To be published as HC 673-ii

House of COMMONS



Treasury Sub-Committee

Administration and Effectiveness of HMRC

Wednesday 31 October 2012

Lin Homer, Jim Harra and Ruth Owen

Evidence heard in Public Questions 100 - 309



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Oral Evidence

Taken before the Treasury Sub-Committee

on Wednesday 31 October 2012

Members present:

Mr George Mudie (Chair)

Mark Garnier

John Mann

Jesse Norman

Teresa Pearce

Mr David Ruffley

John Thurso

Mr Andrew Tyrie


Examination of Witnesses

Witnesses: Lin Homer, Chief Executive and Permanent Secretary, HM Revenue and Customs, Jim Harra, Director General, Business Tax, HM Revenue and Customs, and Ruth Owen, Director General, Personal Tax, HM Revenue and Customs, gave evidence.

Q100 Chair: Nice to see you, and welcome to your first Treasury Sub-Committee. I hope it is the first of many. If you are all settled, who is starting? Mr Garnier.

Q101 Mark Garnier: Thank you. Good afternoon.

Lin Homer: Good afternoon.

Mark Garnier: In evidence last week, Peter Lockhart suggested that investing more in compliance activities would increase the yield at HMRC. Could you, in theory, bring in significantly more revenue if you were given additional funds to try to close the tax gap?

Lin Homer: I think this is the project we are in the middle of at the moment. The £917 million that was provided at the last spending review is largely headed towards increasing compliance yield. Some small amounts are aimed at ensuring that we maintain the voluntary compliance, but the vast majority of it is heading towards improving compliance. For that £917 million we believe that we will be able to increase our compliance yield by £7 billion a year by the end of the spending review. So, yes, I think we are a pretty good investment.

Q102 Mark Garnier: But is it a straight-line investment? For each £917 million-

Lin Homer: Can I guarantee £7 billion?

Mark Garnier: Yes.

Lin Homer: There is a variety of returns in the projects we have underway at the moment. I think one of the things we are trying to do as we go through this spending review is to analyse what we have done as we do it and try to work out whether the levers we pull did exactly what we expected and, therefore, get better at judging where to put the risk. My own view is we have to be a little bit cautious about always investing on maximum return, if I can put it like that. I have no doubt we might get on to talk a little bit about debt, ensuring we get debt returned to us. We think overall, although you obviously need to go for the big sums, you also need to send a signal that the small debts will not drop below your radar. We believe we will always have to have a variety of projects, but we think averaging a one-to-seven return is definitely okay for this period. If we are going to put forward more proposals for investment, we would have to try to be clear about what thresholds downwards we thought were still a good return. Treasury would obviously have a view as well.

Q103 Mark Garnier: I want to be clear we are definitely talking about the same thing. You referred to debt. In terms of compliance, that is tax avoidance, evasion, dodging and also debt, actually paying as well-it is all the same thing?

Lin Homer: Yes. I spent a morning out with one of our distraint officers as part of my induction. Let’s be honest, some businesses slightly regard the tax man as what they used to perhaps think of as a cheap overdraft. I do not think they think we are cheap any longer.

Q104 Mark Garnier: What is the interest rate you charge?

Lin Homer: It depends on the circumstances. We do not charge interest, we charge penalties, and they now rack up pretty quickly. Some debt in a sense is a form of not complying because they are choosing not to pay on time consistently. I recently wrote a letter to an MP about a small business that was in its eleventh quarter of being late paying VAT. That is not ordinary debt. That is a bit more than that. Yes, we do include it, but it is the full range from very serious organised crime through to individuals.

Q105 Mark Garnier: How do you differentiate from a business that is desperately trying to pay and comply with paying its tax obligation to you and somebody who is definitely trying not to comply? It is a pretty fine line, isn’t it?

Lin Homer: Yes. Sorry, Chairman, I realise I did not introduce my colleagues. I think many of you will know Jim Harra, who is a long-term HMRC person, now DG of Business Tax. Ruth Owen has recently joined us as DG for Personal Tax.

How we differentiate is that our time to pay arrangements, which are provided to over 600,000 businesses and individuals at the moment, are offered when we can see a sustainable business that is asking us for an arrangement. We would not include in those arrangements either people whose businesses were not sustainable and were putting off the moment of recognising that or, as I say, businesses that are consistently seeking to delay paying taxes as a kind of business approach rather than because of unique or particular circumstances.

Q106 Mark Garnier: You reported additional revenue from compliance activities at £16.7 billion for 2011-12. How much of that have you actually collected and how much is still to be collected?

Lin Homer: That is all action. It covers cash in hand and revenue protected. I am not absolutely sure I could tell you pound for pound what the breakdown was, but that is all done. That is either cash collected now, revenue protected now, or revenue definitely protected where there will be an ongoing impact.

Q107 Mark Garnier: But it does not necessarily mean it has all been taken in?

Lin Homer: It is not all cash in the bank.

Q108 Mark Garnier: Realistically, if you are looking at the whole of the tax gap, when are you expecting to see it significantly reduce, or do you think there is always going to be a big tax gap?

Lin Homer: I think there will always be a tax gap and I suspect there will always be discussions about the size of the tax gap. What we need to do is use the tax gap as trend information and not get too carried away with year-on-year changes. What we are seeing is two things, I think. One is that our tax gap compares favourably with other countries; it is significantly lower than Sweden and the US. The other is we are seeing it broadly flat or slightly reducing. My view is that that is the trend we would want to continue. What you have to think about, as with our compliance activity, is what are the things that make a difference either way. That is one of the reasons I think we have to have a degree of coverage over all areas of avoidance and evasion so that people do not believe there are places they can hide.

Q109 Mark Garnier: Can I change the subject slightly to the cost of compliance? Last year, this Committee expressed concerns that efficiencies achieved at HMRC result in increased tax compliance costs for individuals. Effectively, you are pushing down the burden of compliance on to the individual. What assessment, if any, have you made of the cost to taxpayers of your efficiency savings?

Lin Homer: I think you had a very interesting debate also about the degree to which we are pushing some of that activity on to agents. We have a general figure about the admin burden of paying tax. In the five years of the last spending review we made a sizeable dent in reducing that tax burden. We believe in this spending review that we will also reduce it. We have not established an absolute figure, but we know there are savings to be made in some of our projects. We would recognise and accept-

Q110 Mark Garnier: Are these savings to HMRC, though?

Lin Homer: No, to the taxpayer. I think we would accept there are some things we are doing that are changing the burden the other way. I do not believe that there is a costable shift from us to the individual, but I think what we have been doing is probably heightening the risk of individuals not paying enough attention to their tax. It is an interesting observation for me as a newcomer trying to get to grips with the tax system that I think quite a lot of people know more about their mobile phone arrangements than they do about their tax arrangements. They will change their contract or they will go online to check things. We are steadily reminding people that they have an obligation to be in good shape with their tax affairs. I would not see that as passing a burden over to them so much as making them more aware that that burden was always there but they need to take it seriously.

Q111 Mark Garnier: Typically, do you find your average taxpayer is financially literate or as financially literate as they need to be to understand what it is you are asking them for?

Lin Homer: I think it varies a great deal. I am sure Jim, from many years of experience, might have some examples, but I think what we see is a whole range of circumstances. What we believe we have a duty to do is to help ensure that it is as easy to be literate around your tax as possible. Some of that long term might be tax simplification but that probably is long term. Some of it is, therefore, the way we arrange our business. I think many people who use the self-assessment system would say it is now much more intuitive and easy to use than it was even a few years ago. We are seeing that in very much higher rates of usage and of people filing online. We are now adding things like joint design with small companies of apps for small businesses. A small business now can have a hand held. They can keep a lot of their records as they go instead of shoving bits of paper in their pocket. People are living their life with smart phones and we feel if we can give them applications that help them do that they do not have to become tax experts but they can get more of a grip on their business. We have had some great success with those. Jim has some fantastic web-based information for small businesses.

Q112 Mark Garnier: Jim, do you want to talk about this?

Jim Harra: I think the main challenge in this area is with SMEs. A large proportion of them will-

Q113 Mark Garnier: When you say SMEs, do you include micro businesses?

Jim Harra: Yes, micro businesses and small businesses, most of whom will employ an agent to manage some of their tax compliance with direct tax, but even that depends on them keeping good business records. That is an area where we are putting a lot of effort to make sure that SMEs know what records they need to keep that will enable them to comply with their tax obligations when, at the end of the year, they go to their agent.

We have worked with the software industry to put out, for example, a record-keeping app on mobile phones, which enables micro businesses to take a photograph of a receipt and keep it on their phone in a record-keeping thing, which is handy for anyone who is on the move. We have also been working on introducing business record checks, which are not us going in after the event and investigating someone’s tax affairs but going in at the outset to help businesses keep the right set of records that will enable them to file the right return at the end. That is the main area. It is partly about people’s time and it is partly about their focus and their literacy around what they need to do to be in business.

Q114 Mark Garnier: When efficiency savings are proposed, do you make an impact assessment on the taxpayer to see what effect that is going to have, what cost that is going to bring to the taxpayer?

Lin Homer: Yes. When we put a new proposal in place we have to do impact assessments and as part of our business case we will look at the admin burden. We have fairly detailed figures. It is why I am able to say over the life of this spending review we expect to see admin burdens reduced slightly, but for last year they increased slightly and we are aware of that. We take the period in total. Some of the things Government is doing, particularly because of the times we are in, are going the other way. We are very alive to that and believe it is reasonable to expect us to bear down on those wherever we can.

Q115 Mark Garnier: You have mentioned in some of your responses the complexity of the tax system. There will be some questions coming up about the child benefit thing in a minute so I do not necessarily want to pin you down particularly on that, but this has highlighted the utter complexity of certain tax systems. It is not just necessarily the child benefit business that has come about, which is on the face of it a pretty straightforward and simple policy, but over the last 15 or so years we have seen a horrific increase in the complexity of the tax code. Two questions. The first is what conversation do you have with the Treasury when they are introducing these taxes or these ideas? Secondly, I am so confused by how it has got to this stage. Is there somebody in the Treasury actually trying to work out how complex it can be, a complexity gnome, if you like, sitting there trying to make it really difficult for everybody? How does it work with you guys? Are you sitting there talking to them and trying to work it out?

Lin Homer: I have not met the complexity gnome yet, unless they are in disguise. I think HMRC has had a very active tax policy partnership with HMT for some while, but I do believe that we need to make that as strong and as robust as we can. It is good for the Chancellor and for Treasury if we give robust advice early and at the right point.

Q116 Mark Garnier: Can you give me an example? Why don’t we use this latest one? What conversation would HMT have with HMRC over trying to implement this policy of the child benefit thing?

Lin Homer: Loads of conversations. At the point of emerging policy, we talk about the impact of that policy and we start right at that point to talk about the issues of implementation. I think we have to probably get better at forward planning. While it remains an entitlement of every Government to think about what they are going to do in the tax system on a regular basis and they do not have to share that well in advance, it does not stop us thinking about the kind of changes that any Government might want to make or that we might want to suggest would be worth thinking about. First of all, we maybe need to do more work in advance. We have to be prepared to think on a whole system basis rather than just a narrow what-would-suit-HMRC basis because there are good reasons sometimes for doing things in a different way than might be the best way for us from a customer perspective or an overall governmental perspective. I do think if we start earlier, if we work jointly together-

Q117 Mark Garnier: Do you ever say no?

Lin Homer: For instance, we published the work HMRC did on the higher rate tax and that was a detailed piece of work that clearly did feed into the decision making about that issue. That is evidence that you see on the ground and there is obviously much more behind the scenes as well.

Q118 Mark Garnier: Do you ever say, "No, this is just not a workable tax at all", over any period?

Lin Homer: I have not been there that long. I have not personally said no very often yet, but what I have asked for I think we have been very positively welcomed.

Q119 Mark Garnier: Have any of your predecessors said no?

Lin Homer: I have asked to ensure we are at all the conversations. Of course, one of the consequences of my recent changes to my top team is Edward Troup has kind of moved across the line. Nick Macpherson and I have absolutely agreed that in a sense Edward will continue to be in all the conversations he was previously in. I think we have a really good opportunity to be influential. At the end of the day, it is a right for any Government to do the things it wants to do. It is my duty to make sure they understand the consequences of that and to try to advise them on ways to achieve that that will be best in terms of cost and consequence for the Government and for the taxpayer.

Q120 Mr Tyrie: Did you draw specific attention to the Treasury of the complexities involved in this child benefit proposal?

