House of Commons Public Accounts Committee
Management of tax debt
Twenty-sixth Report of Session 2008–09
Report, together with formal minutes, oral and written evidence
Ordered by the House of Commons to be printed 13 May 2009
HC 216 Published on 9 June 2009 by authority of the House of Commons London: The Stationery Office Limited £10.00
The Public Accounts Committee
The Committee of Public Accounts is appointed by the House of Commons to examine “the accounts showing the appropriation of the sums granted by Parliament to meet the public expenditure, and of such other accounts laid before Parliament as the committee may think fit” (Standing Order No 148).
Current membership Mr Edward Leigh MP (Conservative, Gainsborough) (Chairman) Mr Richard Bacon MP (Conservative, South Norfolk) Angela Browning MP (Conservative, Tiverton and Honiton) Mr Paul Burstow MP (Liberal Democrat, Sutton and Cheam) Mr Douglas Carswell MP (Conservative, Harwich) Rt Hon David Curry MP (Conservative, Skipton and Ripon) Mr Ian Davidson MP (Labour, Glasgow South West) Angela Eagle MP (Labour, Wallasey) Nigel Griffiths MP (Labour, Edinburgh South) Rt Hon Keith Hill MP (Labour, Streatham) Mr Austin Mitchell MP (Labour, Great Grimsby) Dr John Pugh MP (Liberal Democrat, Southport) Geraldine Smith MP (Labour, Morecombe and Lunesdale) Rt Hon Don Touhig MP (Labour, Islwyn) Rt Hon Alan Williams MP (Labour, Swansea West) Phil Wilson MP (Labour, Sedgefield)
The following member was also a member of the committee during the inquiry: Mr Philip Dunne MP (Conservative, Ludlow)
Powers Powers of the Committee of Public Accounts are set out in House of Commons Standing Orders, principally in SO No 148. These are available on the Internet via www.parliament.uk.
Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at http://www.parliament.uk/pac. A list of Reports of the Committee in the present Session is at the back of this volume.
Committee staff The current staff of the Committee is Mark Etherton (Clerk), Lorna Horton (Senior Committee Assistant), Pam Morris (Committee Assistant), Jane Lauder (Committee Assistant) and Alex Paterson (Media Officer).
Contacts All correspondence should be addressed to the Clerk, Committee of Public Accounts, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5708; the Committee’s email address is [email protected].
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Contents
Report Page
Summary 3
Conclusions and recommendations 5
1 Getting taxpayers to pay on time 7
2 Improving debt recovery 9
3 Managing tax debt in a recession 13
4 HM Revenue and Customs’ settlement with EDS 14
Formal Minutes 15
Witnesses 16
List of written evidence 16
List of Reports from the Committee of Public Accounts 2008–09 17
3
Summary
In 2007–08, HM Revenue & Customs (the Department) collected around £450 billion in tax and National Insurance contributions from 35 million taxpayers. At 31 March 2008 the Department was owed £17.3 billion in outstanding tax, interest and penalties, £4.5 billion of which was more than a year old. Debts arise when people or businesses forget to pay, do not understand the need to pay or deliberately try to avoid or delay payment.
Most tax payments are made on time, but during 2007–2008 30% of tax payments were made after they were due. In 2007–08, the number of tax debts increased by 22%, and the level and age of debt increased on some taxes. The Department has improved the quality of information provided to taxpayers about arrangements for payment and debt recovery, and has provided more ways for taxpayers to settle their tax debts. But the Department needs to change the behaviour of taxpayers who persistently pay late.
The Department could do more to encourage prompt payment, for example, by offering newer methods of payment used by other organisations. It also lags behind best practice in recovering debt. For example, it does not risk score its debtors. Risk scoring would allow it to tailor the help it gives to those who do not understand their obligations or are in financial crisis, while dealing promptly with debtors who deliberately pay late. Other organisations and tax authorities have significantly improved their performance by using risk profiling.
The Department is also unable to automatically link debts owed on different taxes by the same taxpayer, which is a barrier to effective and efficient debt management. The Department estimates that it would cost more than £250 million to develop IT systems which would link all of a taxpayer’s records, which are currently held on its different tax systems.
In managing tax debt, the Department must balance the need to maximise revenue for the Exchequer with that of offering support to individuals and businesses in temporary financial difficulty. Balancing these objectives becomes more difficult in a recession. Since launching the Business Payment Support Service in November 2008, the Department had—by February 2009—agreed over 60,000 ‘time to pay’ arrangements with individual businesses, worth £1 billion in deferred tax.
On the basis of a report by the Comptroller and Auditor General,1 the Committee examined HM Revenue & Customs on getting taxpayers to pay on time, improving debt recovery and managing tax debt in a recession. The Committee also considered the Department’s recent settlement with EDS on the compensation for the Tax Credit computer problems.
1 C&AG’s Report, Management of Tax Debt, HC (2007–08) 1152
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Conclusions and recommendations
1. Some 30% of tax payments are late. The Department is not yet using recognised good practices in debt management, as recommended by this Committee in 2004. In particular, risk profiling would help improve the management of the growing level of tax debt in this more difficult economic environment. In January 2009, the Department started to pilot a scheme to risk profile taxpayers with self-assessed Income Tax debts. It should extend risk profiling to all the main types of tax debt.
2. The Department has not explored all the payment methods it might offer to taxpayers to settle their tax liabilities. It has only recently introduced the facility to pay by credit card and to set up direct debits by telephone and online. It should do more to exploit developments in payment technology. For example, it should evaluate by the end of 2009, the costs and benefits of using autopayment technology and enabling people to settle their debts in cash through schemes such as Paypoint and Payzone.
3. The Department cannot view all the debts of a taxpayer at the same time or automatically link debts across taxes. Such deficiencies are major barriers to effective and efficient debt management. The Department has decided it cannot afford to develop a new IT system to link taxpayer records on different taxes because of other demands on its administration budget. It plans to bring VAT debts into its main debt management system, but it needs a staged programme so that progressively it can link and manage all of a taxpayer’s debts as a whole.
4. The Department does not follow good practice in measuring the amount of debt collected within 30 and 90 days. The Department’s debt management system cannot provide this information routinely. From January 2009, it planned to measure the percentage, by value, of self-assessed Income Tax debt collected within 30 and 90 days. It should extend this to cover all major taxes.
5. The Department cannot measure the cost effectiveness of different collection activities because it does not know how much debt is collected through each activity. It has made significant changes to its Debt Pursuit work, and is looking at ways of expanding the capacity and work of the Telephone Centre so that it collects more debt. It should introduce activity-based costing so that it can assess the relative success of collection activities, as well as the effect of changes in their scale and organisation.
6. The Department has tended to focus its debt collection activities on standard office hours. Other organisations have increased their effectiveness by staffing debt management activities outside normal office hours, when it is easier to contact customers. The Department should examine the costs and benefits of expanding debt collection work in the evenings and weekends.
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7. The Department has responded quickly in offering support to businesses in financial difficulty during the recession. The purpose of the Business Payment Support Service is to give time to pay to businesses in temporary financial difficulty. Without a risk profiling system it is more difficult for the Department to assess the risks of debtors defaulting. It should track actual rates of default and assess whether the criteria it applies in deciding applications do, in practice, deliver support to the target audience.
8. The arrangements to support taxpayers during the recession may be needed for some time. In responding to the current recession in the UK, the Department should seek to draw on the experience of other tax authorities in handling recessions.
9. The formula for EDS to pay the Department £26.5 million in compensation did not work as intended, so that the Department received less than £1 million in three years. EDS has now paid the balance in a lump sum. In settling future disputes with suppliers, the Department should avoid payment mechanisms which depend on contractors winning future government contracts. The Department should also work with the Office of Government Commerce to make sure wider government learns from the handling of this dispute. The Office of Government Commerce should provide guidance to all departments that, in settling disputes with suppliers, they should not agree to terms which depend on future government contracts to fund compensation.
