are prepared to put up with it, call centres and all sorts, the closure of offices, and it is the taxpayer who is suffering, often the elderly, vulnerable. Now, at what stage do you say, "Enough is enough. You either sort this out, come clean with me and say it is resources and then it is my responsibility, or if you are not asking me for that, I want it sorted out"? When do you have that conversation? Are you going to have that conversation? Have you had that conversation, or do you disagree with the analysis?

David Gauke: There are particular areas such as contact centres where very clearly the performance of HMRC for many years has been well below that of most other contact centres. This is something that we all know about, and I certainly discuss it on a regular basis. Now, I am not in a position to direct HMRC precisely as to where they spend their money, but I certainly welcomed the decision to take on 1,000 staff over the peak period for tax credit renewals from April to September this year to try to address that and try to improve-

Q388 Chair: Do you really think as a Minister though that you are not responsible or not able to tell them where to spend their money? Surely that is the one power you have as a Minister-how they implement that. You direct the resources and if-

David Gauke: Strictly speaking, that is not the situation. It is a non-ministerial department, but-

Chair: Where do they get their budget from?

David Gauke: No, they get it from the taxpayer and we are their representatives.

Chair: You are the Minister.

David Gauke: But let me make this point-

Chair: Yes, sorry.

David Gauke: We do sit down regularly. I express my views, my concerns. HMRC senior management talk to me on a very regular basis, letting me know their thinking. There is a regular, frequent exchange of views. We bounce ideas off each other, there are discussions and it tends to be a collaborative process. The governance as such is not one where I, as a Minister, can in any way micro-manage how HMRC do it, but I would expect and hope that my concerns are reflected in how HMRC go about dealing with their budget.

Q389 Chair: As we sit, we know there is a difficulty with their call centres. Have you given any of your feelings, thoughts, ambitions, instructions to Dame Lesley-

David Gauke: Yes.

Chair: -or is just something you have noted as a problem?

David Gauke: No, no, we discuss this on a regular basis and, if you like, my role, I think, is to hold HMRC’s feet to the fire and ask the question, "Well, what are you going to do about this? How are you going to improve it?", some of which is about improving the capability of dealing with the existing number of calls, some of it is about reducing the number of calls in the first place. I express my views on the subjects very forcefully on a very regular basis indeed. I suspect that I have discussed this particular matter in three or four meetings in the last fortnight probably. So there is that exchange of views. I don’t want to say, "Look, it is hands off, I don’t have anything to do with it." I suspect I am probably more engaged with HMRC than most Ministers in my position, but we also have to recognise that there are people there who are full-time managers of organisations and in operational decisions I hold them to account, in a way a bit like a non-executive chairman. Of course, we already have a non-executive chairman, but I try to provide support in that role.

Q390 Mr Tyrie: Would you be prepared to go away and have a think about the extent to which the morale issue is linked to policy, and say something publicly on it, or send us a view on it?

David Gauke: I am more than happy to do that. As I say, I think this issue is-

Mr Tyrie: I would stop there if I was you.

David Gauke: Let me say this: I think that how we are going to fix this is something that HMRC has a responsibility to do and my job is to hold them accountable. I think Ministers can make matters worse, and I fully accept that point.

Q391 Mr Ruffley: The Public Accounts Committee said of the 2009-10 annual report of HMRC: "There is little transparency for the taxpayer over the way that tax disputes with large companies are resolved." What do you think as a Minister you can do to improve the transparency?

David Gauke: We have a long-standing principle of taxpayer confidentiality, and that does constrain transparency. It is the case that the National Audit Office is looking at the governance of some of the settlements that have been made with large businesses to ensure that that governance is appropriate, and that is absolutely the right thing to do. People do need to be reassured that everything is done in a proper way. I know that a lot of allegations fly around in this area. A lot of it, as far as I can see, seems to be pretty ill-founded, but unless we abandon taxpayer confidentiality-perhaps there will be a debate on that particular subject; there hasn’t been up until now-clearly not all the information is going to be in the public domain.

Q392 Mr Ruffley: But you think there can be an improvement on the current arrangements?

David Gauke: We need to ensure that the governance is all that it should be, and having a respected third party, if you like, such as the National Audit Office, to review and examine the governance of HMRC in this particular area I hope will provide that reassurance, and quite possibly constructive proposals as to what can be done.

Q393 Mr Ruffley: I know you don’t want to prejudge the NAO, but what improvements in governance might there be?

David Gauke: I think you probably have it right, I don’t really want to prejudge what the NAO says. HMRC is convinced that everything has been done properly and there has been nothing wrong with the process in accordance with the current governance arrangements, but I look forward to hearing what the NAO has to say, and if there is scope for improvement, clearly we should look to follow it.

Q394 Mr Ruffley: When do you expect that work to be done and when do you expect it to be published?

David Gauke: I am not quite sure what the timetable is on that. July, I understand now.

Mr Ruffley: 2011?

David Gauke: Yes.

Q395 Mr Ruffley: Just for the avoidance of doubt. In each of the last three years, how many cases dealt with under the HMRC high-risk corporates programme have been settled?

David Gauke: I would have to check the numbers and I don’t know whether all those numbers are in the public domain or not, but if you bear with me one moment. Right, 38 cases within the high-risk corporates programme, but not all of those have been settled, as I understand.

Q396 Mr Ruffley: The figures I have in a written parliamentary question is 2008/09 settled six, 2009/10 settled 12, and 2010/11-so up until this March just gone-seven, and those opened for the corresponding years beginning 2008/09 is four, then seven and then 2010/11 13. There seems to be quite a spike historically for those settled in 2009/10. Is there any particular reason for that?

David Gauke: I think that was-

Mr Ruffley: It was way out of whack with all the preceding and subsequent years.

David Gauke: Yes. Obviously that predates my time in office, so I am not privy to ministerial decisions made in advance of a year ago. The litigation strategy set out by HMRC, though that did predate the change of Government, has sought to try to settle where they consider that to be appropriate.

Q397 Mr Ruffley: Because under the coalition Government those number of cases, high-risk corporates programme, has doubled in the last 12 months. Why is that?

David Gauke: I believe because HMRC-as I say, I am not involved in any decisions to settle-had been further advanced in their settlements.

Q398 Mr Ruffley: But it is fair to say, isn’t it, Minister, there is quite a lot of public interest expressed through the media about large companies and the tax they pay?

David Gauke: Yes, yes, but I should also add that of course simply looking at the number of cases settled doesn’t necessarily represent a complete and accurate picture of the size of settlements or tax liabilities. Some of these vary in size quite significantly.

Q399 Mr Ruffley: Which brings me elegantly on to my next question: how many tax investigations were settled for a sum of more than £10 million in each of the last three years?