Lin Homer: The discussion on this particular proposal is not one I was personally involved in, but I have been involved in a lot of discussion with Treasury colleagues as well as my own since then about the implementation.

Q121 Mr Tyrie: I would like to stick with what happened beforehand. Are any of you qualified to be able to talk about what went on?

Jim Harra: I was not directly involved in it.

Lin Homer: I don’t think any of us, I am afraid. It is obvious to me from the work I have seen since that we were involved in the discussions, and I think we fed in thoughts and views. It is obvious to me in the discussions we have had since that our views about how we implement it have been listened to. Obviously, there were policy views about ensuring that child benefit, which has traditionally been received by the parent, often the mother, continued to be received. I think it was a judgment made with an understanding of what that entailed. I do not myself think it is quite as complex as you would believe from reading some of the newspapers at the moment.

Q122 Mr Tyrie: Let’s have a look at some of these alleged complexities and then a wider public can judge for themselves. You would agree that it requires one taxpayer to share information with another taxpayer?

Lin Homer: It definitely requires some discussion, yes. It requires one taxpayer and another taxpayer first of all to discuss whether either of them earn over £50,000 and is in receipt of child benefit and then to establish which one of them is the higher earner.

Q123 Mr Tyrie: To do that, one could argue that there has been a breach of taxpayer confidentiality that has been imposed here?

Lin Homer: The first step we would suggest is they talk to each other. That is up to them. If there are reasons why that is not possible, we have agreed that we will answer a limited series of questions in the higher and lower range.

Q124 Mr Tyrie: You have built in, if I may suggest, a little twist of complexity to the system where you are going to be part of a three-way conversation in order to resolve unusual cases where people might want to keep to themselves what they are earning from their partners?

Lin Homer: I doubt we are going to find ourselves as the third person in many of these conversations but it is possible. Of course, we already have that arrangement.

Q125 Mr Tyrie: Why don’t we take a look at self-assessment, for example? If one of the people is taxed under self-assessment they will not have all the relevant information, will they, until they file a paper return nearly a month later or, if it is online, in January, whereas you have asked for the information the preceding October? Isn’t that correct?

Lin Homer: We are asking people, if they have to register for self-assessment, to do so by the beginning of October. They will then, if they want to file by paper, have to file by the end of the month, so that is the reason for having a deadline that is earlier than that. If they are going to file online, it would be the following January. What we are really encouraging people to do is have the conversation now, make a choice now. If you choose to opt out of child benefit, there is no problem with self-assessment because you are not going to pay any tax. If you are going to keep receiving it, you really need to know now that you are going to do that and that one of you is going to have to register for self-assessment if you have not already. The actual registration and then the final filling in of the details will happen in either October 2013 or January 2014 and the payments will follow in the January 2014 tax return.

Q126 Mr Tyrie: These people have to get to grips with some of this complexity themselves, haven’t they, rather like they clearly already have with their mobile phones? Is that what you are telling us?

Lin Homer: Hopefully they are going to get a letter. Ruth and her team have been sending out letters beginning this week, 100,000 this week, 300,000 each of the next three weeks. There is a very good website that you can get to via hmrc.gov.uk/childbenefitcharge. I have tried it myself, because I am not the most technological person in the world. It is a relatively easy set of questions that pretty clearly signal when you need to have a conversation with your other half. Personally, I think what we are seeing is quite a lot of people being able from that to make the choice without reference to us and without reference to further advice. Our call centres and their agents, if they use one, would be able to step in if there was a bigger question.

Q127 Mr Tyrie: Are you going to require clawback in the event of separation?

Lin Homer: The arrangements about payment use some fairly well-established principles. The tax accrues for the period of the relationship. If you are together for half a year and one of you is receiving child benefit and the other is not and then you separate, there will be a tax charge that accrued for that first half and vice versa. Those are fairly well-established principles.

Q128 Mr Tyrie: It has been put to us that it will be quite difficult to integrate the child benefit charge with PAYE. Do you have concerns about that?

Lin Homer: People will need to register for self-assessment if they are PAYE because we will not know otherwise. Once they have registered, it will be perfectly possible for the charge to then be taken through their code.

Q129 Mr Tyrie: What about making adjustments in the event of changes in circumstances such as new children or separation?

Lin Homer: There is a range of circumstances. You might change your mind about whether to have child benefit or not and go in and out of the scheme. We will have a situation in which people will be able to flag up a change to us and/or we will pick that up at the subsequent self-assessment period. We will be able to see how much flex there is but, because we are going to be coding out for people who are in PAYE, because we are going to be taking in a couple of instalments, we will have points in the year when we can make those changes if we need to.

Q130 Mr Tyrie: What are you going to do about couples where one partner earns over £50,000 and the other is in receipt of child benefit but where they are not married or they are civil partners?

Lin Homer: If you look on the website, the normal definition of a partnership is applying. It is well established in a number of areas of law. We will be applying that, so it will apply to partnerships that are recognised under those definitions.

Q131 Mr Tyrie: I gather from an article in the Telegraph that you intend not to fine for wrongful claims but only to require a return of the money.

Lin Homer: I think this is the same as all of our penalty regimes. It will depend on the circumstances. We are certainly not going to rush straight to criticising people if the first time they fill in their SA they do not realise that they are liable.

Q132 Mr Tyrie: So you may fine people?

Lin Homer: There are going to be two very simple questions in SA.

Q133 Mr Tyrie: Just to be clear on this, people get fined quite often. You said you are going to apply exactly the same treatment as other parts of the tax code. In other parts of the tax code people get fined quite often. You have led the Telegraph to believe that they were not going to be fined.

Lin Homer: I am not sure where the Telegraph got that view from. You know increasingly, and I think encouraged by yourselves at earlier hearings, that the approach that we take is to try increasingly to warn people they are heading towards penalties. We have had a great deal of success over the last year. We have improved our system. We are warning people that they are heading into that territory. We have halved the number of people who face SA penalties. Stephen Banyard, who I am sure was before you, was on record as saying we want the tax not the penalty. What we will do to start with is we will make sure people understand. If people cheat deliberately, we are not going to make any different rule in child benefit than elsewhere. If somebody tries to pretend that they are not together when they are, or if they deliberately fill in and then keep giving us wrongful information we-

Q134 Mr Tyrie: But just to be clear, you fine people before you have established fraud, deliberate cheating. You fine people well before that in other parts of the tax code.

Lin Homer: But in relation to SA, what we do is we check details and encourage people. What I am saying is we will go into this process in exactly the same way. First of all, we will make sure people understand it. Then we will make sure that people have not made an error. Then we will make sure that they have time to consider. You do not get to our heavy end of penalty, if I could put it that way, accidentally. You get there very deliberately. What you do get is the option to rectify your position much earlier on.

Q135 Mr Tyrie: To be clear, people may be subject to fines if they get this wrong?

Lin Homer: They may be if in due course they deliberately keep ignoring.

Q136 Mr Tyrie: You are now back to intent again. People can get fined without intent in other parts of the tax system. Earlier you told me you would treat this in exactly the same way as other parts of the tax code.

Lin Homer: We have published guidance that makes it clear, for instance, that someone who comes to us and voluntarily discloses will be treated differently from someone we find. We will apply the same kind of principles. We could provide you with our published guidance. Our intention is to use that in the same way.

Q137 Mr Tyrie: I think it would be helpful. Just to be clear, should I take from this exchange that people may be fined just as they may be fined in any other part of breach of the tax code?

Lin Homer: Yes, but I would want to add that we understand our responsibility for making sure, first of all, that they know and understand the changes that are taking place.

Q138 Mr Tyrie: I have run through quite a number of complications there, haven’t I? We have been through self-assessment, separation, integration to PAYE, civil partnerships, confidentiality aspects. There are others in the notes that I read before this meeting. It is quite a lot of complexity. Were all these raised with the Treasury before this change was brought in?

Lin Homer: I was not there. I know there was robust discussion about not only what was being done but how it would be done. I think if you go on our website the interesting thing is those drop-down questions help prompt people, "Am I a partner? What happens if?" Although it can sound like an enormous list of things if you put them like that, we think we have devised a helpful and pretty simple set of questions to ask yourself that make that not as complicated as it might sound as a list.

Q139 Mr Tyrie: Let’s move this back to some of the points that Mr Garnier was asking you. You said you do not know what the compliance burden on taxpayers is, but you think you are reducing it. How can you know whether you are reducing something if you do not know what the absolute size is?

Lin Homer: I don’t think that is quite what I said.

Q140 Mr Tyrie: I am sorry. Do say what you mean.

Lin Homer: I think there are a couple of things and they are slightly different. We do know what the admin burden that we place on taxpayers is. We have a baseline figure for that and when we make changes we assess whether it is a plus or a minus. Over the last five years, we reduced that by in excess of £500 million. There is a second question that says in order to comply with your laws are individuals having to do more, and what I said is there has always been an obligation on people to pay their tax. They have an individual responsibility. I do not think we have sized that in the admin burden way, but to the extent that we are perhaps making people think a bit more about the importance of complying with tax we may be creating some more time in there. But that has not changed, that has always been there. That is a matter of awareness.

Q141 Mr Tyrie: With the Chairman’s permission, I think the main Committee would be interested if you could have a go at working out what that number is, the number that you said you had not yet worked out. Admittedly, it is difficult but I think it is worth looking at and giving us a number.

Lin Homer: It is a bit like asking the cost of complying with the law, though.

Q142 Mr Tyrie: Well, it is complying with a very particular part of the law. Once we have an absolute number we can then monitor it over time and see whether it is going up and down.

Lin Homer: Yes, we have that.

Q143 Mr Tyrie: This is very germane to my last point. You mentioned regulatory impact assessments for each new proposal. The problem here is it is not so much what the impact is of the proposal at the time it is brought in, it is what the impact is over time. As it changes and develops so often, it becomes much larger than its initial impact. Are you going to monitor the impact and the cost derived from it of the child benefit proposal in that respect?

Lin Homer: I think we should be having a stab at the ongoing impacts. I do not think we just do preliminary and stop there. Sometimes there are transition costs and then there are ongoing costs. Yes, it is reasonable for us to keep those under observation. We were discussing before we came, it might be reasonable for us to try to set ourselves a target of how much within this period we will try to reduce admin burdens.

Q144 Mr Tyrie: Maybe for child benefit you could give us a figure.

Lin Homer: We will try to do that.

Mr Tyrie: Then we can monitor that over time. Thank you very much.

Q145 Chair: Could you speak up just a little?

Lin Homer: I will, yes.

Chair: The same with you, Mr Harra. You are so softly spoken. No wonder there is a lot of tax not being taken. You are too gentle.

Q146 Mr Ruffley: Ms Homer, just some more questions on child benefit. Patricia Mock at Deloittes Private Client gives a very plausible scenario of a divorced woman with two children. She is in receipt of child benefit and she moves in with a male partner to whom she is not married. He is a higher rate taxpayer and under the rules that higher rate taxpayer would have clawback applied to him, even though the children were not his. It is not a huge leap of the imagination, and call me a cynic, but there could be quite a few men in that stylised but nevertheless real world example who say, "I don’t want to pay this" and he does not tell the truth. He does not disclose that he is a higher rate taxpayer, does not have any discussion with the woman who is in receipt of the child benefit. Could you explain to us in a situation like that, which could be widespread-let’s just assume it is widespread-how does HMRC discover that there has been non-compliance in that example?

Lin Homer: The first thing to say in that example is if he does not disclose and the mother continues to receive child benefit, she is entitled to do that and no tax charge occurs against her.

Q147 Mr Ruffley: No, we understand that and there is no deduction at source. She is getting the £20 for the first child and the £13.50, whatever it is, for the second and subsequent children. I get all that.

Lin Homer: What will happen if he is in self-assessment already, as he approaches each year he will now have two questions on his self-assessment form, which he will have to fill in by lying, and just as through our whole compliance over time if-

Q148 Mr Ruffley: It is very helpful taking us through this, I hope rapidly. So that we are clear, what do the boxes say?