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1 Getting taxpayers to pay on time
1. In 2007–08, HM Revenue & Customs (the Department) collected around £450 billion in tax and National Insurance contributions from 35 million taxpayers. At 31 March 2008, the Department was owed £17.3 billion in outstanding tax, interest and penalties. Debts arise when people or businesses do not pay taxes that are legally due by the required date. This might be because they do not understand the need to pay, or forget to do so. Some may deliberately try to avoid or delay payment, perhaps because they face temporary cash flow problems.2
2. Most tax payments are made on time, but during 2007–08 30% of tax payments were made after they were due. The Department estimates that much of this debt was settled within a month of the deadline, leaving around 10% of tax payments outstanding after a month. The level of late payment to some extent reflects taxpayers’ knowledge of how the system works, which may influence their behaviour. For example, many taxpayers know that they will not be fined for late payment of self-assessed Income Tax if they pay tax due in January by the end of February.3
3. The Department considered that the main taxes where businesses persistently defaulted on payment were VAT and Pay As You Earn/National Insurance contributions. On VAT it could penalise late payment by progressively increasing the surcharges payable up to 15% of the tax due. For Pay As You Earn it required businesses with more than 250 employees to use the mandatory electronic payment scheme which imposes severe penalties for late payment.4 For businesses with fewer than 250 employees, the Department charges interest or penalties on late end-of-year payments, but not on late payments during the year.5 The Department is exploring ways of modernising the current penalty structures to deter taxpayers from filing or paying late.6
4. It is often more cost-effective to prevent debt from arising than to recover the debt.7 Since this Committee reported on the management of tax debt in 2004,8 the Department has improved the quality of information provided to taxpayers about payment and debt recovery arrangements. It has improved the information in its leaflets and on its website to help taxpayers to know when tax is due, how to pay and the implications if they fail to pay.9
5. How taxpayers want to settle their tax debts will change as technology advances. Following recommendations by this Committee in 2004, the Department has made more
2 C&AG’s Report, paras 1, 2, 4.2, 4.3 3 Qq 2, 53; C&AG’s Report, paras 1.1, 4.13 4 Ev 15 5 Qq 48–49; Committee of Public Accounts, Fifty-third Report of Session 2006–07, Helping newly registered businesses meet their tax obligations, HC 489 6 HM Revenue & Customs, Modernising Powers, Deterrents and Safeguards—Payments, Repayments and Debt: Meeting the obligations to file returns and pay tax on time, Consultation Document June 2008 7 C&AG’s Report, para 4.1 8 Committee of Public Accounts, Forty-ninth Report of Session 2003–04, The recovery of debt by the Inland Revenue, HC 584 9 Qq 24–25
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payment methods available. In 2008, the Government introduced legislation to accept payment by credit card and to pass on the merchant’s handling charge to the taxpayer at the time of payment. The Department has also introduced facilities to set up direct debits by telephone and via the internet. But it does not offer other, newer methods of payment used by other organisations. These methods include Paypoint and Payzone to settle debts in cash at shops and newsagents, and autopayment, which allows callers to make a payment without speaking to an operator.10 The Department is exploring the relative costs and benefits of increasing the range of payment options.11
6. The Department is also in the early stages of expanding its payment instalment scheme. It is currently consulting on a scheme to allow individuals and businesses to make monthly payments on self assessed Income Tax and Corporation Tax to meet their annual liability by a series of payments straddling the due dates.12
10 Qq 21–22; C&AG’s Report, paras 4.8–4.9 11 Q 21; Ev 14 12 HM Revenue & Customs, Modernising Powers, Deterrents and Safeguards—Payments, Repayments and Debt: The Next Stage, Consultation Document November 2008
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2 Improving debt recovery
7. The £17.3 billion owed to the Department at 31 March 2008 in outstanding tax, interest and penalties included £4.5 billion of debt that was over one year old, and more than £2 billion that was over two years old.13 In recent years, the Department has reduced the amount of tax debt as a proportion of net tax receipts on most taxes. However, during 2007–08 debt as a proportion of net receipts (Figure 1) and the age of debt have increased on some taxes.14
Figure 1: Tax debt as a percentage of net tax receipts by tax type
7%
6%
5%
2004-05 4% 2005-06 2006-07 3% 2007-08
2%
1% Tax debt as percentage of net tax receipts Tax 0% Income Tax Corporation Tax VAT VAT excluding suspended VAT Tax
Source: C&AG’s Report
8. The Department uses several methods to recover tax owed (Figure 2). For most taxes, it sends out postal reminders when payment is due. Unpaid debts are referred to the Department’s Telephone Centre which attempts to contact debtors to obtain payment, and then transfers unresolved debts to local Debt Pursuit Offices. Where an address is incorrect, the Department’s Tracing Unit traces up-to-date contact details. Missing telephone numbers are traced by an external provider. If these recovery methods are unsuccessful, cases are passed to the Department’s Enforcement and Insolvency Service for bankruptcy or winding-up procedures.15
13 C&AG’s Report, para 1.16. The £4.5 billion figure for debt older than one year excludes suspended debt. Suspended debt arises when the Department has not been able to confirm its assessment of the tax due. While it is legally collectable, by its nature it may not be recovered. 14 C&AG’s Report; Figure 4 15 C&AG’s Report; Figure 1
10
Figure 2: Overview of the Department’s debt collection activities
Payment becomes overdue
Debt Management and Banking issues postal reminders
Unpaid Income Tax, PAYE and some Debts with unknown telephone other debts are referred to the numbers are passed to external Department’s Telephone Centre tracing service provider
Debt still unresolved are passed to the Debt Pursuit Offices for enforcement action (VAT and Corporation Tax Debts with unknown addresses debts are automatically transferred are passed to the Tracing Unit after initial postal reminders)
Cases unsuccessful after enforcement action are passed to the Enforcement and Insolvency Service for bankruptcy
Court proceedings
Source: C&AG’s Report
9. Since 2006, the Department has reduced the staff numbers in the Debt Management directorate by 14%. To manage its workload using fewer resources, the Department has prioritised higher value tax debts. This may maximise receipts in the short-term but the Department risks sending a message that it pursues some debts more rigorously than others. In addition, debts not collected quickly become more difficult and expensive to collect. As at 31 March 2008, 15.8 million tax debts were outstanding, 22% more than at 31 March 2007. In particular, the number of lower value debts has increased. The Department
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has a series of projects to reduce the number of lower value tax debts, including some joint work with the Department for Work and Pensions.16
10. Unlike a number of debt collecting organisations, the Department still does not risk score its debtors, as this Committee recommended in 2004. Risk scoring allows organisations to tailor the help it provides to those who do not understand their obligations or are in financial crisis, and to deal promptly with debtors who deliberately pay late. Other organisations that have introduced risk profiling have significantly improved their performance. For example, the Dutch tax authority identifies taxpayers with a history of non-compliance and ‘fast tracks’ them through its system.17
11. The Department’s initial proposal for a risk scoring system would have cost £200 million so it has scaled back its plans and will implement them in phases. A pilot exercise on self assessed Income Tax debtors in 2009 involves assigning risk scores on the basis of the individual’s tax history and analysis by an external agency of credit history and other information. The risk score determines the sequence of actions the Department takes to recover the debt, so that it speeds up higher risk cases. The Department expects to evaluate the pilot in the summer of 2009 and, if successful, it will consider extending the approach to other taxes.18
12. In 2007–08, the Department dealt with over 15 million tax debts. It uses different IT systems for each tax. The systems are old and not compatible with each other so the Department cannot readily establish how many taxpayers have a debt on more than one tax. In a one-off exercise in 2008 involving 2,000 VAT cases, the Department found 27% could be linked to debts on other taxes. The Department estimates it would cost more than £250 million to develop an IT system which automatically links the different tax records of each taxpayer. Given the number of change programmes across its operations which require funding from its administrative budget, the Department has limited available funding to invest in new IT systems for managing tax debt. In the absence of such investment, the Department is looking at ways of linking certain tax debts using its existing systems, for example, by bringing VAT debts into its main debt management system.19
13. The Department has improved its management information on debt but it does not yet measure the percentage of debt collected by value within 30 and 90 days. Other organisations use these measures, which are important indicators of performance and help to prevent the build up of older debts and associated write-offs. The Department is now starting to measure debt collected within 30, 60 and 90 days for self-assessed Income Tax and intends to extend this measurement to other taxes.20
14. In 2007–08, the Debt Management directorate cost £204 million and collected £310 for every £1 spent. But the Department does not know how much tax it collects through each debt recovery activity and so cannot reliably measure the cost-effectiveness of different
16 Qq 27–28; C&AG’s Report, paras 2.1–2.2 17 Q 8; C&AG’s Report, para 2.1, Box 1 on page 16 18 Q 56 19 Qq 12, 97, 98; C&AG’s Report, paras 2.1, 2.7, 2.8 20 Q 38; C&AG’s Report paras 1.4–1.5
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methods. It started to develop activity based costing in 2008 but has not yet set a firm timetable.21
15. The effectiveness of the Department’s Telephone Centre and local Debt Pursuit Offices depends on making contact with the debtor to arrange payment. Although the Department’s Telephone Centre is open from 8.00 am to 8.00 pm Monday to Friday, and at certain times during the weekend, the Telephone Centre’s capacity outside of normal office hours is limited. Most visits by Debt Pursuit teams take place during normal office hours. The Department and other debt collecting organisations have found that contact rates have improved by working in the evening and at weekends. As part of its ‘Fieldforce’ project to improve the efficiency and effectiveness of face to face visits, the Department is encouraging staff who carry out visits to be flexible in their working hours to maximise contact with debtors. The Department considered it was too early to judge the success of the project.22
16. Some organisations, such as the Department for Work and Pensions and the United States Internal Revenue Service, use private debt collection agencies to collect debt on their behalf. In 2004, this Committee recommended that the Department look at the costs and benefits of using such agencies. As part of a pilot on using private debt collection organisations, the Department is consulting on how these organisations have been used by other parts of government.23
17. In 2007, the Department wrote off £336 million because it could not trace the debtor. This figure was more than three times the amount it wrote off in 2002. The Department attributed the increase to more tracing activity and a greater focus on high value debts, which enabled it to identify higher levels of untraceable debt. The total value of cases awaiting tracing had halved since 2005–06 and the Department estimated that the increase in tracing activity enabled it to collect an additional £114 million of debt in 2007. The Tracing Unit is successfully tracing around 90% of direct tax cases referred.24
21 C&AG’s Report, paras 1.2, 3.2, 3.3 22 Qq 13, 79; C&AG’s Report, paras 3.10, 3.15 23 Q 31 24 C&AG’s Report, para 3.7, Figure 9
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3 Managing tax debt in a recession
18. In managing tax debt, the Department must balance the need to maximise revenue for the Exchequer with that of offering support to individuals and businesses in temporary financial difficulty. As the economy slows, balancing these objectives becomes more difficult. The number of taxpayers in financial distress is rising at a time when the Exchequer would benefit from steady sources of revenue.25
19. In devising its approach in the current recession, the Department has drawn on past experience. For example, during the economic downturn in the early 1990s, the Department only began to see the full effect on certain tax revenues one year to 18 months into the recession. In the current recession, the general reduction in credit means all organisations are incentivised to call in their debts as early as possible, making the environment in which the Department operates increasingly competitive. Changes to regulations on providing for debt mean that lenders are now more focused on collecting debts within 90 days.26
20. As part of the measures announced in Pre-Budget report 2008 to support businesses in the economic downturn, the Department has introduced the Business Payment Support Service to help businesses suffering temporary financial distress.27 As at 12 February 2009, the Service had agreed over 60,000 ‘time to pay’ arrangements with individual businesses, worth £1 billion in deferred tax.28 The Department checks with each applicant that they are unable to pay on time and assesses whether they will be able to pay over the period of the arrangement. To help raise awareness of the scheme among all businesses in temporary financial difficulty, the Department has advertised the Service through newspaper adverts and provided information on how to apply on its website.29
21. The Department emphasised that the scheme was about giving time to pay, not about allowing people not to pay. It had a duty to help viable businesses during recession, but its overriding objective was to protect the integrity of the tax system.30
25 Q 3; C&AG’s Report, paras 7, 4.2; Ev 14–15 26 Q 101; C&AG’s Report, para 1.15 27 HM Treasury’s Pre-Budget Report 2008, para 4.10; Ev 16–17 28 Statement by Financial Secretary to the Treasury, 12 February 2009 29 Qq 7, 24 30 Qq 4, 5; Ev 16–17
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4 HM Revenue and Customs’ settlement with EDS
22. In November 2005, EDS agreed to pay £71.25 million to settle the Department’s claim for compensation for the Tax Credit computer problems. The settlement included cash payments by EDS and the offsetting of certain amounts which would otherwise have been due to EDS from HMRC. The Department agreed that £26.5 million could be paid over three years, in quarterly instalments which were contingent on the new business EDS won with other government departments. The Committee has previously recommended that Government should not be placed in the invidious position of having to commission further work from the contractor in order to recover compensation for underperformance.31
23. The payment mechanism did not work as designed as EDS did not fully convert its projections of future work into contracts. While the Department held discussions with EDS to secure full payment, over the three-year period EDS paid only £978,705 of the £26.5 million part of the settlement. With the involvement of Hewlett Packard, which acquired EDS during 2008, and the Office of Government Commerce, the Department and EDS reached agreement that the balance would be paid in a lump sum, which was paid in January 2009.32
24. The Department acknowledged that EDS was under no legal obligation to make the final payment when it did. In negotiating the settlement it had been unable to persuade EDS to offer a larger immediate cash payment, commit to regular instalments or to pay interest on the sum outstanding over the three years. With hindsight it would have liked to have been able to examine more fully the risks of EDS not winning the contracts it expected.33
31 Committee of Public Accounts, Eighth Report of Session 2007–08, Tax Credits and PAYE, HC 300; Committee of Public Accounts, Twenty-Eighth Report of Session 2006–07, HM Revenue and Customs: ASPIRE—the re-competition of outsourced IT services, HC 179 32 Qq 14–15; Ev 13 33 Ev 13
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Formal Minutes
Wednesday 13 May 2009
Members present:
Mr Edward Leigh, in the Chair
Mr Richard Bacon Rt Hon Keith Hill Rt Hon David Curry Mr Austin Mitchell Mr Ian Davidson Geraldine Smith Mr Nigel Griffiths Rt Hon Alan Williams
Draft Report (Management of tax debt), proposed by the Chairman, brought up and read.