David Gauke: I don’t know whether you have the numbers in front of you, I don’t have them.

Mr Ruffley: Or what about something that might stick in the mind: tax investigations settled for more than £100 million in each of the last three years?

David Gauke: I suspect at that point we might be running into issues to do with taxpayer confidentiality. What I can say is at 31 October 2010, there were in HMRC, as a whole, 22 businesses where the total value of tax under consideration in respect of all issues on those businesses was greater than £250 million.

Q400 Mr Ruffley: Could we just go on to settlements under controlled foreign companies legislation? Do you have any figures to hand on that? What I am particularly interested in is how much tax was estimated to be at risk, that is to say, before an inquiry had been completed, what was estimated to be at risk involving CFC legislation in each of the last three years, and in how many cases the tax at risk was more than £100 million.

David Gauke: First of all, before returning to the details, it is worth making the point on the estimated number that of course, almost by definition, that is a preliminary number, and until the work is-

Mr Ruffley: It is why it is an estimate.

David Gauke: Exactly.

Mr Ruffley: But you will have estimates, won’t you?

David Gauke: Well, I can’t provide those figures now, but I am quite happy to write to the Committee to provide those numbers. But I would just make this point: sometimes those estimates are therefore used as, "This is the money that is surrendered." They are, as you rightly say, estimates. They are preliminary until HMRC is able to investigate these matters more fully, puts more work in and discusses this further with the relevant taxpayer, who provides more information. Those estimates are very, very much ballpark figures, and by no means likely to be an accurate assessment.

Mr Ruffley: But it still will be interesting, because it is one of the metrics you use, or your officials in HMRC use, so I think if you could write to the Committee about how much tax was estimated to be at risk in cases involving CFC legislation and how many cases were over £100 million, that would be useful, if that is available.

David Gauke: I am very happy to provide anything we have on that. All I would say is that it would be a mistake to look at what the estimate is and the final settlement and say the difference between the two-

Mr Ruffley: No, I quite understand.

David Gauke: -is tax that has been lost somehow by HMRC.

Q401 Mr Ruffley: Sure, but it is not a nugatory point, is it, because you will do estimates for a reason? They must be of some assistance to the Revenue in estimating what they think the possible yield is before they go through the full inquiry, which is what I would be interested to know.

How many are in the team at HMRC that deals with these high-risk corporates?

David Gauke: That can vary from time to time. I think again, if I can’t provide you the numbers in the next few moments, I can certainly let you have details of the size of that team.

Q402 Mr Ruffley: Sure. The senior members of that team, by which I mean the person or persons who decide finally to settle, when to settle and at what quantum to settle, who are they, what grades of officials are they?

David Gauke: Well, again, that will depend on the particular settlement, the size of the settlement and the nature of it. Depending upon which settlement, it could be very senior staff indeed.

Q403 Mr Ruffley: Have any settlements ever had to be referred to you at all?

David Gauke: No, and nor would they be. I cannot be involved in those decisions, for the reasons I was outlining earlier. It wouldn’t be appropriate for Ministers to be involved in decisions that could benefit or disbenefit specific taxpayers.

Q404 Mr Ruffley: Yes. In the Vodafone case, because of the adverse publicity about what may or may not have happened allegedly, did you have any discussions with senior members of HMRC who were involved in that decision to settle?

David Gauke: I had no discussions about Vodafone in advance of the settlement.

Q405 Mr Ruffley: The question I think arises of the numbers of officials who resign or retire, leave HMRC and then go on to work either for tax consultancies or law firms or FTSE 250 companies. Do you have the data on the number of officials who at one time or another have worked on the high-risk corporates programme or its predecessor, those who have left in the last three years and how many have gone into any of those consultancies, law firms or companies?

David Gauke: I know we have provided numbers of staff who have moved from HMRC to companies or firms, as you mentioned. Whether they are for high-risk corporates-

Q406 Mr Ruffley: Is that information available?

David Gauke: If that information is available, we will certainly be prepared to provide it.

Mr Ruffley: I just wondered if-

David Gauke: Yes, as I say, we have the overall figures, but we won’t at the moment-

Mr Ruffley: Not those who have worked at any time for the high-risk corporates?

David Gauke: -be able to break it down. Let me see if we can do that and I will provide that.

Q407 Mr Umunna: Following on from Mr Ruffley’s questions, could you provide us with the aggregate value of claims brought in court in relation to the high-risk corporates programme and the aggregate value of the sums for which those relevant cases were settled for each of the last five years? Is that information you can provide? That doesn’t involve any breach of confidentiality; I am just asking for the aggregate value.

David Gauke: Let us see if we can do that, and if we can’t, we will give you an explanation. But no, let us see if we can provide that information.

Q408 Mr Umunna: Minister, before I move to Mr Banyard, because I have a couple of questions about a case of record, I noticed in the answer that you just gave that you said that you weren’t consulted in relation to settlements in advance of them being made. Do I take it from that answer that after settlements come to perhaps the public’s attention, you do then ask questions? There have been a range of written questions and answers, and also oral ones with, for example, the Member for Haltemprice and Howden, about this. Do I take it that you take an interest after the settlement and ask questions?

David Gauke: Yes. HMRC will not and cannot provide to me information that is not in the public domain. But as I was saying earlier, I have regular conversations with senior HMRC staff and I would need to ensure that I am comfortable or that we can be comfortable with the position that has been taken within the constraints that exist, which are significant. So I have not sat down and had someone talk me through the Vodafone settlement, but nonetheless I, as you would expect, I would seek reassurance on the governance here and ensure that there is nothing that strikes me as being unusual or wrong.

Q409 Mr Umunna: I will come back to you. Mr Banyard, can I just ask you about a case which has been reported, because it was heard in open court, and that relates to Goldman Sachs. For a 26-month period in the late 1990s, that investment bank set up an offshore vehicle to pay bonuses to their London bankers, and under the arrangement London staff who were employed by that vehicle were seconded to the London offices and essentially were employees and worked for Goldman Sachs’ headquarters here. That arrangement was subject to proceedings which were brought by-well, which occurred between HMRC and Goldmans that started in and around December 2002 and continued through to the end of 2009, because HMRC was concerned that this arrangement was being used to avoid the payment of national insurance. Now, all that I have just said is a matter of public record and has been heard and discussed in open court, and there are various judgments in the interlocutory hearings which have formed parts of those proceedings online. Are you familiar with those proceedings?

Stephen Banyard: I am not particularly familiar with them, but the settlement terms are not in the public domain and I couldn’t comment on them here.