Lin Homer: There are two questions. I am sure Ruth will correct me if I get it absolutely wrong. One is the number of children for whom child benefit is being received in the family unit and the second is the amount that has been paid. Those two things together tell you the period of time that is involved. If it is a partial year, that is dealt with. The question that is asked is, "Is anyone in the family unit?" There are definitions about what that means. Going back to Mr Tyrie’s question, if someone was uncertain about the definitions they could then raise that with us. That would help us weed out people who are confused. But if people keep persistently ticking no to a box where the answer is yes, then in due course, whether through investigative work or possibly through a campaign like we used against doctors, for instance-we had a campaign because we know quite a lot of doctors do extra work and not as many of those seem to declare it-we could use one of our normal compliance approaches to decide whether to take action. We know from the general number, so we will have an aggregate figure of numbers of people being paid child benefit who are in units we believe to be over. We think the figure is about 1 million to 1.2 million. If less than that figure comes through our system, we will have a rough idea of the amount of avoidance that is going on.

Q149 Mr Ruffley: Sure, but just one final point on this. Is HMRC going to be doing bedroom snooping? In this stylised example, suppose the man has a moderately casual relationship with the divorcee with two children, and she receives the benefit. Suppose he actually wants to game this a bit and perhaps he lives five nights a week in the same household. Then he thinks, "You know what, I can probably not count as a household if for a year I just spend three nights a week". You can see examples, and I have tested this out, that there could be gaming of the system by a higher rate taxpaying man who actually says, for reasons we might understand, "They are not my children. I don’t see why I should be paying a tax charge for this and I am just going to hang out there less than half the week and spend nights". In a situation like that, how would the tax form tease that out?

Lin Homer: We face the issue generally that some people aim to cheat. As I was saying, we have a range of compliance approaches to that. We do some marketing. We do some investigation. I think the really important thing to remember before we get too anxious about that is that this is a country where people are largely compliant. So 92% of our tax does come in, most of that entirely voluntarily and quite a lot of the rest only needs a nudge to get there. The question about whether people will game in a sense their whole relationship for a £20 a week benefit I think is one where I would be confident to say in this country most people do not do that. Most people know-

Q150 Mr Ruffley: It has been known to occur in the benefit system, though, hasn’t it?

Lin Homer: Absolutely, and we have experience of that.

Mr Ruffley: So it is not unknown.

Lin Homer: Of course, in the benefit system, as with this child benefit arrangement, family income is part of the disclosure. That is the compliance experience we have. We have pretty good experience of the kind of interventions you have to make to find out. We use data matches, we use telephone calls, we use full investigation, so we have quite a lot of experience.

Q151 Mr Ruffley: You think you have it under control and you do not think there will be horrible stories upsetting middle England about HMRC being bedroom snoopers?

Lin Homer: There is absolutely no intent. In our tax credit work, the bulk of the interventions are by telephone. By the way, our starting point is we do not think there are that many of the type of person you described in the UK any longer, or ever, and where we do have to chase, our campaigns and interventions will, as normal, be taken into those areas.

Q152 Mr Ruffley: The final point is you seem to be suggesting-and correct me if I am wrong here-that in terms of the tax credit system you have need of the technology to work out what is a family unit and who is living with whom and, therefore, it should not be too difficult to use that technology you have for tax credits in the case of this child benefit regime. Is that a fair summary?

Lin Homer: Yes, and some of the benefits within that system are much bigger quantities than we are talking about here, so I guess the reason to cheat might be regarded as higher. As I say, they are not all deeply technological. Straightforward telephone discussions with people reveal a great deal. I have sat and listened in to a number since I started. I know Ruth has as well. People in this country do have an inclination to honesty when asked straightforward questions. The work we have been doing in benefits and credits over the last couple of years has shown that if you go through a series of questions and ask for some backup information it can be very helpful in keeping people on the right side of the declaration line. We have quite a lot of experience. I am not saying it never happens, but I am saying it is not going to be new territory for us.

Mr Ruffley: You sound commendably confident. Thank you for those answers.

Q153 Teresa Pearce: Just to follow on on the child benefit issue for a moment, you have said about these simple questions about are there children, how much do you get. What if the person just does not know? What if you have two people who live together and the woman has children and he says, "How much do you get in child benefit?" and she says, "Mind your own business"? What happens then? He has not lied; he does not know.

Lin Homer: But then obviously a telephone call to us to say, "What do I do in these circumstances?"

Q154 Teresa Pearce: If he does not, what power do you have under self-assessment to charge a penalty to somebody who self-assesses exactly what they earn and what they have but does not put the income of somebody else on the form? Is there a power?

Lin Homer: Yes, because the new arrangements for child benefit make the person in a family unit who is a higher rate taxpayer liable to this charge, so they have a duty.

Q155 Teresa Pearce: Is there a change to the independent taxation rules?

Lin Homer: The independent taxation rules have some exceptions because tax credits already require families to declare family income. This is again not new territory for us or for the tax system. What it means is that it does place an obligation on the person to answer that question. We have set ourselves up so that we can help and aid. I do not think there are many mums that could keep secret from a partner, even a new partner, how many children are with them.

Q156 Teresa Pearce: No, but whether she claims it or not; she might not.

Lin Homer: Absolutely, and obviously in those circumstances the question about where the error-

Q157 Teresa Pearce: Or there could be a split claim with an ex-partner?

Lin Homer: There are very clear arrangements for the circumstances in which the right to claim child benefit can be transferred. As I say, it is not a new issue for us but there will be obligations for the couple to have a discussion. We will be able to deal with a situation that arises because one person is tricked by another. Again, that is not new to us; we get that now.

Q158 Teresa Pearce: You say about tax credits and simple conversations with people, but in tax credits you are giving people money, in this you are taking money off people.

Lin Homer: We are giving them child benefit. We are still giving them money, or the DWP is giving them child benefit. The "we" was the Government.

Q159 Teresa Pearce: In tax credits it is a family claim. We do not have a family tax return. You say people are very compliant and they are because it is their own tax. I think the complexity will come when it is as a family unit and needing to know what somebody else has in income. Prior to independent taxation there were an awful lot of men, mainly, who were called in for interview because they had not put all the building society accounts on their tax return. The building society account they had not put on was the one that their wife was saving up money to run away with normally.

Lin Homer: You are painting a picture of the general public-

Q160 Teresa Pearce: I think it is a real change in shift from independent taxation and that is something that was hard fought for, so I think it needs to be carefully monitored.

Lin Homer: That is why we are going through it with some care.

Q161 Teresa Pearce: On to another fun subject, real-time information. Real-time information from HMRC’s point of view has a huge benefit in early reporting, early money. There are four stages to the roll-out and tomorrow you are about to start stage 3. Is that on target?

Lin Homer: Yes, it is.

Q162 Teresa Pearce: In the previous two stages, could you tell me what sort of data log of errors or problems you found? Is that available?

Lin Homer: Shall I get Ruth to answer that one?

Ruth Owen: Just some very quick numbers for RTI. As you say, we are just moving from stage 2 to stage 3. In stage 2, we had 1,800 schemes in, which was 2 million employments, and that moved up from a very early stage in stage 1 where we had very low numbers of schemes. Each month we have been learning and we have been trying to log what are the lessons for the programme, the way we have managed the project, as well as what are the lessons from working with all of those different schemes. We have a real range of very large companies, different payroll bureaux, different software arrangements, micro businesses, domestic businesses and so on, so we are trying to look at those. We have been working with those employers and those schemes to make sure as we move into stage 3 we have learnt some of those lessons. We have tweaked the system where we can or we know what we want to do to improve. To the extent of is there a log of things, some of the things we have done, some of the things will be in some of our publicity. When we start really ramping up our communications to get to stage 4, we will be setting out for employers, "Look, these are some of the things that people have made mistakes on. Don’t fall into this trap, and make sure you are ready for April", which is when every business will be expected to go live.

Q163 Teresa Pearce: What do you say to the Federation of Small Businesses who say that there is a serious lack of communication to employers about this, particularly small employers, and that a very significant proportion of them are completely unaware of it?

Ruth Owen: We do our own research. At the moment, our awareness levels are at 41%. For small/micro businesses that is 38% and 41% respectively. What we did earlier this year was talk to businesses, including stakeholders like FSB, to say, "What is the best way to get this message across because this is a significant, as you are aware, change to the PAYE system?" Certainly for small business, they said, "Just don’t bother us until we need to do something. Between three to six months is when we really need to know we have to do something about it". We are now in the six-month phase, which is why the communications are about to increase. By January, they will be intense, hopefully, in terms of everybody getting that message about what is going to change, what they need to do differently. We very much heard from businesses, "There is no point telling us six, nine or 12 months too early. The message will go in the bin because it is not relevant at that stage".

Q164 Teresa Pearce: No, I understand that. The same point was made about auto enrolment into pensions. But there are going to be employers who do not fit the norm, so how can you flex your system if you have not even told these people that it is going to happen? You will not have time to change anything to take into account unusual pay systems. You should tell people nearer the time but do you not think it should have been flagged up much further back as well?

Lin Homer: The only thing I was going to say is I think it is worth emphasising that the pilot employers have been a complete range of types of employer.

Q165 Teresa Pearce: How did you get them? Did they volunteer?

Lin Homer: A mixture. We picked people across the range, but because the pilot has gone really well and people have found it not quite as worrying or intimidating as they expected, we have had a bit of a follow-up queue of people to join. To some degree it is not as if we have worked with only one type of employer and now we are going to the rest. Some of the organisations you have mentioned have helped us identify the type of employer. We still feel we have some time to try to work with types if we have not had enough of those types.

Q166 Teresa Pearce: Given that you started off with 320 employers in the first pilot, 1,300 in the second, 250,000 as of tomorrow, and then up to 2.1 million in about five months’ time, do you have a backup plan if this does not work? If people can’t do real-time information, if they can’t do online filing, will a paper system happen?

Lin Homer: Our view is that we will have a system that organisations can link with and it will be tested and ready. It is almost the reverse of a backup plan. We are probably doing more faster than we planned when we started the project.

Q167 Teresa Pearce: So there is not a backup plan?

Lin Homer: The backup plan is to be ahead of ourselves rather than behind.

Q168 Teresa Pearce: The backup plan is for it not to go wrong?

Lin Homer: Therefore, for people who need help there will be even more of our resources to pay attention to that. A couple of things are worth emphasising. One is that for small businesses we are providing a free-to-use new software system. One of the challenges for us is that probably some of these very micro businesses are still doing it a little bit without help. The second is making sure that as all the people in the pilot go through, if there are any lessons we learn from those types of business we are cascading those, not waiting for the rest to join. Our plan is to make sure that this moving up stage by stage does give, as Ruth has explained, the chance to learn the lessons as we go along.

Q169 Teresa Pearce: Real-time information from HMRC’s point of view, the fact you get the information early and you get the money in early, means that people can’t wait until the end of the year and then just reconcile. For Universal Credit this is absolutely integral. What do you view as HMRC’s role? When they get that real-time information, what are you meant to do with it?

Ruth Owen: We are making it available within a data store that we will have a technical link between the-

Q170 Teresa Pearce: You will have?

Ruth Owen: We will have. It is there already.

Q171 Teresa Pearce: Has it been tested yet?

Ruth Owen: It has been tested-

Teresa Pearce: Does it work?

Ruth Owen: -as in it connects. The Universal Credit system is not operating at the other end yet. We know RTI works.

Q172 Teresa Pearce: When people talk about the RTI pilot, they are talking about the pilot of getting real-time information to HMRC?

Ruth Owen: Yes.

Q173 Teresa Pearce: They are not talking about piloting how it works with Universal Credit?

Ruth Owen: No.

Q174 Teresa Pearce: So that bridge between DWP and HMRC has been built?

Ruth Owen: Yes.

Q175 Teresa Pearce: But not live tested?

Ruth Owen: Not tested with things pinging between the two. That will be tested from the-

Q176 Teresa Pearce: This is quite a key point because on Universal Credit it goes in through BACS to the person’s bank account and it comes through RTI to you, and those two numbers are meant to match. You will need to do checking to make sure that what is paid into the account checks, but none of that checking has been done yet?

Ruth Owen: Yes, we can check that already but we are not passing it to-

Q177 Teresa Pearce: Has HMRC checked that the calculation they get for real-time information coincides with what has actually been paid to people?

Ruth Owen: Yes. I do not want to get technical. It is what we call hash matching. So there is a hash-

Q178 Teresa Pearce: There is a unique number for each person?

Ruth Owen: Exactly.

Q179 Teresa Pearce: You have actually checked that what comes into you is the same as what has gone into the bank account?

Ruth Owen: Yes. We are checking two channels, the RTI channel and the BACS channel. It is what we call hash matching. At the moment that is at 95% accuracy.

Q180 Teresa Pearce: How much hand holding do you think some employers will need? Do you have a percentage of employers or a number of people who will find this really difficult? We have a bakers up the road from me and they employ four women permanently and then they have casual people who come in and out when people are on leave. He will pay them in cash and then reconcile at the end of the month what he has paid them and pay that through. Real-time information means he will not be able to do that, will he?