Ordered, That the draft Report be read a second time, paragraph by paragraph.
Paragraphs 1 to 24 read and agreed to.
Conclusions and recommendations read and agreed to.
Summary read and agreed to.
Resolved, That the Report be the Twenty-sixth Report of the Committee to the House.
Ordered, That the Chairman make the Report to the House.
[Adjourned till Monday 18 May at 4.30 pm
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Witnesses
Wednesday 28 January 2009 Page
Ms Lesley Strathie, Permanent Secretary and Chief Executive, Mr Mike Eland CB, Director-General, Enforcement and Compliance, Mr Nick Lodge, Director, Debt Management and Banking, HM Revenue and Customs Ev 1
List of written evidence
HM Revenue and Customs Ev 12
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List of Reports from the Committee of Public Accounts 2008–09
First Report Defence Information Infrastructure HC 100 Second Report The National Programme for IT in the NHS: Progress since 2006 HC 153 Third Report Skills for Life: Progress in Improving Adult Literacy and Numeracy HC 154 Fourth Report Widening participation in higher education HC 226 Fifth Report Programmes to reduce household energy consumption HC 228 Sixth Report The procurement of goods and services by HM Prison Service HC 71 Seventh Report Excess Votes 2007–08 HC 248 Eighth Report Ministry of Defence: Chinook Mk 3 HC 247 Ninth Report Protecting the public: the work of the Parole Board HC 251 Tenth Report New Dimension—Enhancing the Fire and Rescue Services’ capacity to respond to terrorist and other large-scale incidents HC 249 Eleventh Report The United Kingdom’s Future Nuclear Deterrent Capability HC 250 Twelfth Report Selection of the new Comptroller and Auditor General HC 256 Thirteenth Report Department for Work and Pensions: Handling Customer Complaints HC 312 Fourteenth Report HM Revenue and Customs: Tax Credits and Income Tax HC 311 Fifteenth Report Independent Police Complaints Commission HC 335 Sixteenth Report Department for International Development: Operating in insecure environments HC 334 Seventeenth Report Central government’s management of service contracts HC 152 Eighteenth Report Investing for Development: the Department for International Development’s oversight of CDC Group plc HC 94 Nineteenth Report End of life care HC 99 Twentieth Report Ministry of Defence: Major Projects Report 2008 HC 165 Twenty-first Report The Department for Transport: Letting Rail Franchises 2005–07 HC 191 Twenty-second Report Financial Management in the NHS: Report on the NHS Summarised Accounts 2007–08 HC 225 Twenty-third Report Mathematics performance in primary schools: getting the best results HC 44 Twenty-fourth Report Maintaining the Occupied Royal Palaces HC 201 Twenty-fifth Report The efficiency of radio production at the BBC HC 285 Twenty-sixth Report Management of tax debt HC 216
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Committee of Public Accounts: Evidence Ev 1 Oral evidence
Taken before the Committee of Public Accounts on Wednesday 28 January 2009
Members present: Mr Edward Leigh, in the Chair
Angela Browning Mr Austin Mitchell Mr David Curry Dr John Pugh Mr Ian Davidson Mr Don Touhig Nigel GriYths Mr Alan Williams
Mr Tim Burr CB, Comptroller and Auditor General, Ms Caroline Mawhood, Assistant Auditor General and Ms Jane Wheeler, Director, National Audit OYce, were in attendance. Ms Paula Diggle, Treasury OYcer of Accounts, HM Treasury, was in attendance.
REPORT BY THE COMPTROLLER AND AUDITOR GENERAL (HC1152) MANAGEMENT OF TAX DEBT
Witnesses: Ms Lesley Strathie, Permanent Secretary and Chief Executive, Mr Mike Eland CB, Director- General, Enforcement and Compliance and Mr Nick Lodge, Director, Debt Management and Banking, HM Revenue and Customs, gave evidence.
Q1 Chairman: Good afternoon. Welcome to the not force businesses having temporary cash flow Committee of Public Accounts where today we are problems to a point that would eventually be considering the Comptroller and Auditor General’s unhelpful to the Treasury. Report on the Management of Tax Debt. We welcome back to our Committee Lesley Strathie Q4 Chairman: I just want to press you a bit on this who is Chief Executive of HM Revenue and because I want to know what your strategy is. Here Customs. Ms Strathie, perhaps you would like to we are as the Government, the taxpayers giving all introduce your colleagues. this money to banks, trying to help business, but if Ms Strathie: On my immediate left I have Mr Mike you are looking at a particular small business and he Eland who is the Director-General for Enforcement owes you £100,000 if you force him out of business and Compliance and on my extreme left is Mr Nick you lose the tax revenue, do you not? Lodge who is the Director for Debt Management. Ms Strathie: I think first and foremost we comply with the law. We have always had time to pay arrangements and this is about giving time to pay, Q2 Chairman: The overall performance of managing not allowing people not to pay. debt is dealt with right at the beginning of the Report in paragraph 1.1. It tells us that “In 2007–08 around 30 per cent of taxpayers with a tax liability did not Q5 Chairman: Are you doing more in diYcult times, pay on time”. Does this worry you and what are you are you trying to be more understanding, giving doing about it? more time to pay? Ms Strathie: I think it is worth unpacking what that Ms Strathie: Since the announcement we have very 30% covers. It is worth noting that if we take the last quickly put in place a helpline service. Since 25 complete year then six billion of that debt is paid January we have taken 56,000 calls and agreed over within the month following the end of the deadline, 34,000 time to pay arrangements worth £645 million. so in February. Also 90% of VAT debt is recovered At least 39% of those relate to VAT. We are trying to by the end of the month in which it is due. Actually work with business to help them but there is a limit you very quickly get from 30 down to 10. to the length of time we can help. Clearly business has to be viable and we cannot say yes to everybody, but in the vast majority of cases we can make that Q3 Chairman: Obviously we are in diYcult times at decision. the moment and we read in paragraph 4.2 on page 22 the reasons why taxpayers get into debt. In this Q6 Chairman: If I can turn now to the other side of diYcult time how are you going to reconcile helping the coin, if you are being more understanding and tax payers as well as securing revenue? giving people more time to pay, are you not Ms Strathie: I think it is a matter of balance. As increasing deficits? announced in PBR there is a whole package of Ms Strathie: I think this is about timing. If you support for business during diYcult times, clearly we consider 34,000 arrangements made to the value of exist to get the revenues flowing but there is a £645 million most of those arrangements will be balance in trying to work with business so that we do spreading time to pay and they will be arrangements Processed: 03-06-2009 09:28:34 Page Layout: COENEW [E] PPSysB Job: 428884 Unit: PAG1
Ev 2 Committee of Public Accounts: Evidence
28 January 2009 HM Customs and Excise lasting up to three months. The answer at the from a risk assessment agency and we will carry out moment is that we do not know; it is still early days. a risk assessment and we will then tailor action we However, the numbers in relation to overall debt are take on that according to the levels of risk. We have still relatively small. The other side of the coin would begun to implement; it is later than we would have be perhaps in some cases businesses with temporary desired but that is the reason. cash flow problems that we force payment and we know that insolvency brings a very poor return. Q12 Chairman: That is a very full answer; I am very happy with that, thank you. Ms Strathie, when you Q7 Chairman: That goes back to the very first look at linking debts across taxes as is dealt with at question I asked you; I am trying to explore your paragraph 2.6 on page 15, why do you not track strategy. How do you protect the integrity of the tax what people owe you across diVerent taxes? system? Surely everybody is in the same position. Ms Strathie: There would be a huge investment One small businessman should not be treated more required to bring about a single customer view. This leniently than another so what is your strategy on is something that the Department has looked at but that? I think the investment was something in the region Ms Strathie: Maybe Nick would be best placed to go of about £254 million. We are now looking at how we into the detail on how we apply it. link the way we have our management structures Mr Lodge: We would look at each case on its own and the way we approach those debts so, if you like merits. First of all we check with the taxpayer to compensating for the fact that we do not have make sure that they really cannot pay and then if systems that would bring all of that information they cannot pay we look at viability and whether together. they will be able to pay over the period of time of the arrangement. We would monitor those Q13 Chairman: Paragraphs 3.9 and 3.10 are about arrangements to make sure that they do so. your telephone centre and how you collect debt. Apparently you recently found out that it was easier Y Q8 Chairman: One thing that would help, Ms to contact people at home outside of o ce hours. Strathie, is if we had risk profiling of taxpayers. If Surely this is not a very startling discovery, is it? you look at box one in the Report you will see what Ms Strathie: No, I do not think it is a startling the Netherlands do. They seem to have quire an discovery but the Department has moved more of its interesting system which we have recommended to work into the telephone channel. It has extended the you in the past. We say that in paragraph 2.11. I was hours that it is open and in fact we have a further told that a member of the Dutch Audit OYce is here extension—we have been operating eight to eight— this afternoon so it is a very topical question. Why and operating Saturdays and Sundays on a shorter do you not do what the Netherlands do and what we service. We are looking forward to our Field Force in suggested to you which is to risk profile your clients? terms of visiting as well also operating out of hours. Ms Strathie: I think we have begun this journey and there is certainly more to do. Q14 Chairman: My last question is on EDS. Clearly this payment mechanism did not work; why did it take so long to resolve. Q9 Chairman: You may have begun it but we made Ms Strathie: Mr Hartnett has oVered to join us at this recommendation quite a long time ago so I do five o’clock. not know why you have not got on with it. Ms Strathie: I will ask Mr Eland to comment if he may, but the only thing we can change is the future Q15 Chairman: Yes, but he was too busy to come on and I think we recognise that we wish we were time so I am asking you. You are in charge so you further down this road than we are. can answer the question as he is too busy to appear before this Committee on time.1 Ms Strathie: I think you probably know the history Q10 Chairman: I am afraid we spend a lot of time of this more intimately than I do. We have had final looking at the past in this Committee. settlement. Payments were phased over a period of Ms Strathie: HMRC, like any other department, has time. It took quite some time to negotiate that final a lot on and has to prioritise its resources. settlement and we did receive the final payment pre- Christmas in our accounts. Q11 Chairman: So there are other more important Chairman: Thank you. Nigel GriYths? things to do than to listen to this Committee; I quite understand that. Q16 Nigel GriYths: Just following on from the Ms Strathie: Absolutely not. Chairman’s question about the system for linking Mr Eland: The reason why we have not acted sooner debts, you have suggested it would cost £254 million was because we started to develop a new system to achieve this, but why was that not built into the which, when we went into the design analysis, was original contracts on computerising the records? going to be simply too expensive for us to deal with. Ms Strathie: I think we are talking about a number It would have cost in its fullest version £200 million of very large and often quite old systems here so any so we have scaled back on that and we are IT strategy in a business—and they do not come introducing it in phases. We are going to introduce it much larger than HMRC—has got to work out what for this year’s SA return—the self-assessment return—which is due obviously at the end of this 1 Mr Hartnett had been asked by the Clerk to attend the month. We will use data from our own systems and hearing at 5pm. He arrived at 4.30pm. Processed: 03-06-2009 09:28:35 Page Layout: COENEW [O] PPSysB Job: 428884 Unit: PAG1