Q410 Mr Umunna: I am aware of that, and you will note that I have not asked you anything about the settlement terms. I have just asked you about the case so far. Just in terms of the arrangement that was the subject of those proceedings, which was an employee benefit trust, those were in operation in a number of other companies at that time. You, HMRC, also brought proceedings against them in relation to those arrangements, and again, all of those proceedings are a matter of public record. Now, you will note I have not mentioned the companies, I have not even cited the proceedings, but you will agree, or perhaps you could confirm that what I have just said is correct?

Stephen Banyard: We have taken settlement agreements, or we have worked on EBT with other companies, yes.

Q411 Mr Umunna: With respect to those companies, and these were companies with whom you had similar proceedings at around the same time as Goldmans, you successfully litigated those proceedings and settlements were reached in or around 2005, which secured the full payment of national insurance. Again, I have not named the companies and I have not cited the proceedings. I simply asked you to confirm that what I have just said is correct.

Stephen Banyard: I believe so, but I would need to look into it in detail.

Q412 Mr Umunna: Okay. However-and again, this is a matter of record, because it is all in the Goldman’s interlocutory hearing I have just referred to-Goldmans refused to play ball over EBTs and so the proceedings in relation to them carried on for another four or five years. Again, that is all a matter of public record. I suppose this is a matter of public record, but you may or may not wish to comment on it, but the intention was in that case for Goldmans to use the EBT vehicle to avoid national insurance contributions in the sum of £23 million through a complex share purchase arrangement and, as it stood at the end of 2009, there was around £10.8 million worth of interest owing in addition to that. So we are talking around £40 million. Are you able to confirm any of that?

Stephen Banyard: No.

Q413 Mr Umunna: Could you perhaps tell us why, or could I perhaps invite HMRC to clarify what happened in that case, because there have been details of the settlement or leaked details in the media in relation to this particular issue. You will understand that insofar as the public is concerned and the people we represent are concerned, they would expect large corporates and wealthy individuals to be required to contribute to the Exchequer and meet their tax obligations in the same way as everybody else. Now, when your colleague, Dave Hartnett, has appeared in front of us before, and was, I think, questioned by Mr Norman in relation to the Vodafone case, obviously a view was taken within the organisation that there needed to be clarification to assure the public as to what the terms of that arrangement were. Now, in relation to Goldmans, there are serious allegations which have been made in the media in relation to HMRC settling this case and also in relation to Mr Hartnett in particular. Would you consider as an organisation publishing or providing to us information about that case so that the public can be assured that the proper procedures have been followed?

Stephen Banyard: I think the sensible thing would be for us to take that away and write to you.

Q414 Mr Umunna: Could you perhaps just tell us-Mr Ruffley asked about the people who decide upon the settlements-just a bit about the process and the procedure involved in deciding whether to settle such cases?

Stephen Banyard: I am not a member of the high-risk corporates programme, so I don’t have first-hand knowledge of it. The settlements are settled at a level appropriate to the size and the complexity of the case and the precedent value. It might be at director level, director of a large business service, it might be more senior, depending on the size and the severity of the case. The processes followed are laid down. I can’t personally tell you what they are here, but again, we could let you have a note which would tell you how we go about that.

Q415 Mr Umunna: Could you also tell us in relation to the particular case that I have raised whether the internal procedures were met in relation to the Goldman’s settlement?

Stephen Banyard: We could do that in the letter as well.

Q416 Mr Umunna: Thank you very much. Finally, can I just ask you, Minister, going back to the answer you gave me before in relation to taking an interest in matters that have arisen after settlement, because they become an issue of public interest, are you aware of the subject that I have raised this afternoon?

David Gauke: I am aware that there are a number of press reports and press comments.

Mr Umunna: That wasn’t the question I asked.

David Gauke: On this specific one, I have to say I have not had any specific conversations with HMRC staff about this particular matter. I have not-

Q417 Mr Umunna: So you are not aware of it?

David Gauke: I think I am aware of issues with regard to Goldmans along these lines, but this is not a subject matter which I have discussed with HMRC senior management.

Q418 Mr Umunna: Minister, you said that you speak regularly-almost every day, it would seem-to HMRC officials, including Mr Hartnett, who appears to, according to the report, have settled this case. Given that it is a matter of public interest and you meet regularly with the HMRC personnel I have just cited, why haven’t you asked any questions about this particular case?

David Gauke: I have discussed with HMRC the general governance and the arrangements as far as settlements are concerned with large corporates. I have had discussions that have been about the governance with regard to Vodafone and in advance of Mr Hartnett speaking to this Committee earlier in this year. I was aware that he was going to set out further details to this Committee, but I don’t see it as my role to discuss each and every case just because there has been a press report critical of HMRC in that, as long as I am satisfied that the general approach taken by HMRC is the appropriate one.

Q419 Mr Umunna: But isn’t that a slight contradiction, because you did take an interest in Vodafone, you did ask questions about that, because it was a matter of public interest, and presumably-if you will let me finish-politically sensitive? I would say the same characteristics apply to the Goldman case. You have just confirmed you are aware of this and you are aware of these reports, yet you don’t seem to have asked any questions in particular about this politically and publicly sensitive topic when it has come to your recent conversations with HMRC officials, one of whom has been named in connection with that particular case.

David Gauke: I am conscious that a lot of allegations seem to be made on the basis of little or no evidence, as far as I can see. I also made the point that within the constraints that exist as far as client confidentiality is concerned I don’t expect-indeed, I am not entitled-to be talked through details that are not in the public domain. I do have an interest in ensuring that the overall governance is correct, there is nothing that appears to be out of place, and I do that in a generic case, but I think it would be fair to say that on Vodafone, which has been a particularly high-profile case, I had further discussions, but again, no specific information was provided to me. Of course, in the Vodafone case there were more details that were in the public domain, but I am not in a position to comment on specific cases.

Mr Umunna: But you have said that part of your job is to scrutinise and I would argue although you don’t have operational responsibility for what happens at HMRC, insofar as the public is concerned, they will want to know that you are ensuring that there isn’t one set of rules for wealthy individuals and very large corporates and investment banks and another set of rules for everybody else.

David Gauke: Of course, but as I say, we have the NAO that is looking at the governance in this area. They are able to do that to a considerable degree of depth and we await their report in July.

Mr Umunna: Thank you.

Q420 Jesse Norman: Minister, just to pick up on the last point about Vodafone, of course it is right, as you have said, that you should not be, as it were, inserting yourself into every process of tax recovery. The amounts in this case are enormous or potentially enormous, and so I suppose that would be a basis for personal investigation. You will recall that the amount received was £1.25 billion on about 10 years of potential tax paid. Do you know if that sum included any interest that was accruing over that period of time?

