Conclusions and Recommendations
1. HMRC faces an enormous challenge in moving
to a new contracting model by 2017 and appears overly complacent
given the scale of the transformation required.
Although HMRC decided three years ago to move in principle to
a new contracting model it still does not have a detailed business
case for the change although this was originally expected before
July 2014. HMRC says it hopes to publish the business case next
spring, which will leave only two years to engage the market,
recruit the skills, and procure and manage the transition of the
services it will need before the existing contract expires in
2017. The Department is confident it can meet the 2017 deadline
although some of the key milestones may shift. The Department
expects the new arrangements to reduce its running costs by 25%.
However, HMRC still cannot estimate the cost of this change, in
terms of moving staff, equipment and office space; it could not
even provide the Committee with a range. Cabinet Office in its
evidence accepted that it would be better to delay the project
and negotiate an extension to the expensive Aspire contract than
risk a failure in tax collection. Cabinet Office accepted the
need for a contingency plan, but HMRC appeared not to do so.
Recommendation: HMRC needs to move quickly
to develop a coherent business case, setting out the commercial
and operational model it intends to put in place to replace the
Aspire contract. This should include a robust transition plan
and budget.
2. The end of the Aspire contract and the
move to replace it with many more contracts and suppliers puts
both the service HMRC provides to customers and tax collection
at risk. Although expensive, the Aspire
contract has provided stable systems to support the collection
of taxes, over £500 billion in 2013-14. A failure of HMRC's
ICT could put at risk the timely and accurate collection of tax,
potentially resulting in reduced revenue. This was illustrated
by difficulties in a project to centralise HMRC's PAYE and National
Insurance databases. In this case failings by HMRC when it engaged
a supplier outside the Aspire contract resulted in nearly £1
billion of tax foregone. HMRC is aware of the risks involved in
replacing the Aspire contract but it has not quantified them.
Recommendation: As part of its business
case, HMRC should identify the key risks to tax collection and
customer service, both during transition and once operating its
new model, and develop a strategy to mitigate them.
3. HMRC has been outmanoeuvred by suppliers
at key moments in the Aspire contract, hindering its ability to
get long term value for money. The contract,
which cost £7.9 billion from July 2004 to March 2014, has
generated a combined profit for Capgemini and Fujitsu of £1.2
billion, equivalent to 16% of the contract value paid to these
suppliers. HMRC considers the contract to have been expensive,
and pressure to find cost savings in the short-term led it to
trade away important value for money controls. For example, in
a series of disastrous concessions, HMRC conceded its rights to
withdraw activities from Aspire, to benchmark the contract prices
against the market to determine whether they were reasonable.
It also gave up its right to share in any excess profits. In 2007,
HMRC negotiated a three-year extension to the Aspire contract
just three years after the contract was let, extending the end
of the contract from 2014 to 2017. The Department has still not
renegotiated the terms of the contract in line with a memorandum
of agreement it signed in 2012 designed to separate Capgemini's
role in service provision from its role as service integrator
and introduce more competition.
Recommendation: HMRC should develop a clear
view of how the new model will support its long term vision for
tax collection. It should take a consistent, whole-life approach
to costs and benefits in both its commercial negotiations and
in its management of contracts, so that the long-term objectives
are both clearly articulated and properly supported.
4. HMRC's experience in managing multiple
ICT suppliers, the essential ingredient of the new approach, is
limited. HMRC anticipates meeting its
future ICT requirements with a 'mixed economy' of small and large
suppliers. However, since 2006-07, some 84% of HMRC's ICT spend
has been through a single supplier under the Aspire contract.
While HMRC has tried to compete more work outside the Aspire contract,
it has tendered only £22 million a year since 2012, some
3% of the annual amount paid under Aspire. Getting the skills
to manage multiple suppliers, and to design and integrate technology,
is a pre-requisite for the success of the proposed change. HMRC
believes that it is an attractive employer for ICT specialists
due to the scale of its digital ambitions and it plans to expand
programmes to recruit graduates and apprentices. So far HMRC has
recruited some new staff at senior and operational levels but
it has yet to recruit staff for many critical technical and commercial
roles despite there being less than 3 years before full implementation
has to be achieved. The constraints on public sector pay have
been a factor in other departments having failed to recruit and
retain the technical and commercial skills they need and HMRC
will face similar constraints.
Recommendation: HMRC must produce a realistic
plan setting out how it will recruit the necessary commercial,
technical and operational skills in a market which is likely to
be overheated, and act with pace to implement it.
5. The consequences of this transition failing
are severe and HMRC and the Cabinet Office are jointly accountable
for managing the risks to tax revenue and value for money.
An extension to Aspire could prove costly: as well as paying more
for technology than it otherwise would due to the absence of competitive
pressures, HMRC risks delaying its plans to improve efficiency
and customer service by modernising and digitising its tax collection
processes and overcoming the limitations of its legacy systems.
Even more importantly, problems with transition, or inadequate
management of the new model, could put the amount of tax collected
at risk.
Recommendation: HMRC and the Cabinet Office
should jointly agree key milestones and warning flags leading
up to the end of the contract in June 2017, with contingency plans
that manage the risks to value for money should these milestones
be missed. HMRC should provide a note to this Committee by the
end of February 2015 setting out what plans, including contingencies,
it has put in place to manage the transition.
6. We are not convinced
that the Cabinet Office's 'red lines' on IT procurement, such
as its restriction on any IT contracts over £100 million,
are realistic in a business as large as HMRC's, or that transformation
on this scale is achievable by July 2017. Although progress has
been slow, the Cabinet Office is confident that HMRC's plans are
the right approach and show a good understanding of the risks
HMRC needs to address. The Cabinet Office maintains that its 'red
lines' on IT procurement will be applied pragmatically if HMRC
cannot comply with them fully. Having mandated the new approach
to buying technology, the Cabinet Office shares responsibility
with HMRC for its implementation and accepts accountability for
the success of this transformation.
Recommendation: The Cabinet Office needs
to help HMRC build the commercial and technical capability it
needs, playing a strong coordinating role for government by working
with suppliers and managing the market. It should offer support
to HMRC where it can, but also provide challenge and ensure that
HMRC is actively managing the risks to tax collection.
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