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28 January 2009 HM Customs and Excise business it can do in the existing systems and by Q22 Nigel GriYths: What is the rough order of the improvement and where you might want to invest in cost diVerence between allowing people to settle future systems. I would imagine right from the start their debts in cash as against by credit card or of any strategy on the systems we are trying to build debit card? we have taken on more areas of business and more Mr Lodge: I could not quote you a precise figure, I changes in that time too. It takes a very long time to am sorry, but I do know that cash generally is much build an integrated system. Even if you build a brand more expensive to handle. new system for any area of our business a lot of the Ms Strathie: I cannot speak for a specific cost but I challenge is the integration of that to the others. can speak from a general business point of view where you may be talking £1.20 for that transaction of cash versus 3 pence for a direct payment. Q17 Nigel GriYths: What experience did you learn from the last recession in the 1990s and, less Q23 Nigel GriYths: Could we perhaps have a note of relevantly,in the early 1980s of taxpayers who decide 2 to try and keep up to date with some tax due at the those figures? expense of another tax? Ms Strathie: We will certainly take that request away. Ms Strathie: I have to confess to being in a diVerent job in the recession in the 1990s and the 1980s. Q24 Nigel GriYths: What is the strategy of the Department to try to identify who the most Y Q18 Nigel Gri ths: I am glad you had a job. vulnerable business taxpayers are likely to be during Ms Strathie: Yes I did and I was dealing with a lot of this recession? people who had no jobs. I think it is very clear that Mr Lodge: Our strategy is to make it as easy as when people have a number of people to pay they possible for those vulnerable taxpayers to contact us will make choices. If you are in business you will and the Business Payment Support Service I think is make a choice for your business. One of the a good example of that where we have publicised challenges for us now in working with business is to that service pretty extensively, including in the understand both the business customer and the national media with full page advertisements. individual customer better and to try to help them to do the right thing. Some of our customers have Q25 Nigel GriYths: When were those roughly? greater needs in that area. Mr Lodge: Earlier in January I believe; quite recently. We have improved the website so that Q19 Nigel GriYths: What stress do you put on the people have plenty of information on the website importance of making it easy for taxpayers to pay about how to pay and where to go if they need help. their taxes, especially the businesses? Our strategy really is to encourage people to come to Ms Strathie: I think huge. In the whole area of debt us as soon as possible. prevention would be the cure. Introducing much better marketing to customers, reminding them of Q26 Nigel GriYths: What is the barrier to the when they have to file on line, introducing penalties Department tracking how many debtors there for people who do not pay on time, making available currently are? payment by debit card and credit card and being able Ms Strathie: We have a number of cases rather than to pay on line are all examples of helping people to individuals because a debtor could have several do the right thing. debts and again that comes to not having a single customer view. Q20 Nigel GriYths: Are the expanded facilities to pay by credit and debit cards that are mentioned on Q27 Nigel GriYths: Paragraph 2.1 at page 14 stresses page 24 of the Report in place now? that the number of lower value debts has increased Ms Strathie: Yes indeed. I paid my own immediately fairly dramatically, why has that been allowed? when I filed earlier this month so I can say that I have Ms Strathie: As we tried to tackle some of the very tested the system. old debt with a reduced workforce and looking at new ways of delivering, we decided to tackle high value debt and have had to keep resources flowing to Q21 Nigel GriYths: Why does the Department not the Exchequer. However, I think we have seen a allow people to settle debts in cash through systems considerable increase in smaller debt and we have a like PayPoint and Payzone? number of pieces of work in hand including some Ms Strathie: Cash is normally a very expensive way joint work with the Department of Work and of settling but perhaps I can ask one of my colleagues Pensions to tackle that. to explain. Mr Lodge: That is absolutely right, we do not Q28 Nigel GriYths: The Report says that the currently use those particular channels partly Department’s debt management staV has reduced by because of cost but what we are intending to do is to 14% since April 2006. In the light of the recession look at the costs and benefits following the what are you doing to reverse that? suggestion that the NAO made in its Report to see whether it would be feasible and cost eVective. 2 Ev 14 Processed: 03-06-2009 09:28:35 Page Layout: COENEW [E] PPSysB Job: 428884 Unit: PAG1
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Ms Strathie: We certainly will not be reversing the Ms Strathie: I paid mine on-line so I did not get to staV numbers. I think we still have many challenges that bit. to live within our budget and that has to mean that, like any other business, we constantly look at new Q34 Mr Touhig: The reason I pay by cheque of ways of doing our work to get the results we need. course is that the cheque is paid but the money stays in my account for a few extra days. Q29 Nigel GriYths: What are these new ways? Ms Strathie: Indeed. I do not think it is Sir Mr Eland: Our basic strategy is, first of all, things Humphrey-ish because if I look at this in terms of like prevention and making it easier to pay that we how many cheques we will process and how many have touched on. Essentially then there is a risk people it will take to open the envelopes and deal based approach introducing the sort of risk with them, then you multiply up, even if it were the V Y assessment I referred to earlier so that we are then di erence of half a minute that is a huge e ciency Y able to focus eVort on the people we most need to. challenge and an e ciency saving. We are looking to improve the productivity of the staV we have, streamlining our processes and Q35 Mr Touhig: That is what it is about, is it? You carrying out some new management techniques do not plan to stop us paying by cheque, do you? around team working and so on. Ms Strathie: It would be much cheaper if everybody was able to file on-line and pay immediately on-line. Q30 Nigel GriYths: The figures we have got from the NAO Report on page 11 are that for every pound Q36 Mr Touhig: You have no plans to make us do you spend on debt recovery you collect £310. Why that, do you? are you not able to sustain an argument for Ms Strathie: Not yet. expanding staV as debt is clearly likely to expand? Ms Strathie: I think there is aVordability versus Q37 Mr Touhig: When the Chairman introduced the investment in return. We have an admin budget and session this afternoon referred in the Report that that is ring-fenced resourced. We cannot simply 30% of taxpayers with liability do not pay on time draw in more revenues and then re-invest those but the payments were made soon afterwards. I revenues. We have to prioritise the resources we have think you said it goes down to about 10%. and the way that we do the job to do it because we Ms Strathie: Yes, after a month. need the resources to invest in the first instance. Q38 Mr Touhig: We recommended to you in our last Y Report that the Department should monitor the Q31 Nigel Gri ths: In our previous Report, as is percentage of debt collected within 30 to 90 days in stated in paragraph 3.22, there was a line with good practice. The Department measures recommendation which involved the use of private Y the time taken but not how much it collects. Why? debt collection agencies for the most di cult debts Why do you not know how much you are collecting to collect. How much of this has been explored and in that period of time? to what conclusions? Mr Lodge: This is tied in with some of the points that Ms Strathie: I do not think we did this early enough Lesley and Mike have already made about new for a number of reasons. We have now looked at systems. Our current systems do not enable us to what has happened in DWP as well as looking at take these measurements automatically and so the some experience of other debt collection agencies. new approach we are taking for self-assessment debt We are in the design phase of a pilot in how to do it, that arises from the end of this month will including talking to those agencies who have been encompass for the first time, introducing measures involved in other parts of government. We very that can calculate for us the value of debt that is paid much hope to start that but we are only at the after 30, 60 and 90 days and we plan to extend that. design phase. Q39 Mr Touhig: If you do not know how much you Q32 Chairman: On this question of tax debt we read are collecting in 30 to 90 days how come Ms Strathie in paragraph 1.12 on page 11 that the level of tax is saying that you are down to about 10% of debt as a proportion of net tax receipts is going up outstanding debt after a month? obviously from 3.8% to 4.3%. I think I would like to Ms Strathie: That was not value, that was 30% of have a note on your strategy for dealing with this people file late. There is roughly a third of the problem.3 population who, wherever you set the deadline, will Ms Strathie: Yes, of course. still be late.