David Gauke: I would have to check that. I think the answer is yes but again, I must stress that I am not informed of any details that are not in the public domain, so I am not going to be a useful source of information to you if you want more details that are not already out there.

Q421 Jesse Norman: I understand. As far as I am aware, it isn’t out there. I wrote to Lesley Strathie a month ago for further information on this and I have yet to hear the detail on it. It would be an interesting disclosure. There are a number of inconsistencies in even Mr Hartnett’s clarification that would merit further investigation. He made the very interesting general claim that, as far as he was aware, there had never been a case to his knowledge in which a large corporate had failed to pay the tax that was due.

David Gauke: Correct me if I am wrong and you were obviously asking the question, but I think it was in the context of whether there had been penalties levied on large corporates and whether a large corporate had been guilty of tax evasion.

Q422 Jesse Norman: That wasn’t the phrase he used; that certainly was the context but it wasn’t the ph r ase used. The other inconsistency that was very striking was in his claim that they had essentially gone through a long process of negotiation that had been rather stalled until he had intervened and yet the amount of money had been exactly what the Revenue had been seeking. Those two claims don’t seem likely. It is likely that the Revenue didn’t settle for the full amount that it was seeking during this process in negotiation. That would be something to look at if you were so minded.

Parallel to that is the case of WPP. Are you familiar with the settlement recently that may have been done by the Revenue in connection with WPP?

David Gauke: I am not aware of, again, anything that is not in the-

Q423 Jesse Norman: No , I don’t remember the exact date when it was concluded. I mean, it would be interesting to know whether it was connected with WPP’s decision to relocate back in this country and that would be something else to look at. I a m sure you share my view, Minister, and it came out of testimony with Mr Hart nett , that there is quite a disproportionate effect in terms of the penalties levied on small businesses as compared with large businesses. Small businesses pay penalties at a rate of about 200 times those of large businesses. N ow, there is undoubtedly under- compliance of small businesses, there is no doubt about that. The question is really whether you might, on our behalf , as p arliamentarian s , be able to satisfy yoursel f that those procedures are fair and have been fairly implemented because they do hit firms very hard in our constituencies. O ne firm in my area- Herefordshire has some activities in the defence area and this firm does some imports and exports of kit, equipment, uniforms - brought the Revenue in to help it to think through a difficult issue of coding and was then appalled to discover a team that basically then went on a fishing expedition in its own offices for a period of time. I t i s clear that the Revenue has extended some grace to some small businesses, but there does seem to be an unfairness in the way that it i s proceeding against these two different classes of taxpayer.

David Gauke: Obviously I can’t comment on the individual constituency case that you have. The penalties regime exists where a taxpayer has either been careless or has been dishonest, in very broad terms. Now, large corporates may be many things. They may be very aggressive in their tax planning and they may well engage in tax avoidance, and HMRC will try to address that. But, by and large-I think is the point that Mr Hartnett was setting out-Mr Hartnett’s experience, which is considerable, is that large corporates don’t tend to be careless or dishonest. They are many things but not that. So that is why penalties don’t tend to be levied on large corporates. SMEs, a minority of them, are careless, and a minority, a small minority, one would like to think, perhaps are dishonest, and that puts at a disadvantage the majority who are honest and careful and comply with their tax obligations, and clearly a significant part of the tax gap does lie within the SME sector. So HMRC does have a role to pursue that and that is why there is a penalties regime, but if you are making the case to me that there may be occasions where HMRC get it wrong but there are SMEs who are pursued by HMRC in a way that is disproportionate and unfair and unreasonable, of course that does happen.

Jesse Norman: And who may be neither careless nor dishonest.

David Gauke: Indeed, yes.

Q424 Jesse Norman: One of the things that ha s been very striking about the progressive reorganisations of the past decade in the Revenue and Customs has been the essentially pulling away from the customer , to the removal of local offices, closure of local offices, removal of staff from local offices. I think myself that i s one of the reasons why customer service performance appears to have gone down and why morale is poorer because it i s harder to sell - and, of course, an awful lot of cost has been placed in the hands of the individual that didn’t exist before because they could to the local office and get the tax sorted. O f course technology doesn’t require centralisation , y ou can use technology to localise. At some point, will you be sympathetic to the idea of looking at relocalising some services in order to provide better tax advice and better service to local people?

David Gauke: I think it is worth making the point that demand for the face to face service is diminishing. I saw one figure showing that it has fallen by 40% in the last year or so. There are occasions where monies are spent on an inquiry centre, for example. There is one example, I can’t provide names for commercial confidentiality reasons, but there is one inquiry centre where HMRC has been paying £162,000 a year in rent and that inquiry centre gets, on average, four appointments a week. There are another two examples where the rent is £26,000 and £34,000 a year and they are getting, on average, one appointment a week each. It is clearly not sensible to pursue that but we can be, and I think HMRC can be and is being, more imaginative in the sense that there doesn’t necessarily need to be a separate HMRC office incurring all those costs. HMRC can make use of job centres or council offices and so on and be much more creative in the way that is done. By and large, although there are local offices that have been closing and have been closing for a number of years, it doesn’t mean that face to face services are being withdrawn. But HMRC does need to be proportionate to the customer demand. If, in one particular town, there is only one appointment a week, then HMRC really does have to think long and hard about how many resources it devotes to providing face to face service in the traditional way and whether there other ways in which it could be done, perhaps through engaging the voluntary sector, for example? Are there other ways, perhaps by moving around, having travelling HMRC inquiry centres? I think HMRC is looking at how that service can be provided more efficiently while still protecting that desire for face to face service for people who really need it.

Q425 Jesse Norman: I wonder if you just couldn’t relocate some central processing into local areas to give them critical mass . A classic example is the Herefordshire tax office. Th at office used to have 95 people and now has 10 people and, of course, that isn’t just customer facing people, it is people with expertise who have been pulled out, so you don’t get the answers . T he net result : a lot of additional cost on the individual business or the individual person. It would just be a mater of dividing up the pack slightly differently from centralising in large office blocks.

David Gauke: Yes, I can see that argument, but I can also see the alternative argument that at a time, more than ever, when we have to find efficiencies, where we have to get more for less, can there be some rationalisations that involve savings? That has been a course that HMRC has pursued over recent years and there is indeed some evidence, if one looks at the compliance yield, for example, that has gone up over recent years at a time when expenditure in this area has been reduced. I think there is quite a strong counterargument to be honest.

Q426 Jesse Norman: Absolutely. T he compliance yield is, I think, a useful gross measure but, of course, if what you have is a long tail of people who aren’t paying the right tax because they a re not being pursued or because they hav e been poorly coded or they ha ve just slipped through the system, the compliance yield can go up but morale and the feeling that you ought to be paying tax and there are people you know who aren’t paying tax who should be, which is v ery corrupt ing to morale , that could continue. So, as you say, it is a bigger picture.

