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Lord Sheldon: My Lords, my noble friend commented on the important speech made by the Attorney-General and I welcome what he said, especially when he mentioned that there was a change in the approach to this matter from what we thought were the main financial aspects to some of the legal consequences, which I had not gone into. He said that it was a huge job; it is an ongoing job. I can see that there are a number of matters to be dealt with over a long period of time, but I had not realised quite how long that time was likely to be. The implication of my noble and learned friend the Attorney-General was that it was rather longer than we had heard from Dawn Primarolo in the debate in the House of Commons on 8 December.

The task of bringing together Customs and Excise and the Inland Revenue is a major undertaking. It must not be underestimated and my noble and learned friend the Attorney-General certainly did not do that. The savings of staff— whether the 16,000 to which my noble friend Lord Barnett referred arising from the Gershon proposals or the 3,200 through efficiency saving—are important, but they are by no means the main consideration. The main consideration of this merger, coming together or whatever we like to call it, must be the revenue collection and the maintaining of the standards of honesty. Those are the crucial issues.

These revenue departments have been called,

which is absolutely right. This is an enormous advantage that we have had over so long a period. When one considers the vast amount of money handled by these departments, it is a wonderful tribute to our Civil Service and the consequence of the invaluable reforms introduced by the Northcote-Trevelyan report in the middle of the 19th century.

Looking at these two large departments with so long a history I would have expected that some coming together would have resulted in an increase of staff at the outset. There are problems and one does not normally deal with problems by reducing one's staff. I would have thought that that increase of staff would
 
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continue for a very considerable time until the eventual efficiencies —if they are to be there—were introduced over a longer period. I am surprised and a little sceptical that efficiencies that may be obtained in the long term are expected so early.

Both departments have a long and successful past. The Inland Revenue, dealing with income tax and other matters, dates from 1842 and the customs part of the collection of these monies dates from the 13th century. They are two great historic departments with quite different patterns of working. On the one hand, the Inland Revenue deals with financial matters after they have taken place. There are records that can be examined and the time to deal with them is not a problem. On the other hand, Customs and Excise deals with actions as they take place—the transfer of goods in particular—and the department as it now is follows that precedent.

Another important difference between the two departments is the kind of expertise that they have of necessity acquired in the course of so many years with their very long pasts. The history of Customs and Excise, which comes from intercepting smugglers and dealing with criminals, is something that we know and is well recorded in so much of our history. Although the present day approach has over the years altered the attitude of that department, it is still rigorous; more rigorous than the Inland Revenue. The Inland Revenue's history comes from dealing with mostly honest but certainly unwilling taxpayers. It is not easy to see how these two different kinds of expertise will survive, still less be transferred with success from one part of a new department to another. It is still more difficult, given the present level of work by each of these two departments which are under considerable strain at the present time.

As Financial Secretary to the Treasury, I remember seeing the volumes of Inland Revenue legislation in Somerset House. There was one volume, which was enough for a large chunk of the 1840s. By the time we came to the 1970s, volume after volume was required for each year. Since then, the changes have not been slow. Indeed, in many ways, they have accelerated. Bringing about this coming together with profound and fundamental changes at such a time will lead to a great upheaval in government administration and we must not underestimate the importance of that.

David Varney, the chief executive designate to the merged departments, told the House of Commons Treasury Select Committee that he was not able to commit himself to the financial benefits of the merger because he thought that the details were not known. I would have thought that a full investigation, however difficult it would have been to undertake, would have preceded a decision to merge, let alone to produce a Bill to lay before Parliament. I would have thought that, like Andrew Tyrie, who commented in the Second Reading debate in the House of Commons, we should have had,


 
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I do not understand the pressure to act with such haste. After all, the House of Commons Treasury Sub-Committee recommended this merger in April 2000 and it was rejected by the Government. The sudden change of mind now is not easy to understand. But even if one understands it, the speed at which the change is taking place is more difficult to comprehend. Given such a reversal, much work might have been expected to have been done to justify coming to a completely opposite conclusion in such a short time on so important a matter as this.

The work that is only now proposed could have been undertaken with a longer time-scale. As David Varney, the new chairman, has said, there is much work yet to be done. The very size of the new department will present problems, with 30 million taxpayers and £400 billion of revenue. We have never seen anything like this in this country and we are not likely to see anything like it again—such a merger, or "coming together", as we see here. We must look at the matter in a rather different way from the way we usually look at the alteration of government departments.

Efficiency savings by collecting taxes across both Customs and Excise as well as the Inland Revenue are expected to save 3,200 posts by 2007-08. If a coming together of departments led to such a reduction in the posts required, there would be much more of this sort of thing happening. But there is a danger—that the great control that government can obtain over such a large department can be perhaps too great. But there will be a saving of 3,200 posts expected by 2007–08, with other departments pooling information and decision-making, among a number of other activities. There is a danger, too, to confidentiality. The more the sort of information that we are talking about crosses these larger departments, the more danger there is to confidentiality.