Q33 Mr Touhig: Ms Strathie, I received a demand Q40 Mr Touhig: Who are the worst late taxpayers, for tax liability to be paid by 31 January. Do not individuals or companies? worry,I have paid it. However, I was interested when Ms Strathie: Most individuals’ tax is PAYE and I looked through the notes on instructions how to therefore collected and then PAYE is collected pay you insist I should not fold the cheque or the through business. demand note or any paper work I was putting in the envelope. That is a bit Sir Humphrey-ish, is it not? Q41 Mr Touhig: I was talking about where there is a demand such as the one I have just received; who are 3 Ev 14 the worst payers there, individuals or companies? Processed: 03-06-2009 09:28:35 Page Layout: COENEW [O] PPSysB Job: 428884 Unit: PAG1
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Mr Eland: In percentage terms 59% comes through Q47 Mr Touhig: Do you have a particular strategy PAYE and VAT and largely small companies. Self- for that? One suspects and one hears things assessment is about 21% of our debt and that will anecdotally that a lot of companies use this process have some small companies in it and some as a delay in paying their liability. individuals. A lot of debt arises from small Ms Strathie: Getting the balance right between companies. recognising the diYculties that some businesses are having with lines of credit is something we take into account. We are consulting at the moment on the Q42 Mr Touhig: Are they worse than individuals? whole regime of sanction penalties for failure. With Mr Eland: In terms of quantity of debt yes. one strand we are trying to help people do the right thing and make it easier for them to pay on time but on the other hand we are consulting and trying to Q43 Mr Touhig: In terms of paying on time? bring about a regime. If the 30% goes to 10% in a Mr Eland: In terms of paying on time I think of that month before any sanctions are applied, if you late payment most is from companies, although applied the sanction two days later would that there is this annual thing that happens in January/ incentivise the same behaviour? We do not know but February when there is late payment from self- we are looking right across the piece. assessment taxpayers. Throughout the rest of the year it is largely company late payment. Q48 Mr Touhig: Do you see any pattern with some companies who dispute this year in, year out? Q44 Mr Touhig: How long would you be prepared Mr Eland: Yes we do. Clearly we have a history and to enter into correspondence with a late payer if the we know that some people will pay late as a tactic. company or the individual disputes the amount or At the moment we do not charge interest or have a has queries on the amount and so on? If somebody penalty on in-year PAYE payments for smaller is just messing about and trying to avoid payment, businesses; we do for very large businesses. how do you look at that? Mr Lodge: If somebody disputes their liability then Q49 Mr Touhig: Are these substantial companies we will want to sort it out as quickly as we can but if that year in, year out cause diYculties? there is a debt that is established and we are clear Mr Lodge: I think it varies. For in-year Pay As You about then we will want to go ahead and collect that. Earn I have sat and listened to the phone calls from Obviously there are various mechanisms for people our staV who are phoning companies and asking to appeal if they dispute the liability. why they have not paid and asking them to pay their month’s Pay As You Earn and you do see the same organisations cropping up. The very largest Q45 Mr Touhig: When you send out the notice as companies are subject to a diVerent regime for in- you did to me to talk about under-payment would year Pay As You Earn which does involve surcharges you say that that triggers the time for me to say that and therefore the costs and benefits are rather this is wrong and you would not really expect me to diVerent. It is a little bit like waiting for a red utilities come to you after 31 January and then start querying demand. If people know they are going to get a series and enter into protracted correspondence with you. of letters they will wait for the red one to turn up and Ms Strathie: I think all of our work is asking the that is why we need to move to a more risk based customer if they disagree to let us know that system. straightaway and why. We are trying very much to encourage people to do the right thing. I think, Mr Q50 Mr Touhig: Dennis Healey once said that there Touhig, the real challenge for us is to understand were two statements he would treat with suspicion, what happens this year after 31 January because the first was that the cheque that was in the post and payment is due by 31 January and it becomes the second was, “Hello, I’m from the Government, immediately payable rather than being phased I’m here to help”. Finally on that topic, if you have through someone’s tax code and this year we have a number of companies that year in, year out cause overtaken the number of people who file manually you diYculties, do you set up some sort of special by filing on-line and we do not know just how big mechanism to overcome this? We have asked before that figure is going to be; it is over four million now, for information about companies that avoid we hit the three million mark earlier in January. Of payment of tax and we were told that because of data course there are just a few weeks before there are protection we could not be told, but one hears all penalties involved in non-payment. We know the sorts of stories about companies who do find all sorts sanctions work because people pay within those two of ways to avoid paying their liability when it is due. windows but the volumes have shifted. Ms Strathie: I think the Department has had a fairly strong approach on avoidance and, indeed, an approach that would make it undesirable for Q46 Mr Touhig: Indicated in your response you have companies to avoid tax payment. a bigger problem with companies rather than with Mr Eland: I think the risk based approach means individuals over late payment. that we will be identifying those sorts of customers Ms Strathie: Yes and with companies the value of but instead of, as we do now, going through a the debt would generally be more than for sequence of reminder letters, telephone calls and so individuals. on we will be looking to move straight up the system Processed: 03-06-2009 09:28:35 Page Layout: COENEW [E] PPSysB Job: 428884 Unit: PAG1
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28 January 2009 HM Customs and Excise so we will cut through the letters and maybe they will tougher in applying sanctions earlier. They have get a visit straightaway so that we can take more incrementally changed over the years, the impact of direct action immediately against the higher risk filing by October or filing by January. whereas for the lower risk people we might be able to stop it just with a letter. Q55 Angela Browning: When you receive statements from companies and they have those ageing boxes Q51 Mr Touhig: Would it be possible for you to on the bottom of the statement and they tell you one provide the Committee with a note on the companies month, two months, three months, some even go up by turnover and the liability and the ones that you to four or five months, I always thinks that simply are having persistent problems with. I am sure you 4 tells the person receiving it, “Although we want you will not want to give us the names. to pay on time and there is usually a duty to pay by a Ms Strathie: No. certain date, actually we are the sort of organisation Chairman: Thank you for that. Angela Browning? where you can see nothing much is going to happen if you leave it for two months, three months, four Q52 Angela Browning: Ms Strathie, you will be very months” or you would not put that. That is a pleased to know that I paid my tax at lunch time disincentive to get people to pay on time so why are through the post oYce. You will be all right next we still having this month when people, quite clearly year; it was a large sum of money. from this quote, are working the system? Ms Strathie: I hope it was a good experience. Ms Strathie: I do not know the proportion of people who are working the system versus people like me Q53 Angela Browning: Yes it was. I chose to pay at who will do it when I have to do it to make sure I the Post OYce but one of the things about this tax have done it before 31 January and some people are year is that the 31st falls on a Saturday and yet you always late for everything. If I go back to business at ask for three working days to allow the money to go the moment as well, were we to have an immediate from the Post OYce to you so in eVect we lost a day sanction and no flexibility at all then we would not I assume this year because of it falling on a weekend be able to do anything in the time to pay date. I had a lot of calculation to do in order to draw arrangements for now. We would not make these the money out of a very good interest bearing decisions in isolation so it is all of our stakeholders. deposit account where it has been for some time. I We have had one round of consultation and now we have to say that it is not because our parliamentary are out for the other and I am not sure. Clearly the salaries have increased, I had a capital gains disposal economic environment has changed quite a lot since in the previous tax year. The point I want to make is we started on this journey so I cannot really second that when we see on page 25—and you alluded to it guess the outcome. just now—in actual fact I did not need to be so careful because I could have waited until 27 February without losing any interest. Q56 Angela Browning: Going back to page 16, the Ms Strathie: We would not have wanted that. That Chairman asked you about the system in the goes to my point about consultation on the regime. Netherlands and I must say I would have liked a bit Everybody will have wondered whether it is right to more factual information about whether you really immediately penalise someone who does not file by are going to implement a system like this and, if so, the deadline because we always give quite a long time where in the process have you reached. Are you to do it. I am very grateful that you filed today. going to apply it to people who return self- assessment forms? Is it going to be for the corporate sector? How is it going to be applied? Can you give Q54 Angela Browning: You have been consulting on us a few more details? Do you have an end date in this, I see, according to the NAO Report last year; mind as to when you are going to apply a system like what was the outcome of that consultation? I think this or similar to this? the Moira Stuart adverts are very good and very Mr Eland: We are going to start with the self- funny and she has that sort of authority that makes assessment system starting with this round. We will you think that you had better pay up, but we see here evaluate it in July this year to see if it has been on page 25 a quote which says, “It’s better to owe successful and then we will start to look at what them [the Department] than the bank . . . I always other areas of the system we will extend it to. First of pay before the end of February, because they say it’s all we will assess the individuals against other interest free up until then”. I think we heard that databases and their credit history and segment them somehow all these debts get paid in February and into higher risk and lower risk categories. The lower you are only left with about 10%. So they are risk categories we will take action like sending letters working the system that you have set up. or maybe a phone call; the higher risk people we will Ms Strathie: I think there is probably an element of take more direct action and maybe visit them. people saying, “Well, I have lots of people to pay, I have a cash flow here, I’m running my business so I will” and even within diVerent taxes. The Q57 Angela Browning: Are you modelling it on what consultation is not complete—February is the we see here in the Netherlands? closure for that—but that is exactly what we are Mr Eland: We are modelling it on something similar looking at, the core regime of tax and whether we are to this system. We have been round and looked at a number of companies and how they work and that 4 Ev 15 is how we have designed this system. Processed: 03-06-2009 09:28:35 Page Layout: COENEW [O] PPSysB Job: 428884 Unit: PAG1
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Q58 Angela Browning: Presumably the next time we Q63 Angela Browning: Floating charges by banks look at this we will have an indication as to how and things like that. successful it might be rolled out across the Ms Strathie: Yes but we do not have that status. Department. What I would say is that insolvencies are still Mr Eland: Yes. relatively low across the UK and were the tax demand to be the straw that broke the camel’s back Q59 Angela Browning: Could I move onto we have no preferred status. something else now which interested me and that was the fact that you have 3.6 billion categorised as missing trader fraud. There is a very helpful Q64 Angela Browning: Is that policy one of last explanation at 1.11on how this works in terms of the resort or is it one you find is beneficial when you way people register for VAT in the UK in order to crunch the numbers? trade in the EU. They sell goods back here in the UK Ms Strathie: I think it is last resort. The law means but the revenues do not get the output tax back so that we need to demand tax and do our best to collect there is this 3.6 billion. What are you doing to it when it is due. Even if we go back to what I was address that? saying about giving support and time to pay, we Mr Eland: We have taken a set of actions. There are would not give time to pay if we do not believe the a number of criminal prosecutions under way at the money is there to pay anybody. moment. We also have stopped the claims of people Chairman: Thank you very much, Mrs Browning. who we believe either knew or should have known John Pugh? about the fraud and who have claimed input tax deduction back from the Exchequer. We have stopped those claims of companies and we have two Q65 Dr Pugh: When I looked at this Report it or three billion claims which we have actually arouses some suspicion. It is not actually too bad a stopped. In some cases people have appealed against Report if we look at progress being made, targets us stopping them and we are in litigation on it. We being met. Your Department seems to stand have also taken a number of steps to prevent it international comparison, but there are some fairly happening again. obvious things that the NAO point out that you do not seem to do like, for example, know how much Q60 Angela Browning: How do you stop them, for you are owed in direct/indirect tax from any one V example, forming another limited company and individual, or know how e ective a certain debt doing the same thing all over again? recovery activity is, or know the value collected in Mr Eland: We have introduced new data matching the 30 or 90 days of debts. I am wondering whether tools and so on that we use at the point of VAT we have a known phenomenon here or whether we registration so we can look at any data—similar actually have something that is a little more cloudy address or telephone number or whatever—and or grey than I first thought. Clearly there is where we have suspicion that there is no trading something called tax debt and there is clearly also history or something like that then we will make something called tax liability and at a certain point more in depth enquiries before we allow them to in time—normally for MPs round about 30 register. We are trying to stop people getting into the January—there is a danger that the tax liability will registration system. We have also got a derogation— become a tax debt. Often some of these debts are of a special UK exemption—from the European legal an innocuous kind, you just get a letter from the system that enables us to adopt a diVerent approach. Inland Revenue saying that you owe a bit more and your code will be adjusted in one way or another. Is Q61 Angela Browning: I was going to ask you about tax debt as simple as that? Does that count as tax that and whether you have that cooperation. Do you debt? Is there a clear and unequivocal definition that have suYcient ammunition in law both in the UK applies right across the piece for every tax? and within the EU to tackle it? Ms Strathie: No, that is the short answer. There are Mr Eland: We are monitoring all of this very diVerent sanctions, there are surcharges, there are carefully. The fraud levels have come right down and diVerent points, but I think that if we take self- they seem to be keeping down but we are not assessment on-line, as we said, there is a window complacent about it. At the moment we feel we have between the deadline and the other before there is a strategy in place to deal with it. any sanction.