To go back to RTI, what political decisions, Minister, do you think will need to be made and by whom to safeguard the delivery of th at ? Obviously it is going to be quite a tough task.

David Gauke: Well, obviously you had a session with Mr Banyard earlier to talk about that and-

Q427 Jesse Norman: I a m talking about the political side really.

David Gauke: Yes, and it is a challenging timetable but HMRC is confident that it can deliver on that timetable. Again, I discuss this matter regularly and ask the questions about whether it can be achieved and I, for one, welcome this Select Committee’s interest in this particular area. The performance and reform unit, which used to be the Prime Minister’s delivery unit, is very heavily involved in scrutinising, for example, the data quality assessments and so on. It is important that we get this right. It is important that we can deliver this and that we don’t jeopardise the workings of the tax system, but we can make an important contribution towards bringing in universal credit that would have a significant benefit to the country as a whole.

Q428 Jesse Norman: Is that a nice way of saying you don’t think there are any specific political decisions that can be taken between now and it happening?

David Gauke: It is largely an operational matter. It is a big operational matter but I am keen to be, within that constraint, engaged and interested and asking searching questions as other Ministers are in DWP.

Q429 Jesse Norman: But you wi ll only be given publicly available information in response to that.

David Gauke: This isn’t to do with client confidentiality. This is not about taxpayer confidentiality, at least not yet.

Jesse Norman: Thank you.

Q430 Chuka Umunna: Minister, I am left a bit troubled by some of the answers you have just given to not only Mr Ruffley and Mr Norman’s questions but mine too, because it leaves me wondering where on earth is the accountability in the settlement of some of these tax disputes? I am reading from the Public Accounts Committee report here and this is HMRC’s litigation and settlement strategy. It states: "Where its legal advice is strong, it should not accept settlements from less than 100% of the tax and interest due for less than 100% of the tax and interest due." Now, you say that you don’t get involved with any of these negotiations or settlements until they have occurred and so, in terms of your scrutiny and accountability remit as a kind of actor on behalf of Parliament, you are really absent from the scene, and then afterwards, once you have become involved, the flag of taxpayer confidentiality goes up. Meanwhile, we are left none the wiser as to whether or not HMRC is doing its job properly and whether people within it are behaving properly. What is the route out of that? Do we need to set up a new Committee of the House akin to the Security and Intelligence Committee where Parliament can hold HMRC to account on these matters and do so in a way where we don’t have all these confidentiality issues because we are not getting much information? I think the only incidence of that happening, as you have acknowledged yourself, is in relation to Vodafone because of the numbers involved. They were huge, those numbers, but how can we have confidence if we are struggling to really hold you accountable?

David Gauke: As I mentioned earlier, and as you will be aware, the National Audit Office is reviewing the governance in this area and we await that response, but I do-

Q431 Chuka Umunna: That i s governance though , Minister . We a re looking at what is -

David Gauke: It is governance, but let me point out that one of the risks of an alternative approach is that, if politicians from whatever party find themselves becoming intimately involved in decisions as to whether a taxpayer has paid the right amount of tax-a highly technical matter where, let us be honest, most of us, as Members of Parliament, are not hugely well qualified to make that judgement-the risk may exist in future that these decisions become increasingly politicised and popular taxpayers get a better deal than unpopular taxpayers regardless of what the law says. This is a matter for the law. This is a matter for strict legal requirements and accountability, and the challenge here is to find a way in which-and I can understand that-

Q432 Chuka Umunna: So you don’t think the status quo is necessarily entirely satisfactory. I appreciate what you a re saying, Minister, and I know you used to practi s e law, as did I, so I completely understand the confidentiality aspect . D o I take from what you are saying that you agree that the status quo is frustrating and not terribly satisfactory , but that if we can, we need to look to a better system that does not necessarily take us down the adverse avenue that you a re rightly pointing out to me now?

David Gauke: I find it frustrating that sometimes allegations are made. We have to remember that some of these allegations question the integrity of dedicated public servants on the basis of little or no evidence, and it concerns me that some of these decisions are becoming politicised and it is quite difficult for HMRC to answer back because they are not entitled to put confidential information into the public domain. It is not possible for me, as the Minister, to see all the information, but is the solution that somehow politicians become more intimately involved in these decisions, scrutinising them and sitting there with a tax rule book and the financial figures for a particular taxpayer, trying to work out whether a settlement that has been reached? Whether that is, in any way, an adequate or satisfactory solution, I have to say I really do doubt.

Q433 Chuka Umunna: But slightly the complete opposite end of the spectrum-

David Gauke: Yes, I suppose, but even finding a compromise, I think there are some real challenges there. But, as I say, the NAO is looking at this particular area and I am sure that HMRC would want to engage constructively with any recommendations the NAO would come up with.

Chuka Umunna: Thank you.

Q434 Steward Hosie: This Sub-Committee has had evidence that investigations into SMEs and individuals can appear heavy-handed or targeted, there is a presumption of guilt. I know when you were in Opposition you were concerned about the impact of those sorts of investigations on individuals and SMEs, but now we are looking for an extra £7 billion in compliance yield, what assurances can you give that they won’t more heavy handed, that things will be done proportionately and properly as the Revenue strive to find that additional cash?

David Gauke: I think it is a very good question and I think it is one of the challenges that HMRC and any tax raising authority has to try to meet to be effective, to ensure that there are sufficient deterrents in place, but that there is a culture of compliance with the tax law that exists for all businesses. Businesses that aren’t tax compliant, SMEs or large corporates or individuals, if they have done wrong, should fear the consequences. Equally, and this comes back, I suppose, to one of the questions put by Mr Tyrie earlier, HMRC shouldn’t be getting in the way of businesses trying to do their business in a way that is disproportionate exactly as he set out. It is a constant balancing act and that is a big challenge for HMRC. Where they have developed in recent years is at having a better understanding of, if you like, customer segmentation-to use management speak for a moment-but understanding where the risks lie, what are the characteristics of the noncompliant, how to allow the willing and able to get on and leave them alone, as it were, and target activity on those most likely to be in breach of the law. As these techniques become more sophisticated and useful, then that is something that gives HMRC an opportunity to target their activity more skilfully.

Q435 Steward Hosie: I think that segmentation is sensible. I a m sure the professionals in the Revenue will understand the risk sectors perhaps more than we would , but whether it i s a risk sector or not, on many occasions business people, small business people have said, "Out of the blue, we received a threatening letter. You pay the mon ey by Christmas Eve or we’ll sequest rate by Hogmanay" with no human intervention. The constant complaint is, "Why doesn’t someone from HMRC come and understand my business ?" particularly if we have just been through a difficult economic period . These aren’t people who are misbehaving; they a re not being wilful, they a re not being evasive, they a re not trying to avoid, they want to pay their dues and they a re at their wits’ end when the threats emerge quickly without the human intervention of someone saying, " Ah, I can see what you’re trying to do here". How do we build this into the culture?