Ruth Owen: He should be reporting on the day of the payment.

Q181 Teresa Pearce: At the moment he will pay them and then at the end of the month he works out what he has paid them, grosses it up, pays over, but he will not be able to do that now. He would have to report when he actually gave them the cash?

Ruth Owen: Generally, yes, but if you want to get on to the-

Teresa Pearce: Good luck with that.

Lin Homer: This is why I think the approach to working very closely with employers has been so important. It does matter that employers are accounting for what they are doing. One of the things RTI will do is it will move employers into needing to account more for what they are doing than some of them will have done in the past. We will try to make that transition smooth for them. It is not a bad thing to make them do because what you have just described is fraught with the risk that either the individual or the small employer by the end of the month-

Q182 Teresa Pearce: It is not normal. I actually made that up about the bakers up the road, but it could be.

Lin Homer: Yes, exactly. What we are doing and what we have an opportunity to do is helping even the smallest business make that transition to smooth and more automated systems where instead of handing over some cash in a brown envelope, scribbling it on a piece of paper he then loses, a bit like Jim and the small businesses with their app of their expense, we are increasingly encouraging the small business to tap that into an app and press a button at the end of the working week and send it off. This is a change, I am absolutely not trying to underplay that at all, but it is a change we think will be good for business as well as for us. What is important is we do it as well as we can and as collaboratively as we can. That is why it is important that Paul Aplin, who was here last week, is at the table with us all the time and he will give us grief right to the end, and rightly so, because that will help us make the system as good as possible.

Q183 Teresa Pearce: I understand what you are saying and it is right and there has been lots of progress in making sure that people pay the PAYE over on time or do it monthly. All of these things are good practice and it is as it should be, but what are you going to do as far as you have employer compliance units. Are you going to do more frequent visits to make sure that what is filed is what actually happens? The more automated something is the less people inquire into it because if it is like, "Computer says yes", it is all right. Do you have enough staff in your employer compliance unit to make sure that you are not just shifting people on to the black economy?

Lin Homer: We think so, but obviously you will expect us when we implement this to keep a really close eye on it, particularly in the early stages. If we see any dramatic changes in behaviour, if we see a lot fewer payrolls coming through from small businesses than we had before, we are not going to assume they have all gone under. We are going to assume that might be a change in behaviour and we will go out and do something about it. I am not disregarding any of those risks but I think we will be watching and we should be able to see those things as they happen.

Q184 Teresa Pearce: Why can’t real-time information just be submitted on the 19th of every month as was? Why does it have to be on the date the payment was actually made? Is that your rule or is that DWP’s rule?

Ruth Owen: It is a mixture of the two. To make it real time the idea was let’s do it as you pay people, as you run your payroll, because as soon as you delay it there is a risk of error coming through. What we want is information that is as clean as possible. It does benefit us and should benefit the business from doing it all at the same time because that is the simplest way to do it.

Lin Homer: For most businesses it is the same thing, effectively, because the payroll would be linked to the transmission. They are not doing one thing over here and one thing-they will end up with a system that effectively does those things.

Q185 Teresa Pearce: Do you have any figures for how many people are given cash pay packets nowadays?

Ruth Owen: I am not sure I do.

Q186 Teresa Pearce: Is there a percentage?

Lin Homer: There is nothing wrong with a cash pay packet. The question is how the employer is entering that into his or her own records. I think the question you are really asking is-

Q187 Teresa Pearce: But you can’t check the cash pay packet with the RTI like you can with BACS, can you?

Lin Homer: No, but I think the second question is how many employers do we think are doing their payroll effectively on a piece of paper and having it tidied up once in a while by an agent for them. That is one of the things I think we are working with FSB and others to try to establish. That is why the free software is available.

Q188 Chair: Can I just briefly take you through a number of questions on the same subject? Our recommendations on this was that we recommended you and DWP should have contingency plans in place. Is that so, yes or no?

Lin Homer: We are assuming we can bring RTI into effect on the day that we said we would. The plan we have put into effect since I suspect you made that recommendation has been to advance more employers before that date so the due date has less pressure on it. I think that is a contingency plan.

Q189 Chair: I am not sure I follow you. You are softly spoken but also I am not sure I followed you.

Lin Homer: Sorry, I am not usually accused of being softly spoken.

Chair: Do you have a contingency plan in place? Assumption, as a good Catholic, I would say is a sin against the Holy Ghost. Assume nothing and you will not be disappointed and you will go to heaven.

Lin Homer: I agree, so we have not assumed that we can leave it all until the due date. We have brought forward the number of employers we are putting into RTI in advance of the due date so that there is a smaller number of employers to deal with. That means, we believe, that the contingency of then dealing with any issues that throws up with the staff that we have to hand will be manageable.

Q190 Chair: You have not done a contingency plan. You are so confident you will finish this exercise before the stated date, October next year, that you are fine. That is the gist of it, isn’t it?

Lin Homer: No, I don’t think so, Chair. I think we have de-risked the go-live date in a different way from the way you are suggesting, which is we have a proposal to delay the go-live date. In a sense, we have taken the contrary view and we have tried to get more employers on earlier. The question about-

Q191 Chair: No, I am just thinking that the October date is October 2013 for Universal Credit. You have no doubt that you will deliver by that date and so you do not have any backup plan if you find next September that you are not going to meet that date.

Lin Homer: I do not want to overstate how challenging this is, so I am not sitting there thinking the October date is easy but I am not proposing to wait until September and change my mind. The period between April and September was planned for a gradual ramp-up, it always was, and what we are doing is heading towards that period of getting more on early so by September we will-

Q192 Chair: So you have not accepted our recommendation. We asked that the preparations for real-time information in both Departments are subjected to external audit as implementation proceeds, for example through the National Audit Office. Has that been done?

Lin Homer: I think you advised NAO and MPA.

Ruth Owen: Yes. We have had four reviews from the Major Projects Authority, which is external to HMRC. As you are probably aware, they scrutinise every major project in Government. We have had four of those review the RTI project. The most recent one was just a few weeks ago. In addition to that, the NAO do look at RTI as part of their overall review of the HMRC accounts and we are on their audit plan this year.

Q193 Chair: Ms Owen, is that a yes?

Ruth Owen: Yes.

Lin Homer: Yes.

Q194 Chair: If we are asking you this and you are doing it, you should say yes.

Ruth Owen: Yes.

Q195 Chair: When you start equivocating or describing a process, it sounds as though you-so you have met that recommendation? You are meeting that recommendation?

Ruth Owen: Yes.

Q196 Chair: Right, let’s go to the next one, "We expect arrangements to be put in place for the National Audit Office to report quarterly to Ministers, this Committee, the Public Accounts Committee and other relevant committees to ensure that Ministers in both Departments can be held properly accountable for the progress of the project". I have not seen a quarterly report pass the Treasury Select Committee’s desk so are you not doing that one?

Lin Homer: I think NAO is looking at us. I am not sure whether they are producing a full written quarterly report for you. I am very happy to discuss that with them.

Chair: The answer is you do not know. Okay, lovely.

Q197 Teresa Pearce: You were talking about the date somebody was paid. What about advances and loans? What if someone says, "This is not a wage, it is a loan"?

Ruth Owen: We are about to issue guidance on advances. It depends on whether it is an ad hoc loan or whether it is a loan that becomes part of the payment system. If it is an ad hoc loan where people genuinely say, "I can’t wait until payday, could you advance me some money?" that is not counted.

Q198 Teresa Pearce: But if people took loans would that be a-

Ruth Owen: If we are starting to talk about directors’ remuneration and things like that, then that will come under PAYE.

Teresa Pearce: Just working how they can get round it. People try.

Q199 Chair: In the National Audit Office report on your accounts, they refer to you separating national insurance and wage payments, "There was not a plan to implement the BACS system by October. To manage this risk the Department devised an interim solution where employers send employees’ information separately from payments". What does the word "interim" actually mean? This is a pilot scheme. You are putting interim arrangements. Am I using the wrong word, reading it into the word? Are these interim arrangements going to be ended before 13 October or is this the scheme until future notice?

Ruth Owen: This is the scheme at least until 2015-16 so it will definitely be there. It is quite a robust system in the sense of an interim one for 13 October.

Q200 Chair: Surely this separation must mean more work for your Department. If you are getting two separate pieces of information and you have to bring it together, it is different from having the information brought together for you, isn’t it?

Ruth Owen: That was the matching that I was talking about earlier. There is one piece of extra data that we need to make sure matches, but in return there are lots of things we do not need to do any more as a result of RTI.

Q201 Chair: The scheme was devised and once you started the pilot schemes you have changed the scheme. Probably you would say that is what pilot schemes are for, but you are going to continue with this interim arrangement. Are you absolutely happy with that and content?

Lin Homer: Yes.

Q202 Chair: The other question I would like to put on record is you are in a unique situation-maybe not unique but a difficult situation, or it could be-where two Departments are working on something. There are rumours going around that each Department has somebody in the room taking minutes to make sure if it all blows up the other Department goes up. I am sure that is just a rumour. Will you put on record your absolute confidence that DWP will meet their end of the programme? If it does not hit the 13 October deadline it will be you, because you have great confidence, extreme confidence, full confidence, that they are meeting their end of the project now? Just say yes or no. I do not want a qualified answer because that would be no.

Lin Homer: I did not intend a qualified answer. I just was not entirely sure I understood your question. I am very confident we are working well with DWP. I probably should-

Q203 Chair: I know you are working well. That was not the question. The question is have you full confidence that DWP, as the other partner in this project, will meet their end of the exercise on time? If it goes wrong, the inference from that is it would have to be at your end that it would have gone wrong.

Lin Homer: I know you don’t want me to qualify the question, but RTI is something we are doing for ourselves anyway. I have no reason to believe they would, but if DWP decided tomorrow they did not want to do Universal Credit we would still do RTI. Come 13 October there might not be anybody waiting to pull our information through, but we would still want to do it for ourselves. I am confident that we will be ready for the stages at which Universal Credit will pull information through, and I am confident that we have a robust enough conversation and relationship with DWP that if there are problems our end or theirs we will talk about it early and straightforwardly. Robert Devereux, as the Permanent Secretary for DWP, and I have both agreed that we will not let shall I call it departmental relationships get in the way of that. If it is not clear to you all, the Department Ruth came from before she came to us is DWP so she knows the locks to some of the doors.

Q204 Chair: That is a long qualification.

Lin Homer: I do not think it is a qualification, but there is not a drop dead date in quite the way your question suggested and that is what I want to be clear about. We are introducing a new system that will massively improve PAYE.

Chair: No, I know that. That is interesting.

Q205 Mr Ruffley: Can I ask about customer service, Ms Homer? We said in our July 2011 report that we expected some robust key performance indicators to be produced by you. The Government identified two in response in their response of October 2011. One was, "Customers find us straightforward to deal with", and the second was, "Cost to customers of dealing with us". Could you tell us what the scale of the survey was for those samples?

Lin Homer: On the customers find us easy to deal with, I think we set ourselves a target of 76%.

Q206 Mr Ruffley: Sorry, I did not explain myself properly. How many taxpayers, either individual or corporate, are you sampling?

Lin Homer: I am not sure I know. It would be a statistically valid number. I am very happy to send you a note about the makeup. It will have two elements of validity; one is the overall number and the other is the breakdown.

Q207 Mr Ruffley: Fine. I interrupted you. You were going to explain what the figures were.

Lin Homer: We were looking to achieve a level of 76% and I think at the moment we are at something like 74%.

Q208 Mr Ruffley: For both of them?

Lin Homer: No, for the ease of handling. I am not sure I know the other one. We did want to update the Committee more generally on the fact that, following your recommendation, we have been doing some work with the agents about publishing PIs and we are about to start in November to do a quarterly publication of these. It will be a bit rough and ready to start with, but my view is it would be better to tell you. The two that you asked were, first, ease of getting in touch?

Q209 Mr Ruffley: I am referring to the October 2011 Government response, which says that the Treasury has already developed two key performance indicators, which rather indicates those are the two major ones initially. The first is, and I am quoting the Government response, "Customers find us straightforward to deal with", and the second one was, "Cost to customers of dealing with us". I am taking it that the Government wanted to draw the attention of this Committee and the wider world to these two KPIs. Is that correct?

Lin Homer: We have added some more after discussion with the agents.

Mr Ruffley: I understand that.