Q62 Angela Browning: Where you precipitate through enforcement and insolvency bankruptcy or Q66 Dr Pugh: So if somebody gets the VAT wrong you initiate the action so far as companies are they get a letter from the tax authority correcting it concerned, how beneficial has this proved? Am I and asking for a bit more, that would count as right in saying that when this happens you are no recovering a tax debt even though there are no strong longer at the top of the list in terms of being able to arm tactics or any real duress used. have the prime share of the assets of a company or Mr Eland: The tax debt arises after the due date. It an individual? is fair to say that some we regard as essentially late Ms Strathie: That is absolutely correct. We never payment they then wash through the system fairly were at the top of the list; we were among a number quickly and others we do have to take positive of preferred creditors. action. Processed: 03-06-2009 09:28:35 Page Layout: COENEW [E] PPSysB Job: 428884 Unit: PAG1
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Q67 Dr Pugh: How much of the tax debt do you to get tax debt recovered. What does that actually recover? What percentage broadly do you regard as mean? Does it mean that some people are better at late payments rather than proper debt? ducking under the radar and are not picked up early Mr Lodge: I think we would regard it all as tax debt. enough or properly enough as debtors? Or does it If payment comes in beyond the due date then we mean that some groups are just basically better at regard that as tax debt. holding out? It actually says in the Report itself that some debtor groups may have become more Q68 Dr Pugh: Even though de facto you have made knowledgeable about recovery processes. Who are little eVort to get it in other than to remind the these people and how are they using the knowledge person that they are owing it. that they have got? Mr Lodge: We will have written or sent a statement Mr Lodge: I think this is something that arises or made eVorts before the due date to remind people, because currently we have an approach that follows as we did this year for self-assessment for example. a set pattern so people who have not paid by the due We regard it all, I think, as coming in as a result of date once will receive a certain style of reminder either the reminder actions or the letters we sent. letter, perhaps more than one reminder letter and then if that happens again they get the same type of Q69 Dr Pugh: When you sit and you look at tax debt letter or reminder letter very often. People quite are you fairly confident that you have got the quickly learn how the system works and what the measure of it? Or is there tax debt that you do not sequence of events is that is going to happen should know about, unknown tax debt? they not pay on time. That does cause some changes Mr Eland: No, I do not think there is unknown tax in people’s behaviour hence the importance that we debt. What we see is that there is a phenomenon that are placing on moving to a risk based system. surrounds late payment which we try to tackle in an automated way as far as possible and through Q73 Dr Pugh: Are you saying they are getting better reminder letters, through penalties and interest at protracting the process or masking the debt that charges and things like that which encourage people they have? to pay. There is then a set of debt where you have to Mr Lodge: Both. take more positive action: follow-up phone calls and so on. Then there are some where you actually have to physically visit the company. There are then some Q74 Dr Pugh: Both. where you have to take full enforcement action. The Mr Lodge: The former I think. They understand the risk based approach that we are trying to move to process that they are likely to have to go through. and outline is to make sure that we are using our resources eVectively against all those diVerent types of actions to identify which is which as early as Q75 Dr Pugh: In terms of improving the process of possible so that we can take the appropriate action cracking down on unpaid debt, a point is made that as early as possible and not wait for the sequence you could improve the IT but there is an issue of Y that would normally follow. insu cient funding. I think that somewhere else in the Report a suggestion is made whether it is supposed to be constraint on the cost of Q70 Dr Pugh: What I was driving at is that it is a bit implementing a particular suggestion. Surely in your like victimless crime; drug oVences that go up and world it is fairly straightforward in making a down depending on how hard people look for them business case for doing anything. If the IT is going because normally people who are sold drugs are to raise X amount of revenue and you know what it people who buy drugs and do not report that. What costs (it may well exceed the initial cost you thought I am trying to find out is whether there is a tax debt it was going to cost but nonetheless you have a rough that is not known to you or only becomes known to idea) it is fairly straightforward. You can make a you when you put rigorous investigative proceedings very persuasive case to the Treasury and say, “We in place? should do this because it is going to cost X and it is Mr Eland: Yes indeed. There is a hidden economy going to bring in Y”. I do not see your diYculty in where tax is avoided altogether or evaded altogether. making a case for better IT. There is under-declaration of tax that we find through our compliance activity rather than our Ms Strathie: Let me try and unpack it a bit. As I said debt management activity. If somebody has earlier, we have an admin budget and we need to live understated their tax liability and we carry out an inside it. That means that we have to prioritise to get audit we discover the under-declaration. the yield flowing. It is not a case of being able to re- invest the revenues we collect. There is a powerful business case to be made, I am sure. Q71 Dr Pugh: What you are marked on is collecting this unpaid tax that you have identified which you might possibly not have identified in the unpaid tax Q76 Dr Pugh: You could run a pilot to show what a in the first place. good thing it is. Mr Eland: Yes. Ms Strathie: If you look at some of the areas of work that I know Mr Eland looked at before had to be Q72 Dr Pugh: In the Report it says that some debtor seen in the priorities of something like the system groups are more knowledgeable than others and that that is going to completely change the way we deal is one of the reasons why you struggle in some cases with PAYE. 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28 January 2009 HM Customs and Excise transaction each time someone moves away from Ms Strathie: Unipart are probably the most employer to employer and we have a big IT system. advanced company in the UK that have adopted That is only one example. what is known as lean philosophy and lean principles and that is where we did our learning. Q77 Dr Pugh: What you are saying is that you would Q83 Mr Williams: The local whisper is that the have some diYculty in constructing the business consultants cost about a thousand pounds a week case. each; would that be approximately right? Ms Strathie: No. AVordability; getting in the queue Ms Strathie: I wish I knew where I could get of priorities. We have lots and lots of transformation consultants at a thousand pounds a week; it is hard programmes; we have a lot of change that would to get one for a thousand pounds a day for any kind bring about benefits but there is a finite pot of of strategic consultancy. The concept of this— resources that you can invest because we need to shake that money out of other areas of business to invest. Q84 Mr Williams: It is not the concept at the moment; I am looking at the cost. Can you tell me what it costs? Q78 Dr Pugh: Can I finish with a leading question Ms Strathie: I do not think we have that with us which relates to local debt recovery? You are today, have we, what we have spent so far? reducing the number of local debt oYces—and Mr Lodge: Not across the Department. oYcers probably—and you are replacing it with something called Field Force but you are having real Q85 Mr Williams: Can you let me have it in writing diYculties in getting people to volunteer for this, as evidence the background on the costing of the problems with the union and so on (yet you are system that was introduced at a cost per consultant obviously committed to reducing the local oYces). and so on.5 This is a doomed strategy, is it not? Ms Strathie: We can give you the cost of what we Ms Strathie: I think most of our contact is on the have spent so far and any other information and telephone or by mail rather than face to face. what we intend to invest in our people in this area over the next three years. Q79 Dr Pugh: A thousand pounds results from every face to face contact, does it not? Q86 Mr Williams: So Swansea was not just an Ms Strathie: You are picking one element of all of experimental operation; it is part of the system of the ways that we are trying to help people to do the introducing it around the country. right thing and avoid debt. The Field Force is Mr Eland: Part of that system is to move away from growing; it is relatively new but it is just one element the consultants who set the thing up into doing the V of trying to get the best value return for our training with our own sta doing it. intervention, just as I said about designing a pilot for outsourcing other elements. I think it is far too early Q87 Mr Williams: If you can do it yourselves, why to say that anything is doomed. are you paying so much for the consultants? Chairman: Thank you very much, Dr Pugh. Mr Alan Ms Strathie: There is a lot of learning. There is big Williams? investment in our people and our managers in particular in this process. That means it is not like any other programme where you prove the concept Q80 Mr Williams: Can you tell me, Ms Strathie, I and then just simply roll it out because the have had a letter from my local oYce in which they philosophy is that you engage the practitioner in ask a few questions and they raise the issue of doing it. Our strategy is to ensure that HMRC is self- something called PaceSetter. What is Pacesetter? Is it sustaining in this rather than the employment of something unique to my local oYce or is it consultants. something that is ubiquitous? Who developed it? Ms Strathie: It is our HMRC brand name for our Q88 Mr Williams: Is it within this system that you biggest strategic programme of continuous have to produce daily achievement records? This is a Y improvement. It is a way of being more e cient, box system which they fill in each day, but having delivering better customer service and engaging all filled it in they now also have to replicate it on a our people in the process by eradicating the non- whiteboard. Why on earth do they need to replicate value added steps in the process. it? That is very time consuming. Ms Strathie: I have watched some of our people who Q81 Mr Williams: So this is across the system. have been in this journey the longest down in Ms Strathie: Yes, but we cannot do the entire Portsmouth and every team has a whiteboard organisation overnight so this is something that has because the work comes in, it has to go out, there are been incrementally building and we have a strategy certain number of hours in the day from people now over the next three years to roll that out right available who are at work and it is productivity. across the Department. Basically at almost every hour of the day the team leader is measuring how productive we are and whether we are hitting the targets. Q82 Mr Williams: Unipart was brought in to introduce it. 5 Ev 15 Processed: 03-06-2009 09:28:35 Page Layout: COENEW [E] PPSysB Job: 428884 Unit: PAG1