David Gauke: Yes, I should make the point that HMRC’s time to pay process-that was introduced under the previous Government-was one that I think, across the board, was widely welcomed and considered to be a good process, effective and well run, which provided a lot of support for small businesses going through temporary difficulties. That time to pay process continues, it is still in existence and for those who are going temporarily through a difficult period where they can’t pay tax, HMRC continues to be sympathetic. It is not designed for those businesses that are only viable on the basis that they don’t pay tax, and I don’t think anyone would disagree with that. So we are at the point now where there may be businesses that have been in the time to pay arrangements for some years where clearly HMRC is going to be less sympathetic for a further request for time to pay because it has been going for some time.

There is, again, a balance that needs to be struck on the basis of collecting debt. HMRC has had to write off considerable sums every year of outstanding debt for businesses that then go bust; that is largely where the write-off belongs. And to protect those taxpayers that do pay their taxes on time, it is important that HMRC is effective in collecting debt, but I entirely agree with you, Mr Hosie, that there is a balance that needs to be struck in not being overly aggressive. One of the challenges is HMRC has to make so many judgements. It deals with so many businesses, so many individuals and so on. It will get some of those judgements wrong and there will be some hard cases, and by and large, as Members of Parliament, we tend to hear about them pretty quickly when they happen. But, as I say, I think HMRC is striving to get that balance right. Stephen, you wanted to come in on this.

Stephen Banyard: We put a lot of effort into helping businesses get it right in the first place, so we have a team of 350 who give workshops, seminars and help to small businesses, particularly those who are just starting up, to small employers, new employers and so forth. So we put a lot into that. We have developed the business link website; we have put a lot of material on to that website that will help businesses. For example, there is a simple record keeping system there on the net that they can download and use. We have people who go out and do record checks and help people, so we put quite a lot in at the front end to encourage and help people to get it right but equally, we know that 35% of small businesses are attitudinally non-compliant, so we also have to go in-

Q436 Steward Hosie: Sorry, can you just explain that? Does that mean their attitude is wrong in the view of the Revenue or they a re simply doing the wrong thing?

Stephen Banyard: No, they are not predisposed to want to complete the tax return fully and accurately.

Q437 Steward Hosie: 35% of businesses ?

Stephen Banyard: Not that they do. We have done a customer analysis, customer research, and asked people what their attitudes are to paying tax. Essentially, you ask people are they willing to pay tax and are they able. You don’t ask those questions, you ask it in a much complicated way. If you do that, then in small businesses about 8% would come in under a group that we would call "rule breakers", people who understate their profits and their tax, but for every one who does that, there are another four who would if they thought they would not be caught out.

Q438 Steward Hosie: So the Revenue’s attitude at the outset to a whole group of taxpayers, and this is fascinating, is one in 12 of you are going to cheat and one in three of you want to cheat. That i s a hell of an attitude to take to the broad mass if that is the policy you ha ve just given us.

Stephen Banyard: No, no, no. The approach is that we want to encourage people to comply. We need to understand where they are. We need to provide systems that encourage people to declare their profits fully and that is where we are. It is far more effective for us to encourage people than to go in and try and find out after the event what has been understated. So the whole thrust of our compliance policy is aimed at encouraging people to get it right.

Q439 Steward Hosie: Indeed , and that is a good thing , but what you have just said is astonishing. I ha ve never heard this before. So your inspectors and all your other staff have a working assumption that at least a third of your clients want to cheat.

Stephen Banyard: I don’t think they go out with that assumption at all. Our inspectors go out and look at the facts as they see them. They don’t go out with preconceptions.

Q440 Steward Hosie: Right but attitudinally, you know one in 12 will and one in three or more want to.

Stephen Banyard: That is the result of our research, yes, but that is not the way in which our staff go out and conduct their business. We risk assess particular cases, we look into them. We look at them dispassionately. We do not go in with a pre-judgement.

Q441 Steward Hosie: I think we wi ll come back to this because this is a fascinating area and it i s the first I ha ve heard of it , but we wi ll come back to this another time. I ha ve two other questions just on debt and the use of private debt collection agencies. As I understand it, early pilots were not particularly successful, pa rticularly in terms of the cost- effectiveness , but there still appears to be a drive to use external debt collection. Why not just employ more HMRC staff?

David Gauke: I am not sure I would agree with the point about the early pilots and my understanding is that they were fairly successful. As far as private debt collecting agencies are concerned, on the basis of, as I say, the pilots which seemed to be successful, we have rolled this out further. There is greater flexibility in making use of private debt collecting agencies as opposed to taking on full, permanent HMRC staff. As a consequence of the work that has already been undertaken with private debt collecting agencies, something like £140 million has been recovered that would otherwise have had to have been written off. Clearly much more than that has been recovered but that is like the additional-

Steward Hosie: That i s the marginal benefit.

David Gauke: Yes, that is the additional sum and, indeed, we think over the years ahead pretty substantial sums, I think something in the region of £1 billion, will be recovered.

Q442 Steward Hosie: HMRC have said they a re not selling debt as part of the current exercise, which leaves the option of selling debt open. Would you like to take the opportunity to rule that out because that i s a real fear for a lot of people that Crown debt might become debts sold to anybody and subsequent ly, down the line , to who knows who?

David Gauke: That isn’t what we are focusing on at the moment and were we to do so, then clearly there would be a need to look at the safeguards that would be in place. So that is not an immediate policy decision, but I don’t want to rule it out. I think it is important that HMRC recovers as much debt as is practical and, as I say, when in recent years something like, I think it is, £1.5 billion or so a year is written off, that is clearly a substantial amount of tax gone. If there are ways of improving debt collection, then I think it would be a mistake for HMRC not to explore those possibilities.

Q443 Steward Hosie: That’s worrying. Do you not see a difference between Crown debt and say the debt on a hire purchase agreement to buy a fridge? Is Crown debt not something more significant that ought not to just be commodified, put into the marketplace and sold on like any other piece of tax?

David Gauke: Well, as I say, it is not something that HMRC has immediate plans to do, nor is it something that has been explored in any great detail up to now.

Steward Hosie: But it has not been ruled out.

David Gauke: Until it has been explored, I think it would be a mistake to necessarily rule it out, but I don’t anticipate that happening in the immediate future.