Lin Homer: I am afraid I have brought those along and I am not sure I have those two that you have referred to. The position we are in is that we are aiming to report on a band of five: ease of getting in touch, ease of understanding, acceptability about the number of times you have to call, getting things right first time, and overall customer experience. We are going to try to do all of those and then publish quarterly against those figures.

Q210 Mr Ruffley: Fine. When are you are going to start this quarterly publication?

Lin Homer: Now, tomorrow. It will look like this. I was going to leave this copy with the Chairman. As I say, I would not want to pretend we think it is highly polished yet, but we thought if we started with feedback from the agents, and no doubt from further afield, we would start to get a feel as to whether this was the kind of information that not only helped us drive up our performance but helped people challenge us on that.

Q211 Mr Ruffley: My next question is how granular are these measures. Are they granular enough for you to determine as an organisation what the most pressing customer service problems are that need to be addressed? If they are, could you outline what are the most pressing customer service problems?

Lin Homer: Yes. I will ask Ruth. She has obviously only been here a few weeks.

Ruth Owen: It is very clear from the responses from customers, which includes individuals, businesses and agents, that being able to access us by telephone is the most important thing for those customers. That is where we have been trying to improve the telephony service. That is definitely their first requirement. After that, then it is being able to get a decent response from us through written correspondence. After that, it is the service that they receive. Once they get through to us, is the information that we are giving to them clear, understandable, and do they not need to phone back with subsequent correspondence?

Q212 Mr Ruffley: That is helpful. In our report of July 2011 on the subject of contacting you by telephone, this Committee said the HMRC performance on responding to telephone calls has been patchy at best and unacceptable at worst. I beg your pardon, we are quoting the PAC report from 2010. It states, according to this note, that, "The Department will be able to achieve its target of 90% of calls answered in a day by March 2012". Do you recognise that target?

Lin Homer: Yes, I do.

Q213 Mr Ruffley: If you do recognise that target, could you tell me what the outturn by March 2012 was against that 90% target?

Lin Homer: Yes. I think in the response to your and the PAC report Lesley Strathie, my predecessor, wrote to say that that was not going to be an achievable target and that she would aim to achieve that target by the end of the spending review. For the year ended 2011-12 we achieved a level of 74% and the year before that was 48%. I would want to put on record the tremendous improvement during that period.

Q214 Mr Ruffley: The 48% was due to PAYE-related issues. Is that right?

Lin Homer: Absolutely.

Q215 Mr Ruffley: That is why it shot up to 74%, did you say?

Lin Homer: And a lot of really hard work by Stephen Banyard and the team.

Mr Ruffley: Sure.

Lin Homer: I took the view not that long after I arrived that waiting another two years for the 90% was too long. Just a few weeks ago we announced that we intended to advance the timescale to achieve the 90% to the spring of next year. Ruth, more or less as she arrived, has been given the task of recruiting an additional 1,000 staff and putting in place the work to achieve that. Although we believe that is achievable by March, we do not necessarily believe we can turn the performance for the whole year to 90%, or even as much as we did last year, if I am honest, because obviously you have the average of the year. What we are hoping is that the very improved performances we have seen in recent weeks will be sustained during the rest of the year, and that from the beginning of next year that 90% figure will be our aspiration. There is a degree of challenge, and I have asked Ruth to look at this, about whether it is 90% all of the time. In a business like ours there are odd moments that cause huge spikes and so we think there will be inevitably some occasions when that 90% can’t be maintained. But our hope would be that those will be small and that the norm will be that that average is achieved and sustained rather than that we get the quite significant swings we have at the moment.

Q216 Mr Ruffley: Let me turn to the target for correspondence. Before I pose the question, when we are talking about letters are we talking about purely snail mail letters or do letters, in your definition, also include email letters?

Lin Homer: I am going to get Ruth to answer this one.

Mr Ruffley: Just so we are clear about what we are talking about.

Ruth Owen: It is your definition of snail mail.

Q217 Mr Ruffley: Snail mail, all right. Presumably you are finding a decreasing amount of snail mail correspondence. Is that right? Are taxpayers attempting to raise written queries by email?

Ruth Owen: Unfortunately we are not seeing a reduction in our post at the moment. I wish we were. We are getting about 10 million letters about tax every year and 7 million about national insurance so it is a significantly busy channel. There are not many circumstances when somebody can email us. We are running a limited pilot with some agents and through the large business service you can email, but as an individual taxpayer you can’t use email because we were concerned about security.

Q218 Mr Ruffley: But you allow taxpayers to entrust very personal confidential information in an online tax form, why not run of the mill queries via email to an inspector rather than snail mail? I am thinking in terms of the efficiency of your organisation. In most other parts of British life people are increasingly-Members of Parliament, for instance, are corresponding with constituents via email. It involves a lot of work but is probably marginally more efficient than opening letters and posting letters and all the rest of it. Is this a blind spot for you as an organisation and, if so, what are you going to do about it?

Lin Homer: We very much want to move on, but I think Ruth’s point about security is right. Generally speaking, online accounts are an altogether more secure place than general email. We are beginning to think, for personal tax and business tax, about ways in which we can create online accounts for people. My hope is that we will be able to put forward some proposals.

Q219 Mr Ruffley: When might those be?

Lin Homer: We are talking with the Minister at the moment about it and obviously this is the time of the year that one starts looking at forward business plans. We do need to have a solution to the security issue first and DWP, who are in a very similar position, are just beginning to put in place some contractual arrangements for identity assurance, which if they are successful would potentially be a big breakthrough for us.

Q220 Mr Ruffley: Who is advising DWP on that?

Lin Homer: The Government Digital Service is involved and-

Q221 Mr Ruffley: So you will be presumably talking to them?

Lin Homer: Absolutely. We all think it would be a very big win for the taxpayer and for us, but everybody would expect us to be able to do it safely and securely.

Q222 Mr Ruffley: Are you rather surprised, as I am, that this work has not been progressed by one of your predecessors, or any of your predecessors?

Lin Homer: Not entirely. I have had exposure to the challenges of identity assurance in previous roles and you do need to know that you are talking to the right person when you are transacting on issues that affect their identity, their right to travel, their bank account, and it is a bit different from general conversation. My experience has been that you can resolve those. In some of the immigration-related work, as you know, Mr Ruffley, we did get to the point where we were using a very secure form of identity that did allow us to speed up our processes a great deal. I think we can get there, but I know one of the things Mike Bracken wants to achieve is a kind of consistent standard in these things so I do think it is important that we go together on this topic.

Q223 Mr Ruffley: No, of course, and just so I locate this properly in my mind, when in the next 12 months do you expect to put forward proposals to Mr Gauke?

Lin Homer: We are all due to publish our plans about digital by default pretty soon and I think-

Q224 Mr Ruffley: So before Christmas?

Lin Homer: Yes. I think David will want some of this to be involved in that.

Q225 Mr Ruffley: That is helpful. Just returning, Ms Owen, to the snail mail taxpayer correspondence target. The target, as I understand it, is 80% of letters to be turned around within 15 days. Are you aware of how that target compares with other Government Departments?

Ruth Owen: No, I am not aware.

Lin Homer: It is about the same.

Q226 Mr Ruffley: That is the sort of industry standard for Whitehall, is it?

Lin Homer: I think it is towards the middle to good range. Certain organisations have slightly longer deadlines. I do not know of many that specify more than 80% within that timescale.

Q227 Mr Ruffley: I see. You achieved in 2011-12 64% against the target of 80%. What is the figure so far this year?

Ruth Owen: The year to date figure is 83% with the last month being 89%.

Mr Ruffley: So that is quite a bit of progress by the sounds of it.

Ruth Owen: It has got better, yes.

Q228 Mr Ruffley: I welcome good news wherever I find it. Finally, Ms Homer, in response to this Committee’s July 2011 report, the Government told us that HMRC was, "Redesigning its face to face service to try to provide a more targeted service for those who need it". Could you give us an outline of what in that phrase the redesigned services look like? I do hate that phrase but I am going to have to use it. Can you tell us what the redesigned services look like?

Ruth Owen: What we are looking at is understanding what customers need from us face to face. We have 280 enquiry centres. At the moment about 80% of the people who use those enquiry centres generally are satisfied by using the phones in those centres or by going on the internet through our service. What we have been trying to do is understand what it is that people really need from us, particularly when we get to the point of answering the phone at 90% so people do not need to come into the enquiry centre to use our phones. That is a mixture of dealing with circumstances that are quite complex, dealing with people who have particular learning or mental health needs, for example. It is about people at particular points in life, say for example a bereavement, where they just need a specific service, once off. It is not forever, but in a particular set of circumstances they would prefer to see us face to face than use the online services. We have tried to work out how best to service them, and what we found is the enquiry centre service is not servicing those people. A lot of people do not live very near an enquiry centre so they have to travel and in particular circumstances, for example if you have a disability or language difficulties, the enquiry centre service is not good enough.

What we are trying to look at is a much more tailored service so whatever it is that you need we can work through our own workforce and through local partners, be that the voluntary sector, people like Tax Aid, or Tax Help for Older People, so that we have a range of options for people in their locality that can offer the service that they are telling us they want. We are in the middle of designing that at the moment.

Q229 Mr Ruffley: In paragraph 125 of our July 2011 report, we made the following recommendation, "We urge HMRC to examine how far declining use of enquiry centres is due to factors such as inconvenience, opening hours, or lack of advertising. More broadly, we recommend that the Government examine whether withdrawing its physical presence from an area has a medium or long-term impact on local compliance". There is a trend of declining use of these enquiry centres, therefore, on the face of it, less face-to-face contact on average. We said you should examine. Have you done any work in examining whether this decline in a physical presence, either because of lack of advertising or inconvenient opening hours, is affecting compliance in local areas? Has a piece of work been done that this Committee could look at?

Lin Homer: I think the compliance units were asked to consider the point you made and I think in the Government response we sent you they identified that they did not believe that the absence of the face-to-face enquiry centres was impacting on their work because that was not an area where they drew a significant amount of their leads from. We still have on the ground activity in areas where we do not have an open enquiry centre. That is perhaps one of the things we could more usefully explain to you, the degree to which inspectors and compliance units still have a presence even where there is not a shop front. But in the Government response I think we confirmed that we did not believe that was a risk and that it was not a reason-

Q230 Mr Ruffley: I know there was an assertion that the Government did not believe it was a problem. Call me old-fashioned but I like some evidence-based policymaking. We all know that with complex cases it can take not one phone call and sometimes it might be face-to-face contact that is required if it can’t be dealt with on the phone. Notwithstanding the internet and so forth, one way of enhancing personalisation is having face-to-face contact. I am not clear in any of the papers that you have produced or anything I have read that there has been any measurement of the withdrawal of physical presence on compliance and on customer satisfaction.

Lin Homer: I think they are two different things.

Mr Ruffley: They are, but let us take the compliance point, which is what I originally raised.

Lin Homer: The basic evidence on compliance I would put before you is the increase in compliance outturns that we have achieved over the period that we have been making those changes. Our compliance performance has gone up in that period and that would tend to suggest that the enquiry centre impact has not been negative. I think it is a different answer for customer satisfaction. We know that there is a degree of desire to-

Q231 Mr Ruffley: That is a separate issue, I am going to grant you that, but on the first point you are saying local compliance has not fallen because overall compliance is going up. Is that a summation of what you said?

Lin Homer: Yes.

Q232 John Thurso: I would like to ask some questions about staff issues, but could I first ask one question to you, Mr Harra, in your role as Director General for Business Tax. What does Starbucks say about the administration and effectiveness of HMRC?

Jim Harra: I believe Starbucks have made some statements and obviously they can speak for themselves in relation to their tax affairs. They are a multinational company and multinational companies do have to pay their tax like everyone else and we expect a very high standard of compliance from multinationals. We have a very intensive process of managing the risks that they pose to us. For example, the largest 2,000 businesses have a dedicated customer relationship manager.

Q233 John Thurso: But they would not presumably get into that as they only pay £8,000 a year tax, or whatever it is?

Jim Harra: When we say what a large business is we do not base that on tax payments, we base that on the size of the business, so the top-

Q234 John Thurso: Would an alarm bell ring if a business that big had a tax bill that low?