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Q89 Mr Williams: Have you any evaluation of Q95 Mr Williams: I still do not know how you got to PaceSetter? What sort of rate of return are you 100; I am still no nearer knowing that. I have gone getting from it as compared with the investment around the roundabout, but how did you arrive at you made? 100? Ms Strathie: Yes we have. I would just put a little bit Mr Lodge: It is a combination of the locations that of caution around it because we have applied we have currently got, where the staV are and where PaceSetter and the chosen techniques in various we can reasonably move work and people to form areas of the business because the approach to this is these larger oYces to gain the eYciencies that we to try it in various areas and then work out the require. strategies moving forward. We can share some information from various pilots. Q96 Mr Williams: Is that a permanent commitment or is it an aspiration or is just a thought at this time Q90 Mr Williams: Perhaps again you will give me a but may not be pursued? more detailed note on that aspect.6 Switching now Mr Lodge: It is a firm plan that we are going to be to the closure of oYces, you have decided you are delivering over the next few years. going to close about two-thirds of oYces. Two-thirds seems incredibly high. Either you were hopelessly Q97 Mr Williams: Coming to your IT, your IT over-indulged with them or you are being profligate cannot link all debtors’ liabilities to you. I would in the way you are disposing of them. Out of 147 it have thought it would be relatively easy to find a means you are going to close 100; how did you arrive common identifying factor but it seems this is at this figure? beyond your IT system. You also have a phone Ms Strathie: Is that two-thirds of debt oYces? It is system which wastes 9% of staV time switching certainly not two-thirds of the entire estate. between in-bound and out-bound because we are Mr Lodge: It is two-thirds of debt oYces. told its IT is not up to it. Why is your IT so inadequate for what you need? Ms Strathie: These are huge systems to replace and Q91 Mr Williams: How many is that? will require huge investment over a period of time. Mr Lodge: We started with 147 so we will be down Clearly the most advanced technology and to about 50. telephone platform allows all sorts of flexibility and allows you to move work around eYciently, but that Q92 Mr Williams: You were surprised when I said a will be another huge investment for us. A lot of these hundred and now he is agreeing with me. systems have been going for a very long time. We Ms Strathie: Sorry, I was looking globally at the already have a number of programmes that are organisation; I knew it had a lot more buildings. looking at replacement systems well down the road.
Q98 Mr Williams: Of the ones you have evaluated Q93 Mr Williams: I am only pulling your leg. Are we have you got any reasonably arrived at evaluation now agreed it is a 100, so we are back to where I for dealing with these two individual problems, the started. linking of a debtor’s liability and overcoming what Ms Strathie: We reduced to a third those locations would seem to be straightforward in-bound and out- where we are operating this service line. bound telephone switching. Mr Eland: We are in the process of correcting the in- Q94 Mr Williams: What I am trying to get at is, is bound and out-bound telephone problem I think. two-thirds an arbitrary figure or is two-thirds a We hope to be able to do that in an automated way carefully derived figure and in which case how did from October this year so that we can save that 9% you derive the two-thirds? of time that you mentioned. On the linking up of Mr Lodge: The work that is done in these local debts, we are planning to bring VAT into our main oYces is a combination of face to face visits, debt management system over the course of next attending the courts where necessary and that is the year. That will not enable us to link all debts work we are going to be doing through he new Field automatically but it is certainly a step in the right Force that we spoke about just a few minutes ago. direction. I think the NAO Report mentions taking The rest of the work that is done in these local oYces an incremental approach and this is the first step in is reviewing cases, making phone calls, sending that incremental approach. letters; work that in essence could be done anywhere in the country. What we are doing is consolidating Q99 Mr Williams: As you have this programme of that work into fewer locations so that we have viable obvious significant redundancy at a rather oYces with the right number of staV. Some of our unfortunate time for anyone to be going redundant, oYces currently are quite small; we need to reap the why is it you still are not able to judge the relative economies of scale from bringing people and work cost eVectiveness of the diVerent collection systems? together. Arriving at 50 is a balance struck between If you cannot do that, how do you know you are how far we can go in that process and the desire to making the right people redundant? Why can you keep the skills and experience of the staV we have not carry out the evaluation? already got. Mr Lodge: As the Report says, we are in a similar position to many other organisations in trying to get 6 Ev 16 much better information about the return we get Processed: 03-06-2009 09:28:35 Page Layout: COENEW [O] PPSysB Job: 428884 Unit: PAG1
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28 January 2009 HM Customs and Excise from interventions. It is rather more about what Q106 Mr Mitchell: Would you be more sympathetic happens when you send people a letter versus a to that kind of social debtor? phone call versus a visit versus insolvency if it gets Mr Eland: If it is a popular football club it no doubt that far. It is trying to understand precisely the has a chance of survival because its revenues— diVerent groups of customers and what happens after you make those diVerent interventions rather Q107 Mr Mitchell: It is not that popular, I am afraid. than the particular skills and experience of Paragraph 1.17 is about historic debts: “Most debt particular groups of staV which we want to retain as over two years old was self-assessed Income Tax much as we can aVord to do. debt”. Why is that? Is that because you are still Chairman: Thank you very much, Mr Williams. arguing over the figures or there has been fiddling? Your last questioner is Mr Mitchell. Mr Lodge: The self-assessment regime, because of its payment cycle with two big payment dates—31 Q100 Mr Mitchell: I assume the situation is going to January and July—delivers into our system big get worse in the sense that as the recession deepens chunks of debt at particular times. Self-assessment you are going to have more debts and more taxes does produce the largest number of individual debts; unpaid. What was the experience last time? How it is our biggest debt workload in terms of numbers, high did debt levels on tax reach in the last two Tory many of which are very small debts. recessions? Ms Strathie: On the first point I think it is too early Q108 Mr Mitchell: Is that not going to get worse if for us to tell any impact on debt. Looking back I you close the oYces at the rate we have just been think in the 1990s it took some period of time before discussing? Before, if you had a problem, you could we started to see some issues in reduced tax yield. drop into the tax oYce locally and get them to look at it; now you will not be able to. Q101 Mr Mitchell: Some period of time into the Mr Lodge: We will be retaining our enquiry centre recession? operations in these locations so you still will be able Ms Strathie: Yes, before we started to have the to go into your local oYce. impact. I think probably about 18 months. Mr Eland: It was about a year to 18 months before Q109 Mr Mitchell: So there will be a local point of we saw the full impact. It is diYcult to make reference. comparisons because we have introduced new Mr Lodge: Yes. systems. Self-assessment has come in since then but obviously what you see is insolvencies rise within the Q110 Mr Mitchell: I see from the Report that you economy and that means tax debt goes along with would have to invest in a computer system to record the company.That is the thing to watch for. What we all the collected debt. That means you are not using Y are trying to do in this recession is to give su cient the practice big businesses use of seeing who is help to enable people to carry on in business so that deficient in various areas through their computer they are not being put out of business by our action. system. At what point are debts collated? If I am owing money on VAT and income tax and whatever, Q102 Mr Mitchell: Are you saying that you are at what point does that begin to ring bells and you going to work more under a kind of Chapter 11 say, “This man is fiddling on a wide scale”? regime this time than you did last time? Mr Lodge: We join up debts at diVerent points in the Mr Eland: We are actively publicising the time to pay process. If we have an individual debt that is arrangements that we are now oVering in order to try particularly large we will look across other taxes to to keep businesses going for longer. see if there are any other debts.
Q103 Mr Mitchell: Is that an imperative? Q111 Mr Mitchell: If I had a debt on income tax you Mr Lodge: No, our imperative is ultimately to— would check other systems to see whether I had one on VAT as well. In that case that solves the problem. Q104 Mr Mitchell: Sympathetically? I have one final question, over £300 million worth of Mr Lodge: We are sympathetic where we believe it is debt I see is to be written oV because you cannot a short term problem and that by doing this we will trace the person owing it. Given the fact that they are recover the tax over a longer period. considering removing passports and driving licences from people who owe child maintenance, is the Q105 Mr Mitchell: Are you more sympathetic to National ID card going to be any help there or are some kinds of problems than others? I am thinking you totally excluded from that? of a small local football club in a small town which Ms Strathie: I have not really given a lot of thought wants its period for paying its tax bill because it is in to the ID card in this area. The £300 million was an financial diYculties extended, that football club increase and a large proportion of that was the provides enormous pleasure to 5000 people (I will missing trader intra-community fraud that we talked not name any names). Is that the kind of thing you about earlier. The people we could not trace were would be more sympathetic to? around fraudulent activity and being unable to Mr Eland: We have to safeguard the tax for the trace— taxpayer generally but we do not want to force somebody into premature liquidation when there is Q112 Mr Mitchell: You only try to trace them in a chance of their survival. your working hours. Processed: 03-06-2009 09:28:35 Page Layout: COENEW [E] PPSysB Job: 428884 Unit: PAG1
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Ms Strathie: No, I think we have many strands to the BBC I was self-employed at ITV and I did not our tracing process; this is about missing operators. pay any tax. A tax debt built up and eventually two Mr Eland: We manage to trace people and find the inspectors announced that they were coming round. new address in about 87% of cases. We are improving I invited the accountant to come round at the same and we are looking to try to get to 90%. A lot of it is time because he knew what I was doing and I did not. done through a central bureau that is looking at I put them in the dining room; I talked to the diVerent sites and so on in order to help find those. accountant for 10 to 15 minutes discussing what we We now know that the average cost is about three would say. We then went in and had the discussion pence a trace7 to do that so it is a good cost eVective and they pointed out various objects they would like way of doing it and it has brought in about £263 to distrain, all the expensive paintings on the wall million since we started the process. We are getting it and things like that. When they went out—I showed down and we are beginning to turn it into a them to the door—I went back into the dining room reasonably successful operation. and the accountant was under the table. I said, Ms Strathie: The amount of success depends on the “What on earth are you doing?” He said, “I’m type of tax. For corporation tax it is about 98%, looking to see if the bastards have planted any student loan is 91%, self-assessment is 83%. bugs”. Is that the kind of practice you would have indulged in or was my accountant mad? Q113 Mr Mitchell: One final question which is Ms Strathie: It is certainly not the kind of practice I deeply personal, quite some time ago when I was would personally indulge in. Would you like to famous I transferred from the BBC to ITV.For some comment on that? reason, because they assumed I was self-employed at Mr Lodge: It is not something we would normally do, no. 7 Note by witness: After the hearing it was clarified that this 3p Chairman: Thank you very much; that concludes per trace relates solely to tracing telephone numbers. our hearing.