The strongest case for coming together would be if it could be shown that the large sums of money escaping the Revenue through evasion could be substantially reduced. The present estimate—subject, of course, to great uncertainty—is that 8 per cent to 10 per cent of revenues are uncollected. Following the coming together, much of the avoidance would remain, but the merger could in theory have an effect in reducing the amount of evasion. The estimate on the other side, from the other part of the department, for the uncollected VAT—again, subject to great uncertainty—is 12 per cent. It is difficult to see whether the coming together will have much effect on the VAT figure.

The savings estimate comes from the 3,200 posts. The Paymaster General suggested that it would represent a saving of £500 million, although that was later altered by the Economic Secretary to £100 million, in the debate on 8 December. The idea of cost reduction at a time of momentous change appears surprisingly optimistic; surely such changes will discover unforeseen problems that can be helped only by spending more money. When you have unforeseen problems, you do not save money: you have to spend money and employ staff to deal with them. A serious
 
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danger is that, in the effort to save money and jobs in administering the service, there could be very considerable losses to the Revenue. You are dealing here with two very complex departments. In joining them together, you are not going to get more money out of it immediately, because the changes will create loopholes and all kinds of problems that can be exploited. Like many others who have commented on the net saving of the merger, I share their doubts about what will be gained, certainly in the short term.

The Revenue and Customs department is to be a non-ministerial department. It is proposed that the VAT inspectors will retain all powers and corporation tax inspectors will retain theirs, with no access by the one to the other. When speaking in the House of Commons on 8 December (Hansard, col. 1175), the Paymaster General said that powers will remain as they are, but that this was only a "temporary position". She then added that there would be a "thorough review" leading to legislation in the 2006 Finance Bill.

As my noble and learned friend Lord Goldsmith said, we have an incremental timetable of fundamental legislation, with at least two bites foreseen and possibly more to come. He suggested that there may be quite a number more to come and that there would be a rather slower move to creating the one department than we heard from the speeches in the House of Commons. I know that frequently legislation has to take into account matters that cannot be known at the time of legislating, but to leave such large gaps is rather surprising.

Another aspect is that the Bill pools information internally. What are the limitations? Any removal of the barriers between departments of state will always help to collect more revenue, but where do we stop? If all departments of state were to join together to provide information, no doubt the Revenue might gain; but taxpayers' confidentiality would be the first loss, with an over-centralised administration at the end of the road and consequent inefficiencies.

There is one change that I do not fully understand: that there is to be a statutory duty to maintain that confidentiality, and an individual statutory declaration will replace the Inland Revenue oath. I do not see the advantage of replacing that oath. There is something about tradition in all these matters; tradition plays an important part in keeping the flow of ideas and standards over a long period. The long history of the two departments has been an enormous advantage, not a disadvantage. We must retain those advantages while bringing them up to date, and we do not want to lose the one while we get the other. Surely the oath has had the advantage of tradition: it has worked well. At a time of major changes, financial weaknesses may be revealed, leading to disclosures and to a decline in standards.

The new department will have 250 major information technology systems, and 3,000 people working them. There will be 100,000 desk computers and an integration of computer systems. That is a long-term and large-scale undertaking, as John Healey, the
 
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Economic Secretary, accepted (at col. 1231 of Hansard) in the debate in the House of Commons on 8 December. There are real dangers here. The Government's record on innovations in IT systems has had some spectacular failures, which I have seen. I shall not list them, but there are a very large number. To assume that all these changes will work satisfactorily and will save money in the time-scale envisaged is surprisingly optimistic.

We know that the House of Commons Treasury Select Committee is going to monitor the coming together. I welcome that, as it is important that the effects on the rights of taxpayers as well as the revenue stream and the operation of the department have some outside observation. I look forward to an interim report arising from this valuable initiative.

What disappoints me most in this exercise is the failure to quantify the benefits and their cost. There was the surprising statement that the Government do not have the legal authority to spend money to analyse options in sufficient detail. Not possible to quantify costs! Sir Peter Gershon was quoted as saying:

Surely that is of fundamental importance. We have to look at all the risks—these are the dangers of which account must be taken.

I am not talking about precise calculations, but some quantification should surely have been made prior to the decision to bring the two revenue departments together. The taking of so momentous a decision may be the right one; but, without a proper analysis of the costs and benefit, it is surely not a decision that fits with our conception of the Treasury, which has rightly exercised rigorous scrutiny before embarking on any project of this kind. We may be right to proceed, but as the preparatory work has not been done we need to proceed with quite exceptional caution.

6.29 p.m.


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