Jim Harra: For those businesses we do a thorough risk assessment based on a deep understanding of the business itself. The customer relationship manager’s job is to man-mark that business, understand what their business strategy is, what their operational model is, what their business performance is and also what their tax strategy is. In other words, what their approach is to tax planning-high, aggressive, or conservative-what it is they are trying to achieve through their tax planning, and then to bring to bear on that business the relevant resources from HMRC to manage the compliance risks they pose. If, for example, the CRM determined that a multinational posed a risk in relation to transfer pricing, they can bring transfer pricing specialists into the issues with that multinational and work with those. We believe we have a very successful strategy for dealing with large businesses. Since we introduced that in 2006 we have brought in £29 billion additional revenues from them, and the National Audit Office has found that the avoidance risk that they posed has declined during that period.

Q235 John Thurso: In the case of large multinationals where they are able to move costs, licensing fees, management charges and so on, it is perfectly possible to manage costs-and there are many of them that are quite legitimately doing this; whether it is right or wrong is a different matter but they are quite legitimately doing this-so that the actual final revenues are declared in a jurisdiction where the tax is as low as it can possibly be.

Jim Harra: By the nature of multinationals, some of the key risks that they pose to us are international.

Q236 John Thurso: The United States has a very simple rule, which is you have to pay a certain amount of tax. Having run a company that had an American business making quite a lot of money and a British one that was relying on the cash from the American business to keep it going, we had to pay tax on that money to get it out. The Americans would not allow us to write off anything else. Is there any rule in the reverse, or is this a requirement for policymakers to have the proper rules in to allow us to do the same?

Jim Harra: I think if my colleagues from the IRS were here they would say that they do not find it particularly simple to achieve that.

John Thurso: They did in our case.

Jim Harra: We do have sets of rules to make sure that we are able to police those international tax risks, so we have transfer pricing rules that ensure that where there is a transfer price across a border within a multinational group that for tax-

Q237 John Thurso: You are giving me a lot of very good answers but you are also drawing a slightly inky cloud over the whole thing. What I am really after is, is it not fair and appropriate that we all pay our tax in the right place at the right time? That should apply to companies just as much as to individuals. Leave Starbucks out of it-they happen to be the ones that got in the papers-but there are quite a lot of multinationals who are operating in this country, making a considerable profit by any known measure that a bank or whatever would recognise, a profit, and not paying tax on it. The question is what is HMRC going to do about it? Is it something it does internally or is it something it flags and says, "Ministers, get to work"?

Jim Harra: I think it is both. It is entirely right that we expect multinationals to pay tax in the jurisdictions where they are generating their profits through their economic activities there. That is the basis of the UK’s corporation tax system and international corporation tax systems. There are rules designed to ensure that the proportion of a multinational’s profits that are relevant to the economic activity they carry out in the UK get taxed in the UK. As I say, we have an intensive process of making sure that they stick to those rules and that where they do not we can intervene. Where the rules are what we need, we are there enforcing them. If we believe that the rules can be enhanced, we would advise Ministers about that.

Q238 John Thurso: Do you count that as being part of the tax gap or not?

Jim Harra: Yes, we do.

Q239 John Thurso: The tax gap includes what those multinationals are not paying you, even despite the fact they are obeying all the rules?

Jim Harra: Yes, our estimate of the tax gap includes an element for the tax we believe we should be getting from a large business that we do not.

Q240 John Thurso: Thank you. Can I turn to you, Lin Homer? You have been in just under a year now. Looking at staff, how is morale?

Lin Homer: We are right in the middle of the staff survey-it closes today-so in another few weeks’ time I will have some very up-to-date information about how staff are feeling. The good news is that this year we have got our folk to fill in the survey. As you probably remember, last year there was something of a veto so our return rate was low and this year we are pretty much spot on the same as everybody else in the civil service in terms of the numbers filling in, so that will be very important. My personal experience since I joined does mirror what you saw in the survey and I think the conversations you had with the union. I do not think I have ever met a more committed and hardworking bunch of people, and there is still quite a lot of them. They are pretty focused on getting the money in. They have a very good understanding of the importance of that to the country. They want to feel more able to shape and influence the organisation and they want to feel they get more out of senior managers. So I think there is still a way to go for us to prove to them that we can be the quality leadership they want.

Q241 John Thurso: In the past it has been very clear-and I think you recognise it and everybody recognises it-with the many difficult changes going on that morale has not been where one would want it to be, and all the surveys and everything showed that. In your view, has the corner been turned?

Lin Homer: We and the unions think we have reached an important moment. I don’t think that you move from having 40% engagement to having 60% engagement overnight, so truthfully I am not holding my breath waiting for great leaps but my experience of the staff is that they have been very straightforward with me. They do not seem to have had any problems in escalating issues to me and they are giving me some early signals that they are up for having another go at getting us all into a place where we feel happier.

Q242 John Thurso: Do you measure staff turnover?

Lin Homer: Yes.

Q243 John Thurso: Do you do that for different levels?

Lin Homer: Yes, we do. I do not have all those figures in my head.

Q244 John Thurso: Is that something that we could have and compare to previous years? Not numbers, I am interested in trends, percentage turnovers and different-

Lin Homer: Yes. I am not absolutely sure how granular, but we can definitely give you business by business and I am sure at least SCS and the rest.

Q245 John Thurso: For me, a very strong measure of what was actually happening, irrespective of surveys, was always how many people were voting with their feet.

Lin Homer: It is interesting because the truthful answer is not that many. Most of the public sector has quite low turnover compared to other sectors.

Q246 John Thurso: In a hotel you might well have 100% but you would not expect that in the civil service. You would expect to find a far lower percentage, probably around 5% or 6% or whatever it might be, but it is the comparator for the business year to year.

Lin Homer: Yes, I am very happy to share those. I do not think it has been a significant issue. An issue that we certainly are alive to, and I know you have been in the past, is that partly because of the period of time we have been retrenching we have become quite an old organisation. We now have a significant proportion of people reaching retirement age and I think it is one of the reasons it is so important that we start recruiting again to get the corporate memory transferred over before those people retire.

Q247 John Thurso: I have two questions that follow on from that. One is I think you are still supposed to be getting rid of 10,000?

Lin Homer: We have to drop down from 66,000 FTEs-there is actually slightly more people because of part-timers-to 56,000, yes.

Q248 John Thurso: But if you look at what your accounts called Project A, which is enforcement and compliance, where you were spending £767 million, that is the extra money for compliance.

Lin Homer: Yes.

Q249 John Thurso: You were talking a little while ago about engaging another 1,000 people and I know that there are people on active compliance work now who used to do other things. How do you balance off the 10,000 who have to go with the ones that have to come? [Interruption.]

Lin Homer: We believe that we will lose the 10,000 by natural wastage. Do you have to go and vote?

Chair: I fear so, but I just want to settle something. Are we coming back? Good, I have a quorum. What do we need, 15 minutes? 10 there and back, okay.

The Committee suspended for 15 minutes for a Division in the House.

Q250 Chair: Thank you very much for your patience. John, you are on your own.

John Thurso: Where was I?

Chair: You were on Starbucks if I remember.

Q251 John Thurso: No, we got past that. Go back to the staffing issue. What I am interested in is on the one hand you have a difficult management challenge of taking people out, which is always difficult in any organisation. On the other hand you have investment to make and so on. Is that 10,000 out figure still valid? Can we move people from the 10,000 out into the 1,000 in? What can you do about all of that?

Lin Homer: Yes. We are treating it as a complex set of interconnecting numbers, so we are not just losing people from one area of business that is reducing and then recruiting people elsewhere. That makes it more complex but it helps us save experience and avoid redundancy for people, which is important for them and saves us money as well. We have been reducing numbers in areas where we believe we can. We talked earlier with David Ruffley about moving towards a more digital system. Even the things we have already done in personal tax are allowing us to be more efficient, so some staff are moving from areas like personal tax into enforcement and compliance. We are training them up. Many of them already have good and useful skills but some of them need additional skills so we are netting off those changes.

I also believe it is important that we start recruiting again because of the age demography. The rate at which we are seeing people leave because they are reaching proper retirement age means that we need to bring some new people in so that they get the benefit of the experience. We have promoted about 1,000 people this year already, which is good because that means people are getting the chance to develop within our business, and we have recruited about 500 people externally to top up from the bottom.

I should mention that within that we have quite a lot of people that we end up calling TFTAs, temporary fixed term appointments, and we sometimes use those in areas where we still have a need now but we know that need is diminishing. We do not make those people full-time employees, we do not end up incurring redundancy, but as we get gaps and we are recruiting externally, many of those temporary fixed-term staff are then moving into permanent employment. The training we have put into them is then benefiting us as we go forward. They are proving to be a very energetic workforce and very good.

Q252 John Thurso: I am sure you have been briefed that you are not allowed to come to a Treasury Sub-Committee meeting that I attend without the subject of Wick Tax Office being raised.

Lin Homer: Yes, it was mentioned.

John Thurso: You have been briefed. The point there is you have an excellent group of people who are now all on compliance doing, as I understand it, an excellent job-and I would love to know about that-but who are very good at doing one work stream, quite different from what it used to be in the old days. In a couple of years’ time that is all due to come to an end. It seems to me that you have two Secretaries of the Treasury boasting about how much money is going in on this and you have a bunch of people who are very good at raking money in. Why on earth do we have to chuck them all out, which will be what will happen in a couple of years’ time? I am sure there are other examples. Can’t they be hung on to and be part of the success going forward?

Lin Homer: Wherever we can we are doing that and I have been very impressed by HMRC. It has taken dispersed workforces much more seriously than have other Departments. We have quite a lot of people who work out of an office that remains manageable for them on a daily travel basis but where their boss or their unit is somewhere else. They are working in a connected way but not in the same geographical space as their team. It is not always possible. I do not know your Wick team as well as I am sure you do but-

Q253 John Thurso: May I invite you to come? You fell for that one hook, line and sinker. I even offer you accommodation in what is left of Castle Thurso. You are absolutely welcome.

Lin Homer: Excellent, I shall take you up on that. I do a lot of frontline visits and we can’t always absolutely make the fit. I was talking to a woman in Lincoln, when I visited recently, who travels about 35 minutes a day to go to Lincoln, which she thought was a long journey and I challenged her a little bit on that, but that is an office that she knows might also be subject to change in the future. She was saying she definitely would not travel more than 35 minutes. There are some circumstances where however hard we try we can’t come to an accommodation. What I must say as the chief executive is we should always try to think about whether there is a solution. If there genuinely is not a job people can do in a dispersed way or an efficient way of offering them that dispersed, either home working or someone else’s office, sometimes in very limited numbers we have to say, "This is not going to work". It has been very small numbers.

Q254 John Thurso: I will not abuse the crease to promote Wick to you any more. Suffice to say that if you can’t come and visit me perhaps I might come and visit you and persuade you of some of the arguments.

Lin Homer: I would be very happy to talk about Wick.

Q255 John Mann: I have been waiting patiently for the opportunity, almost as patiently as I have been waiting for you, Ms Homer, to respond to my letters and phone calls. Three personal phone calls to your office in the last three months, one a month, each with a guarantee, details taken, that someone would get back to me, letters and repeat letters. With all this about standards of performance-you have had long enough to get your feet under the table-if you can’t be bothered to answer me on behalf of my constituents what hope is there for my constituents going to you directly?

Lin Homer: My apologies if I have not responded well to you. I think it is-

John Mann: Not well. Your office has not responded at all on three occasions.

Lin Homer: I apologise. We do not try to run the organisation on the basis that it is always sensible for it to be me that replies. I have already indicated to another member of the Committee that I am very happy to talk to you directly. I have already talked to a number of MPs and Ministers and Committee members directly so it is not that I am not prepared to but sometimes it is more sensible for someone else to. The important thing for me is that I make sure the system works rather than that I try to do it all myself.

Q256 John Mann: That is the important thing for me, which is why when the system is not working I go to the top person in an organisation to try to make sure it does. I make the point because I found that rather astonishing to happen not once but three times. I have your organisational chart in front of me. When you look at that, what do you see?

Lin Homer: You see quite a lot of people.

Q257 John Mann: Kindly provided to us. In fact there are 71 people. 11 of them have the title "change", which is a bit like the 1980s when everyone could be a change agent. I have noted that all 71 are white. Why is that?

Lin Homer: It goes back to some of the same challenges that have made us a too old Department. We have not had any external recruitment to talk of for about seven years. We have had very little internal promotion. You are looking at the top of the organisation and unless you have a reasonable amount of turnover and throughput you will not get the right balance of diversity in the top team. It is something I am concerned about. It is something I think we can change, but when you are in lockdown those things do not change. There are too many people in HMRC who are over 50 and there are not enough people breaking through from our younger ranks because there have not been enough younger ranks, frankly. The diversity in gender, ethnicity and disability will not improve until some of that age range improves because the people at the top in that age range were recruited in very different times.