Q444 John Thurso: Thank you, Chairman. Apologies for being late. As I warned you, I was chairing another Committee. Minister, can I pick up a point that Andrew Tyrie made, which is regarding the compliance investment? I think a memo went round from the Head of Compliance quite recently and it was good news. In order to deliver, 500 more posts were required . O f course, it i s not just the money; it i s the human resource. At the same time, in the other part of the organisation, there are a lot of people going and if I look at the example that I know, which is in Wick, there are 20 people employed, most of whom are now working on compliance; some 10 plus of whom are on partnerships and I gather doing a very good job and are being highly praised for that. When the office closes next year, none of them will stay because they want to live up there, not in a foreign country like the central belt of Scotland or somewhere else. Does it not seem a shame to lose that high quality resource to replace it with trainees who need to be trained and all the costs that go with it ? Without asking you to revisit again the decision for long-term closure, would it not be sensible to find a two, three-year solution so that that team could go on working? For example, if property is the problem, HIE, the Highland Council, lots of people would find property as you were saying to Jesse Norman. I a m sure there are other examples of this where the need locally to keep some jobs , particularly over the next two or three years , and the need for HMRC to retain high ability people could be found by innovative solutions. Is that not something you think you ought to looking at?

David Gauke: If I may, I will follow your route for me not to get too involved in the individual case, and I know that you have pursued this matter for many years with great tenacity. I understand you recently met with Lesley Strathie to discuss some of these points. I think what HMRC are trying to do in this area of, if you like, strengthening the compliance capacity and indeed expanding the number of staff working in the compliance and enforcement area, while at the same time there are reductions in other parts of HMRC-and I have talked earlier about where there are some opportunities to reduce staff-is wherever possible to retrain HMRC staff to enable them to move from one part of the organisation to another, to maintain the skills that they already have and to indeed strengthen them so that they are able to have greater flexibility. That is something that HMRC is looking to do and I think that is absolutely right for them to do that. So there may well be staff who are working in one part of HMRC that is losing staff, but they can be retrained, reskilled and become part of one of the expanding areas.

Q445 John Thurso: My point is that you have staff who don’t need retraining. T hey have the skills, they a re doing it, they a re very good at it, they get praised for doing it and it seems the only impediment to keeping them from happily working is the need to get rid of the property cost, which I fully understand because you have two big elements of cost in HMRC; you have property cost and people cost. If you can get rid of the property cost through innovative thinking by local councils, enterprise bodies, whatever, shouldn’t HMRC be open to those approaches ? I t won’t last forever obviously , but for a period of time that would be an innovative solution to what they are seeking to do.

David Gauke: Where there is a strong business case in being innovative- and I talked earlier that I am pleased where HMRC are innovative in the use of property and so on-let’s put it this way, I am certainly not going to be stepping in the way and preventing them from doing that.

Q446 John Thurso: Excellent. Can I move on then to talk about customer satisfaction? Overall, starting at the baseline June 2008, customer satisfaction was rated 72.8%. It peaked in March 2010 at 76% and the September 2010 figure is 72.5%. Are you content with that?

David Gauke: No, I think it needs to go higher. It needs to improve. I am not content.

Q447 John Thurso: What do you think would be an appropriate target of satisfaction?

David Gauke: I am loth to put a specific number on it and there are a number of ways in which this can be measured. I am not saying, you know, that somehow there is a magic number, whether it is 80% or 78% or whatever, I don’t-

Q448 John Thurso: Most service orientated businesses would be aiming for high 80s, low 90s.

David Gauke: Yes, I think, being on a par with what is the norm, we have to bear in mind where HMRC starts, and so the first thing I’d be looking for is a pretty significant improvement on where we are; up by 5% or so. And I think that, as I was saying earlier, it is not just about that one particular number but we need to be looking at the number of calls to contact centres that get through, the length of time it takes for post to be turned round and the overall experience of the taxpayer. In that context, for example, the Office of Tax Simplification is looking at the experience of SMEs and, if you like, the administrative experience, the processes that SMEs go through in order to have a better understanding of how that can be improved. So, as I say, I don’t necessarily want to put a particular number on it. If we are looking at this as a year zero way, it starts at too low a level and we need to see significant improvements.

Q449 John Thurso: There i s a whole raft of independent management science around this and it ain’t rocket science. In other words, any company that relies on or has a high regard for customer satisfaction can go to very competent specialists, design something with very particular inputs and outputs and set of targets and have it measured independently. I personally think it would serve any part of the Government that has a customer satisfaction, but would this not be particularly appropriate for HMRC?

David Gauke: Yes, potentially. We clearly need to find ways in which the service that is provided to taxpayers is improved and if there is value that can be added in the way that you suggest, then-

Q450 John Thurso: My concern is that if you say, " Yes, it should go up but I’m not going to set a figure , " your successors and my successors, as it were, could be having this conversation in a decade’s time. Also, in virtually every company I know, there i s a correlation between customer satisfaction and staff morale because if staff are looking after their customers, it feed backs to them, so you can kill two birds with one stone. Do you not think it would be a good use of ministerial direction setting or whatever to invite them to set a high target, a considerably higher target, and perhaps then hold them to it quite strongly?

David Gauke: I think it comes back to what I said at the beginning of the session when I set out a whole range of things that I asked HMRC about, that I expect to see them improve. There are a whole host of measures that are being put in to improve the performance of HMRC. I think what we want to do is get those measures in and then I would expect to see substantial improvements in the level of customer satisfaction. As I say, if we can see the improvements in the time it takes to turn post around, the number of phone calls that get through and the waiting time for getting through to a contact centre-there are measures that I have pressed HMRC to bring in, that HMRC are bringing in-I hope and expect to see a significant improvement. As I say, I would hope and expect us to see an increase roundabout 5% on the current numbers pretty soon.

Q451 John Thurso: From April this year all businesses have to do all their PAYE , et cetera , online. Now, there i s an aspiration for 98% of the population to be on broadband. Unfortunately, that i s not 98% geographic coverage and there are vast tracts of the North Highlands that are still at 50 kilobytes . It is extraordinarily difficult to do an online filing because it keeps breaking down; you can’t get through . I n one business I know, it i s a choice between either spending several hours trying to do something that used to take half an hour, 20 minutes, or finding a friend in a neighbouring town where there is broadband . Is it not appropriate that, unlike the telephone where we ha ve said it has to be up every Glen, and unlike electricity, which i s a utility that is absolutely universal, where there is not a universality of a utility, we have to have exceptions for those areas that do not enjoy that utility, otherwise you a re asking people to comply with something that they physically can’t do?

David Gauke: Yes, I think you make a good case on the part of many of your constituents here. There are, as I understand it, some provisions for reasonable excuse not to do something in a particular way and, therefore, there is greater flexibility.