Q258 John Mann: Certainly it is rather unusual these days to see such homogeneity. Do you still send staff to advise other countries on how to run their tax collection around the world?

Lin Homer: We do a certain amount of international work to advise others but also to learn from others. We do some work in emerging countries that I think is well valued by other parts of Government, and I hope we will continue to do some of that.

Q259 John Mann: Do any other countries send people in to us to advise us on how to run our systems?

Lin Homer: Yes. The Committee will know that one of my recent appointments to DG is Jenny Granger who is from the Australian Tax Commission. We have a colleague of hers coming over shortly who is going to spend some time talking to us about comparisons and things we can learn from each other. We have recently sent a director, Naomi Ferguson, to New Zealand.

Jim Harra: She is the chief executive of the New Zealand tax office.

Lin Homer: I have encouraged her to keep an open line to us as well so that if there are things we can learn we do so.

Q260 John Mann: Are you seconding anyone at the moment to SOCA and will you be seconding anyone to the National Crime Agency?

Lin Homer: We have had people embedded in SOCA since it started, because customs investigation was a big part of that. I hope that we will continue to work very closely with the NCA as it emerges. Again, I think there are things we can help them with and things we can learn, so we do see ourselves as part of that. With my time in the Home Office I know some of the people involved in the emerging NCA and I am keen that we are a strong part of that.

Q261 John Mann: Mr Harra, I noted down what you said about your very successful strategy on transfer pricing and multinationals. I wondered if I gave you a few companies which you thought was the best example of this success. If I gave four, Facebook, Google, Amazon and Starbucks, which of those best illustrates the success that you have had with what you described earlier as a very successful strategy?

Jim Harra: I am not able to talk to you about any of those four companies specifically. When it comes to our success on transfer pricing, first of all companies have to self-assess under the transfer pricing rules so they limit the scope that companies have to manipulate transfer pricing to move profits into low tax jurisdictions. Over and above that we do carry out transfer pricing investigations and in the last five years we have recovered £4.7 billion from those.

Q262 John Mann: Do you think it is morally just that Starbucks is paying less tax than a self-owned corner café in one of our constituencies?

Jim Harra: It is an obligation, both a legal one and a social one, that you pay your fair share of taxes, as the tax system requires you to. There can be a whole variety of reasons why a business large or small may be paying less tax than the business beside them. To the extent that those are because of different business performance, that is entirely proper. To the extent that they are down to non-compliance, whether that be avoidance or evasion, that is where HMRC steps in.

Q263 John Mann: Ms Homer, do you regard it as morally acceptable that Starbucks pays less tax than a corner café owned by a single person, or perhaps a couple, in one of our constituencies?

Lin Homer: Chair, I think both you and other members of the Committee know well that we do not talk about individual taxpayers. We have regular conversations about why we do not. It is rooted in section 18.1 and we will not come to these events and discuss the tax position of any individual or company. What we are clear about is it is important everybody pays their tax. We can do things with big business, small business and individuals to make sure they understand those obligations and to make sure that we encourage them, and if necessary forcefully encourage them, to do that. That is what the Government asks us to do so I am happy to be in that space. As I have explained to the PAC on previous occasions, I will stick to talking about the generalities of the tax system when I am in front of these committees.

Q264 John Mann: Let’s talk about generalities then. Would you regard it as morally acceptable if in general a large multinational, employing thousands of people with huge sales here, was paying less in its corporation tax than a business in one of our constituencies that is owned by a couple as their only form of income?

Lin Homer: We issued a briefing, I think in October, on taxing the profits of multinational businesses. I know it is an issue that interests parliamentarians and the public, but I think Jim explained well that what we have to do is make sure that people pay the tax they are required to pay. One of the challenges for people to understand is that in broad terms companies are required to pay corporation tax in the country where they carry on the economic activity, not necessarily where their customers are located. It is understandable that they do not get that but my people need to get that. That is perhaps one of the things that gets lost in some of this discussion.

Q265 John Mann: How many staff do you have who are specifically looking at the issue of offshoring and taxation in relation to potential British taxpayers?

Lin Homer: These are within business tax. I can’t quote the absolute numbers, but Jim’s total staff base-

Jim Harra: In the large business service, which is the frontline staff that deal specifically with about the top 780 businesses, most of whom will be multinationals, there are about 1,200 people. There are about the same again dealing with the next 9,000 or so large businesses, some of which will be multinational and some of which will not. In addition, they have a range of subject matter experts and specialists who they can draw on, such as transfer pricing specialists who sit in central teams. We also have a high net worth unit and affluent units who focus on wealthy individuals, as opposed to multinational businesses, who also often have international tax issues.

Q266 John Mann: Do you have any people physically based in any of the UK Crown dependencies?

Jim Harra: I am not sure of the answer to that. We do have a network of fiscal crime liaison officers overseas. Offhand, I do not know whether any of them are based in Crown dependencies.

Q267 John Mann: Mr Harra, you said that you make regular submissions to Ministers about how legislation or other regulation could be improved to ensure that everyone is paying their fair tax. Can we have copies of them?

Jim Harra: No, you can’t.

Lin Homer: It is a basic premise of the civil service that policy advice is private to Ministers. I think the Committee will know that. We are not necessarily advising that you should do that or you should not do that. We are advising on the consequences. I gave a very good example-

Q268 John Mann: No, that is not what Mr Harra said. He did not say "advise on the consequences", he said "advising" full stop.

Lin Homer: Yes. I am saying "not necessarily". The example I gave earlier is that the work that we did on the impact of differential tax rates for higher rate tax was published at the same time as the Chancellor made his change to the tax rate. The whole HMRC document was published, all of the evidence, and that was put into the public domain.

Q269 John Mann: How many times have you provided advice to Ministers in the last five or 10 years on transfer pricing and suggestions of how the system can be improved?

Jim Harra: I do not know a figure for transfer pricing specifically, but taking avoidance more generally we do frequently give advice where we believe that tax policy is not working as intended or where we believe that a legislative solution can help us in tackling avoidance. Both this Government and the previous Government have been very active in implementing anti-avoidance provisions in response to that advice. There have been a large number of them, including about seven in the last 12 months.

Q270 John Mann: Are the policies that you are working on ones that would encourage large companies to set up here but be paying virtually no tax whatsoever? Is that part of the policy mix that you are working on?

Jim Harra: No. I have never given policy advice or been asked to give policy advice on how we could get companies not to pay any tax in the UK. If we take transfer pricing, that is a set of international standards that apply across the world, not just in the UK, because obviously in any transfer pricing arrangement there is another tax authority on the other side of it. There we work internationally through bodies like the OECD to make sure that those standards work in an effective way and HMRC is regarded as highly active in the OECD on that work.

Q271 John Mann: The members of the OECD are more than happy to have companies attracted to their island in order to pay significantly less tax everywhere else, so the OECD is not necessarily the best place. What discussions are you having with other countries, bilaterally, on seeing who is the most effective in maximising the tax take from large multinationals?

Jim Harra: Through bodies like the OECD and bilateral arrangements through things like our Joint Intelligence Committee, we exchange information, exchange ways of working, identify best practice. That is both the UK sharing what we do and other tax authorities sharing what they do. Recently I have been in touch with my German colleagues, for example, on how they do things. We are constantly sharing information and also constantly sharing where we need to mutually assist each other where we have, say, a multinational that operates in both countries that may cause tax issues between the two jurisdictions and between the two tax authorities.

Q272 John Mann: If you are seeing good exemplars from other countries, are there any circumstances where you would not make Ministers aware of the options available that you have seen through bilateral contact as policy possibilities for them to consider?

Jim Harra: Often what we encounter are operational techniques that HMRC can adopt or learn from without necessarily having to ask Ministers for legislative action. But it is part of our policy advice service to be able to tell Ministers how things are tackled in other countries and what the comparative experiences are in different countries.

Q273 John Mann: You have had such dialogue with Germany. Have you had that with Sweden and Denmark as well?

Jim Harra: We are members of a number of international associations , which means that we have lots of bilateral and multilateral dialogue with countries, including those countries.

Q274 John Mann: I am particularly interested in the bilateral because that would be looking at their precise systems and how they operate. Would it be accurate to say we have good bilateral contact on the systems in place with Sweden, Denmark and Germany?

Jim Harra: With those three countries, yes, and with many others as well.

Q275 John Mann: Therefore, would it be reasonable to assume that Ministers would be aware of those systems and what happens there?

Jim Harra: If there is anything in policy terms that I think the UK can learn from, it is certainly my job to make sure that Ministers are aware of that and take that into account.

Q276 John Mann: My final question. In terms of the large multinationals, and you are not going to comment on individual names but I am thinking of people like Starbucks and others, of which there is a wide range-in Denmark there is only one Starbucks in the airport so it is not one that operates there but there are other names who operate across these countries-which is the country that is most effective in maximising its corporation tax out of these transnationals, multinationals, compared to the rest?

Jim Harra: I do not think there is a ranking of which tax authority is the best. Different tax authorities can learn from one another in terms of different aspects of what they do. For example, the UK is regarded as an exemplar in transfer pricing. A lot of work that the OECD has published has been driven by the UK and the experience that we have had. Increasingly, both there and more widely in our strategic way of dealing with large businesses, we have seen other tax authorities adopting what we do, but different tax authorities can sometimes be ahead of others on certain things and different elements.

Q277 John Mann: They can. For the benefit of the Committee we might choose to study particular examples so I am asking you and your colleagues which are the countries we should be looking at if we are worried about what we hear of multinationals paying virtually no tax in this country? If we are looking at other sets of legislations or regulations in place, which are the countries that we should be looking at if we feel that this is a problem that needs to be explored? Which are the ones you would recommend to us that we look at?

Lin Homer: There are a couple of comments we could make. One is that there was an international benchmarking report done a couple of years ago in HMRC that we could make available to you. It is not just in that area but over a range of areas. From memory, I am pretty sure some of the Scandinavian countries were involved in that as well as others. The other thing is that the tax gap analysis illustrates some of the performance here. In relation to that-I can say this probably more readily than Jim-the UK performs really well. We have a lower tax gap across all the taxes.

Q278 John Mann: Your report on the tax gap specifically identifies that the vast majority of it is from SMEs. I have read that. I am interested in large multinationals as well.

Lin Homer: What that suggests is that if you looked overall, however, for all of those countries the comparator will be the same. The US and Sweden certainly have percentage point differences, I think the US is 10% tax gap.

Q279 John Mann: We are talking apples and oranges because you are saying that Starbucks is acting within the law.

Lin Homer: We are not talking names of individual taxpayers.

Q280 John Mann: You are not naming names but I am. You are saying that companies like that are operating within the law, they are not doing anything illegal. They are not not paying taxes, therefore that is something quite different. We had your predecessor here in relation to Vodafone and he was more forthcoming in discussing matters. We are interested in that but we are also interested in the systems whereby it would appear that with Facebook, Google, Amazon, Vodafone, Starbucks and others there is an impression, and I have that impression, that these companies are not paying a fair amount of tax in this country. I am interested to see if there are examples elsewhere and reports done that we can access on what can be done about that.

Lin Homer: I do not think that is an issue for you to discuss with us. I think that is an issue for you to discuss with Ministers.

Q281 John Mann: No, it is absolutely an issue to discuss with you. You are the experts paid for by the taxpayer in this country on this. You are the people most in the know and you have the background. You do not determine the policy, of course, but we are policymakers. This is a democracy. We are entitled to know what you know in relation to it, not the individual relationships with a particular company but the systems in place and the policy options that are available so that when we vote in here we can vote in a way that best accords with what we think the British people want.

Lin Homer: We could point your Committee to a wide range of published research on these issues, including our own international work. I am very happy to do that.

Q282 John Mann: That would be a first step. If you would do that we can then look at it and see, because it is your duty to inform Parliament of the options that are available and where to look, without breaking any protocols on individual tax relationships. It is your duty as civil servants to be doing that. That is what I am asking you to do to this Committee.

Lin Homer: What I am required to do is give policy advice to the Minister. I do not think I am required to give policy advice to Parliament directly but I am absolutely happy to point you to the general research and published material on this. There is a competitive and varied position with relation to taxation throughout the world and multinationals, as has been said earlier, have a degree of choice about that. There are differences, but I think we could help you find your way through some of that by direction and I am very happy to do that.

Q283 Chair: When we were going for the vote I think John Thurso and I were surprised, Mr Harra, you did not give that forthright answer that you have just given. Is it because you are not doing your job properly or is it that we are not doing our job properly? If you are content you are doing your job properly within the law, and that is how you have to operate, then it is our job to change the law to deal with this matter, and I think that is fair. If I were a Minister I would be very unhappy if you were putting policy suggestions in a public committee.

Lin Homer: Yes, I think you would.

Chair: I would prefer that you push them to the Minister. John Mann is able to cross-question the Minister about matters such as this and so I think that is where it rests. Thank you very much.

Q284 Jesse Norman: Can I say to our very long suffering guests that the end is in sight of a long session. I want to raise a couple of questions just sweeping up around the edges of one or two things that have already been asked. Ms Owen, you were talking about real-time information. Could you comment on the process of IT procurement? Are the approvals now in place for that? Are you happy with the performance of the IT contractors?

Ruth Owen: Yes. To be clear, the RTI system is already up and running so we are well past the procurement stage. That went through procurement over a year ago. It went through all the relevant approvals then and is up and running.

Q285 Jesse Norman: You and I both know that there is an endless series of bugs and fixes that runs alongside the implementation of any large programme, but you are telling me that is fine?

Ruth Owen: Yes.

Q286 Jesse Norman: Is it within budget?

Ruth Owen: We are looking at the business case at the moment for the IT and other parts of the RTI implementation. The original request from the Treasury for money for RTI was £108 million. That was our first assessment of how much this was going to cost. As we were talking about earlier, since then we have made quite a few different decisions about what type of system to operate and to operate a much longer trial. The costs have increased since that original estimate and we are reviewing the business case as we speak.

Q287 Jesse Norman: What kind of scale of increase do you think it will be? Will it double? Will it go up by £10 million?

Ruth Owen: What I know now is, looking like for like for exactly what we assessed at the beginning of the project, I can see that it is going to cost £138 million compared with £108 million. I believe that is going to go up again in the scale of tens of millions.

Q288 Jesse Norman: We could be looking at £160 million or £170 million, it is that scale of things, without tying you to it. That is admirably clear. Thank you very much.

Coming back now to multinationals. Mr Harra, I know you did not intend to say this but let me report what you did say, which is, "Multinationals pay their tax like everyone else". I think we have discovered from newspapers that in many cases they do not pay tax or, if they do, they do not do it like everyone else.

Jim Harra: What I meant to say is-

Jesse Norman: They comply with the law as it presently is.

Jim Harra: -I expect them to pay their tax like everyone else and I take action to make sure that is what they do.

Q289 Jesse Norman: That is helpful. Will the General Anti-Avoidance Rule make any difference to that?

Jim Harra: The General Anti-Abuse Rule, on which the consultation has closed and the Government will make its decisions shortly, will deter the most abusive and artificial avoidance. Generally speaking, large businesses are not operating in that space. Some are and they will be affected by the GAAR if they do not change their behaviour, and I expect that they will, but generally speaking, in the last six years or so we have pushed most large businesses out of that space. There are other types of avoidance that will not be caught by the GAAR that is caught by specific anti-avoidance rules and we will continue to work that. I do not think that the GAAR is likely to have an impact on things like transfer pricing.

Q290 Jesse Norman: The ones that are still affected by that will be quite large. Have you done a quantification of the kinds of returns you could get from that group once the GAAR is introduced?

Jim Harra: First of all, it is going to take some time. It is also going to be quite challenging to identify how much additional revenues the GAAR in itself is producing, because I would expect that we will be deploying it alongside a range of other arguments. It is an additional tool that we can bring to bear and in individual cases it may well prove impossible to tell which tool it was that brought in the revenues. It will have a particular impact on marketed avoidance schemes that tend to be aimed more at wealthy individuals than at large businesses.

Q291 Jesse Norman: Presumably it might also affect dodgy financial planning by the banks working with certain kinds of favoured customers, that kind of thing?

Jim Harra: Based on past behaviours of some banks I would expect the General Anti-Abuse Rule to cause them sleepless nights. However, in recent years we have introduced a code of practice for banks and we expect those banks who have signed up to that code of practice, if they are code compliant, to be operating well away from the range of activities that the GAAR would catch.

Q292 Jesse Norman: That is very interesting. Have you done or made public an analysis of the performance of the banks that have publicly declared in favour of the code versus others?

Jim Harra: No, we have not at this stage.

Q293 Jesse Norman: That would be extremely interesting to see. We would like this Parliament to know whether or not the code is being effective and how many more could be affected if we could encourage them to join.

Jim Harra: Yes, I think that is part of the evaluation of our overall anti-avoidance strategy, of which it is an element, that we do have to-

Q294 Jesse Norman: When will you come back to us with something on that, because it would be very interesting to see that?

Jim Harra: I can’t say today when I will be able to come back with that. The code has not been operating very long in terms of when we have started seeing changes in behaviour and accounting periods coming in. The anti-avoidance strategy itself was put in place in 2011 and we would need to be evaluating it reasonably soon.

Q295 Jesse Norman: Within six or 12 months?

Lin Homer: One of the things we have offered to the Committee on the back of our new tax assurance arrangements is that we will produce an annual report about large disputes. We are anticipating you will have a hearing with us about that. It seems to me we may just consider whether we report this at the same time.

Q296 Jesse Norman: You could include this as well. I want to ask you about that. Have the new governance arrangements for large tax settlements been tested yet?

Lin Homer: They have just started in earnest. To a degree we have been practising with them over the last few months with Jim’s appointment and Edward Troup’s appointment. We consulted on the code of governance and we have just published the revisions to the code as a result of that consultation. De facto the beginning of this month is the beginning of the new arrangement. Edward and I believe it would be worth accounting for this part year at the end of the year although it will obviously be the starting phase. Our hope would be that once we finish our annual report we will capture November through to March in that report.

Q297 Jesse Norman: You are persuaded that will give the Revenue protection against rogue commissioners, private deals, separate kinds of negotiation, that kind of thing?

Lin Homer: It allows a degree more transparency about our arrangements without breaching taxpayer confidentiality. I thought quite long and hard about this on arrival, because I think it is right that we share as much as we can. There is a clear role separation. There is more public criteria about what we are doing, when and in what settings. There is a role for our own audit and risk committee to audit the applications of those processes and there is an annual report. I think the combination of those things does not necessarily improve the quality of what we do but it does improve our ability to account for that.

Q298 Jesse Norman: You have circulated a draft code of governance. When do you think that is going to be published?

Lin Homer: Very soon, almost imminently. As I say, de facto from the beginning of November we will work-

Q299 Jesse Norman: Thank you. Has the addition of an assurance commissioner made any tangible difference yet to the way in which you deal with complex tax cases?

Lin Homer: I think it has in the sense that it has allowed us to have more role separation. Jim, with his responsibilities as Director of Business Tax, including large businesses, has to make that work proceed through his system. It then enters a degree of challenge where our tax assurance commissioner and another tax expert commissioner effectively look at the outcomes of the big cases and challenge whether that is right or not.

Q300 Jesse Norman: How many of those have been done so far?

Lin Homer: There are not huge numbers.

Jim Harra: There are not huge numbers. We are talking here about certain ones where the tax at stake is more than £100 million so there are not a very large number of those at any one time. There have been at least two in the last couple of months where we have put through the new procedures, even though they have not yet formally started, involving the independent tax assurance commissioner and two other commissioners.

Q301 Jesse Norman: Will you push it down? There have been well publicised cases, Goldman and Vodafone, on which I do not expect you to comment but where the numbers involved were less than £100 million-

Lin Homer: We are planning to do a sample of a number of smaller cases as well.

Q302 Jesse Norman: That procedure of assurance and challenge would push down over time. Is that right?

Lin Homer: The plan is twofold. One is to look at a range of smaller cases and the other is to do some retrospective audits so that over this first period we can work out the level we ought to operate at.

Q303 Jesse Norman: Thanks. But it is a handful so far, just to be clear?

Lin Homer: Yes.

Q304 Jesse Norman: When can we expect to see the first annual report on the outcome of your tax dispute work?

Lin Homer: We intend to include it with our annual report, so at the end of the financial year. I imagine we will try to do it at the same time as we sign off our accounts. Then both yourselves and any other Select Committee that wanted to would call us in the period thereafter.

Q305 Jesse Norman: Will it be a separate document?

Lin Homer: We are not completely sure. This is a new system. I shared my proposals with both Andrew Tyrie and Margaret Hodge when we first put them together. We remain open to discussion about that as to whether we incorporate them in a joined-together annual report or whether we disassociate them. We welcome the Committee’s views on that.

Q306 Jesse Norman: A very stupid final question, which is you said there had been a lockdown on hiring and that was the difficulty you had.

Lin Homer: Effectively, yes.

Q307 Jesse Norman: How were you able to hire Ms Owen?

Lin Homer: How were they able to hire me?

Jesse Norman: I was coming to that in a second.

Lin Homer: There have been a very limited number of external appointments. I did not want to suggest there had been none, but overall for an organisation that has 75,000 people there had been almost no regular repeat recruitment. It has always been the case that specialist posts-and I think most people would accept HMRC can’t run without a chief executive-get filled but we have not been topping up the very important people who are going to be the tax inspectors of the future. Jim started as a tax inspector. He gets to be a DG some time later but we had stopped recruiting that kind of person. This year we are recruiting 200 graduates to train as tax professionals. We are also recruiting up to another 500 to be more generally employed. Those are the permanent secretaries and DGs of the future. That was what I meant to stress, not that there had been a complete solid freeze.

Q308 Jesse Norman: In retrospect, was it a mistake to impose a full freeze to the degree it was?

Lin Homer: I think it creates the risk of succession planning, particularly in the professional areas. I completely understand why it was done. When you are potentially having to reduce your numbers, to force some of your skilled people to go while you are recruiting others itself would look like a mistake if you were not very careful. It is important at the very least that we maintain the intake to the professional cadre. We have started again this year and we intend to keep that going even while we are still continuing to reduce numbers.

Q309 Chair: Thank you. If my colleagues could stay for a couple of minutes I just want to say two things. One is you will be pleased to hear, Mr Harra, that the full Committee have agreed after the Banking Commission is finished to take the question of these large companies who do not seem to pay their fair share of tax in this country as a policy exercise, and that will be early next year. So I think we are on the same ground. As far as yourselves are concerned, I was getting this understanding with Lesley Strathie before she unfortunately died and it struck me from reading all the reports from past Select Committees-and I have had support from a recent report done on all Select Committees-that they are a test of endurance for you and an even greater test of endurance for us, with no great end results unless we change the way of working.

We started it with Lesley last year where we put as much detail in the recommendations so that we did not do what Select Committees do, start afresh each year. The membership changes so they come over the same ground. Dare I say it but I think it works in your favour because you just have to endure two hours and put up with us and deal with us and then you can have a year when the collective memory will forget and we will start again. That is not the object of the exercise. You said in a letter to me we had 45 recommendations. I analysed them and seven of those were for the Government, 21 were for your organisation, 16 were what I would describe as platitudes-it didn’t matter whether you accept it or not, "Yes, very good"-and one was for industry. When I analysed them further this morning I thought you were down to 18, but the one I touched on today, and I had another one that time prevents me from doing, just to test you on it, it is clearly not happening

What we are going to do is write to you, the 18 recommendations will be put to you and we will wish an answer as to where you are with them. If you do not accept them, tell us and we will have a lively discussion at some time in the future but at least we know where the ground is. If you accept them, we want more detail as to when you target the implementation, and if it is some time in the future we want to know where you are now. As a result of this meeting we will be producing a report where there will be other recommendations but we will keep a rolling list of recommendations so they will not go away. The good work of this Committee will be taken up by the next Committee and the next Committee until we wear you down and you accept our recommendations. If we are all serious about the job, it is a constructive way to go about it. You do not come here just for pain and think, "Why do we have to go through that?" We are doing an exercise of getting to the objective together.

Lin Homer: Chairman, I have read your previous report because at the time of changeover I was keen that any commitments you felt you got out of Lesley did not get lost. I would be very happy to reply. To a degree, I expected to be rather more tasked on them today than you have tasked me. If you would like to clarify, make sure the ones you think are directed at us are the same ones I think are directed at us, we will get you a written reply as speedily as we can.

Chair: That would be much appreciated. Thank you all very much. Thanks for your patience but also thanks for the pleasant way we conducted the business. The best of luck, the three of you, in your new jobs.

Prepared 6th November 2012