Q452 John Thurso: The only people who can get off are religious organisations; I don’t necessarily think the local hotel can qualify, unless it is temperance.

David Gauke: No, I suspect you’re right. I think we do need to look at this particular issue and see whether there can be some flexibility shown and, as I say, if HMRC are asking taxpayers to do something that is, to all intents and purposes, not possible, then clearly that is unreasonable, but I think HMRC need to look at what can apply in those circumstances.

John Thurso: Thank you.

Q453 Chair: Minister, I just have one or two matters. One of my colleagues has gone who was going to ask specific questions. You will have read these letters that have been sent out and have been in the Mail on Sunday. Now, have you seen them?

David Gauke: Yes, I have.

Q454 Chair: Are you happy with the tone and content of the letters?

David Gauke: Again, I think there is a balance that needs to be struck and we have to put this in the context in which those letters should be used. If there is a tax debt that has been outstanding, there have been requests put in, very often repeated requests, for that tax debt to be paid, then I think it is right that HMRC continue to pursue them and set out the reasons why. There is a need to get that balance right so as not to unwittingly scare people and I think it partly depends on who the recipients are and what the overall context is.

Q455 Chair: I wil l let you read the note .

David Gauke: Largely what the letters say is what the consequences can be for not complying and they really are an accurate assessment of what the consequences can be and it is important that we are honest.

Q456 Chair: In one of the letters, f or example, one part of the letter suggest s that there would be public disclosure, public embarrassment as your name becomes public, which immediately suggests just that, that there i s going to be disclosure of people’s names. Now, it may not mean that but it i s phrased to give the recipient that idea. Do you not fi nd them horrifying? I take what you say and I a m glad you said it. I t i s understandable that certain recipients would be very, very upset , but there doesn’t seem to be any way of filtering or an ability to filter who they go to. They a re being sent out to anyone in the belief that the Department is owned tax. There i s no suggestion, "Come in and discuss it . " Pe ople are getting letters saying, "You owe thousands of pounds and it has to be paid in three weeks time or the bailiffs will come in and it wi ll be public". Now, how is it acceptable for a Government Department to send letters in a tone that you would get from a third - rate bailiff?

David Gauke: My understanding is that those letters are sent out after early communications have been made by HMRC, where there has been no response. In that context, it is not unreasonable to point out some of the potential consequences of not responding, of not paying an outstanding sum and an attempt to encourage taxpayers that owe a debt to engage with HMRC and to engage pretty quickly with HMRC. One of the sanctions potentially available to HMRC is public disclosure and that is something that Parliament granted HMRC that capability and-

Q457 Chair: When ? W hen did they do that?

David Gauke: I think it was in the last Government.

Q458 Chair: Are you saying you a re going to use it?

David Gauke: I don’t think it is something that has necessarily being used yet but it is something that is available to HMRC.

Q459 Chair: Would you contemplate using it?

David Gauke: I think that would depend upon the individual circumstances.

Q460 Chair: O ne of the things you said, and it brings me to a next question, concerns call centres. I f it goes to an elderly person, there is the question of how can they can get hold of the Department, yes? There are offices disappearing; there are 30% of the calls not answered. I s it sensible to send these offensive letters out in this way? I a m sad that you a re. I hear the qualification, "It is my understanding". I would welcome a n assurance from you that you’ will go back and have some words with the appropriate person. W hen I first heard of them, I refused to believe a Government Department would send letters out with that tone, with those threats and I had to be convinced that they were genuine. What does Mr Banyard say to that?

David Gauke: Let me make this point. As I said earlier, it depends upon the individual context. I think these letters are acceptable if it done in a way that is highly selective, well targeted at those people who have previously refused to respond to earlier communications.

Q461 Chair: Do they check the age , though?

David Gauke: I would have to check.

Q462 Chair: Yes . Do they check the age? D o they check the past history?

David Gauke: I think they look at their past history but I am not sure whether there is necessarily an age profile.

Q463 Chair: I think it i s horrifying. Well, call centres; you say you have discussions. We had discussions with Dame Lesley and the things have been going for something like seven years and you ha ve still not reached the target. Now, what they seem to do is kid each Minister on that we a re getting there. We had the treatment about , "We are going to get there. We a re going to do this. We want to do this , " but it never happens. I know, as you said , you a re looking for a 5% improvement ; it needs a 20%, 30% improvement to get to the targets. They don’t even accept the public sector targets. They say it i s 90% when it i s 95%. Now, do you think it is possible for you to go back and have harsh words with Dame Lesley , because people are ringing, holding on for ages, not getting through; a third of the calls no t getting through for a public d epartment on an important thing like tax?

David Gauke: Well, just one point of clarification; that 5% number in the questions from Sir John was about the customer satisfaction number. You are absolutely right, we do need to be getting up to that 90% number on calls getting through in order to be consistent with other call centres. A smile flickered across my face for a moment because the questions you were asking me were very similar to some of the questions that I have been raising with HMRC. In particular, this point about how do we know that we are on track? HMRC are setting out plans by way to show that we will get up to that 90% number over the coming years. The question I have been asking-

Q464 Chair: Over the coming years?

David Gauke: Over the years. Stephen, you’ll have to remind me as to what the timeframe-

Q465 Chair: No , we ha ve pressed Dame Lesley for a timetable because she i s going to the Public Accounts Committee , she has come to hear, it i s always going to happen.

David Gauke: Over the spending review period-

Chair: Fo u r years then.

David Gauke: Yes, and, as I say, part of that is about increasing the capability, part of it is about reducing the demand. One of the questions that I have been asking HMRC is how do we know that we are on track. Because you are absolutely right, Mr Mudie, to make the point that this is something that has been a problem for a number of years and hasn’t been addressed and we have to make real progress.

Q466 Chair: Yes, I know it i s bad . B ut the last thing is you have put money in and a direction in the remit under customer satisfaction to do something about persuading more people to go online. The figures we have were horrifying from an officer in National Statistics; something like 9.8 million people over 60 are not on the computer. Now, the call centre is a shambles, but you ha ve given instructions to do something about online that will not help the elderly because they don’t use it; 9.8 million of them . Do you think you could just have another look the next time you send a remit letter?

David Gauke: Where we can, and it is appropriate, we need to get people online but you are absolutely right to say that online is not a solution for everybody and HMRC must have the capability of dealing with those people who aren’t online and, in particular, pensioners. It is a very, very fair point that you raise.

Q467 Chair: Minister, thank you very much for your long session this afternoon and thank you very much for coming out.

David Gauke: Thank you. It is a pleasure to be back in the Committee.

Chair: You a re at the wrong side of the table. Cheers.

David Gauke: Thank you.