Letter from Permanent Secretary for Tax, HM Revenue and Customs EDS The Clerk to the Public Accounts Committee has asked me to attend the hearing on 28 January to answer any questions you may have about the recent payment made by EDS to complete the settlement agreement with HMRC made in November 2005. Your Clerk also asked me to send a short summary of why the settlement was made and the amounts involved. The claim against EDS resulted from errors made by our then IT suppliers in delivering systems to support the introduction of tax credits. The settlement sum of £71.25 million from EDS comprised four elements: — a cash sum of £31 million payable on 6 December 2005; — a payment of £26.53 million payable in future instalments over a likely three year period from EDS’ revenue derived from future new business won by EDS from Government in open competition; — a repayment of £11.303 million due to EDS regarding the Performance Gain Share for the 15 months to 30 June 2004 which EDS agreed that HMRC would retain and allocate to the settlement, and — a sum of £2.411 million which had been due and payable by HMRC to EDS regarding work carried out by EDS for which HMRC had refused payment but which was agreed to be retained by the Department and allocated to the settlement. HMRC took the decision to accept the oVer on advice from its lawyers including a QC pre-eminent in large IT disputes and solicitors with considerable experience of the issues that can arise with IT contracts. There were considerable discussions between EDS and HMRC about the sum of £26.53 million to be paid in future instalments over a likely three year period. EDS firmly believed that its pipeline of prospective future work would enable the sum to be paid, probably in less than three years. For accounting reasons, it was a “deal-breaker” for EDS to have guaranteed to pay the entire sum within three years. Unfortunately, EDS did not fully convert that pipeline into contracts and the quarterly mechanism by which payments were to be made did not work as EDS and HMRC had expected. The sum of £978,705 was all that was paid within the three year period. Over the last year or so, HMRC and EDS have discussed various mechanisms to ensure full payment of the settlement amount. With the involvement of Hewlett Packard who acquired EDS during 2008, and the Chief Executive in the OYce of Government Commerce, HMRC and EDS reached agreement towards the end of 2008 that the balance of the settlement agreement would be paid in a lump sum at the beginning of January 2009. That has now been done and so full and final settlement has been reached. I hope this is suYcient outline for you to ask any questions you may have. 22 January 2009 Processed: 03-06-2009 09:28:35 Page Layout: COENEW [O] PPSysB Job: 428884 Unit: PAG1
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Supplementary memorandum from HM Revenue and Customs on further questions supplied by Mr Alan Williams on EDS 1. The terms relating to the payment of the balance of the settlement were highly unusual, and created uncertainty about the value and timing of the payments from EDS. Why did the Department not press for a more transparent and enforceable payment schedule? The Department pressed very hard for the highest cash settlement that we could obtain, with the primary aim of maximising the up-front lump sum cash payment. EDS were not prepared to oVer a larger immediate cash payment, nor to oVer committed regular instalments. The alternatives were to litigate, with all the ensuing risks and diversion of senior management time, find an alternative basis of settlement, or accept a lower overall settlement oVer.
2. In your letter to the Chairman you state that “For accounting reasons, it was a ‘deal breaker’ for EDS to have guaranteed to pay the entire sum within three years.” What do you mean? By the time of the settlement, EDS had already given an indication of their profits for 2005 and their earnings potential going forward. They refused to make a settlement that would have necessitated re-stating figures to the markets.
3. The payment mechanism agreed with EDS clearly did not work. What have you learned from this episode? The mechanism depended on EDS winning contracts they had bid for. In the event, EDS did not win the scale of public sector contracts that they had expected. The Department’s position would have been improved if we had been able to negotiate better positions on aspects of the settlement. With the benefit of hindsight, we would have liked to have been able to examine more fully the risks of EDS not winning those contracts.
4. Was it Hewlett Packard’s takeover of EDS that enabled you to obtain the final payment? HMRC and EDS had been in negotiations about the rate of payments for some time before the Hewlett Packard (HP) takeover. HMRC wrote to HP to ensure that they were aware of the settlement and its terms but there were no direct negotiations with them. We know of no single reason that triggered the final payment. EDS was not under any legal obligation to make the final payment when it did but notwithstanding the way the payment mechanism worked out, EDS’ senior management sought to comply with the spirit of the agreement—an honourable approach for which HMRC has thanked EDS.
5. Were the payment terms structured in this way to allow EDS to keep the liability out of its accounts? This is a question for EDS not for HMRC, although EDS’ position was very clear that it could not make a settlement that would have necessitated restating its figures to the markets.
6. What could have been done to resolve the matter sooner? It was expected from the outset that larger payments were likely to come in towards the end of the three year period in which EDS and HMRC expected payment to be made. When quarterly payments continued at a relatively low level, HMRC took up the issue with EDS and explored with them how best to accelerate payments.
7. As it has taken three years to secure the final payment of £25.5 million, is the Department going to recover interest on this sum? In the settlement negotiations, HMRC asked for interest to be paid on the outstanding sums over the three years envisaged for payment but EDS’ position was that the overall sum was suYcient and that interest was not necessary. The parties ultimately agreed that there would be no payment of interest unless there was a failure on EDS’ part to meet the contractual terms. No such failure occurred.
8. How has the Department changed the way it deals with contractor disputes? The Department has not had other disputes of this size and so has not needed to enter into similar settlement agreements. In terms of contractor disputes of a lower order, the Department continues to pursue vigilantly its contractual remedies.
9. How have you helped wider government learn from this episode? HMRC involved the OYce of Government Commerce (OGC) in both the settlement agreement and the process to recover the outstanding balance under the agreement. Lessons of general application will be passed on to wider government by OGC. Processed: 03-06-2009 09:28:35 Page Layout: COENEW [E] PPSysB Job: 428884 Unit: PAG1
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10. Can we be confident that future settlements with suppliers will not be subject to similar confidentiality clauses? The purpose of the confidentiality clause was to protect information that EDS regarded as commercially sensitive. However, the confidentiality clause has not prevented HMRC answering questions from Select Committees and the National Audit OYce—and, indeed, the confidentiality clause specifically enshrined HMRC’s right to comply with all governmental and Parliamentary oversight requirements. Confidentiality clauses are a common feature in settlements of commercial disputes and HMRC would consider a similar clause in future provided we could manage successfully all our reporting obligations.
11. Will the Department be avoiding settlements contingent on future contracts from here on? We presently have no disputes for which a settlement involving future contracts would be appropriate and we would think very carefully before entering such a settlement.
12. What were the comparable legal disputes which made you confident that the settlement was a good one? We took advice from all our advisers on the merits of the settlement. Between them, they had previously acted in many IT disputes and told us that, in their view, this was a very good settlement. We did not receive the names of disputes used as comparators. 6 March 2009
Further supplementary memorandum HM Revenue and Customs Question 22 (Nigel GriYths): What is the rough order of the cost diVerence between allowing people to settle their debts in cash as against by credit card or debit card? HMRC customers can already make payment by cash without additional charge—through their bank or through any post oYce. Such payments reach HMRC electronically. The Department’s preference is for payment by electronic methods which oVer good value to our customers and to the Department, are particularly safe and secure and that involve the minimum of costly clerical handling and intervention. Cash by its very nature is an expensive method and presents risks in handling for the customer and the Department. Because of the very high cost of handling cash, and the risk involved, the Department has moved away from this method of payment over the last five years. Our most recent estimates—based on 2006–07—suggest that directly handling cash payments would cost HMRC around three times the cost per transaction of handling a credit or debit card payment by telephone and up to twenty times the cost of an online credit or debit card transaction. Under our contractual arrangements the unit costs are likely to reduce further as and when volumes increase. We do not yet have comparable costs for Paypoint and Payzone because we have no relevant contractual arrangements in place. Some initial investigation has shown that these payment methods may have a longer clearing cycle meaning that HMRC may not achieve cash value on a timely basis as required by Treasury guidelines but this will be explored further as we look further at the relative costs and benefits of increasing the range of payment options as recommended by the Comptroller & Auditor General.
Question 32 (Chairman): On the question of tax debt we read in paragraph 1.12 on page 11 that the level of tax debt as a proportion of net tax receipts is going up obviously from 3.8% to 4.3%. I think I would like a note on your strategy for dealing with this problem. While noting the increase from 3.8% to 4.3% between 2004–05 and 2005–06 the paragraph goes on to say that tax debt as a proportion of net tax receipts fell to 3.8% in 2007–08. We will not have the comparable 2008–09 figures for some time. We are improving our approach to managing tax debt through a series of linked strategies: — campaign management We have just begun a new campaign management approach for Self Assessment (SA) customers. SA represents our largest workload. Our plan is to use information about individual SA late payers, including information drawn from outside the department, to tailor debt recovery actions according to the individual financial circumstances of those who don’t pay on time. Segmenting debtors and using a risk based campaign approach provides: — a basis to prioritise the debts for pursuit; and — the type of intervention that will most likely ensure that taxpayers quickly meet their tax obligations. We will evaluate this first campaign late in the summer and progressively roll it out to other heads of duty. Processed: 03-06-2009 09:28:35 Page Layout: COENEW [O] PPSysB Job: 428884 Unit: PAG1
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— expanding and improving our debt management telephone centre All debt pursuit agencies in both the public and private sector, acknowledge that early contact with customers achieves better debt recovery results. We are now further expanding our outbound telephony capacity by extending “call centre” functionality to some of our local debt pursuit oYces which from later this year will operate as part of a single, “virtual” call centre operation. Initially, this will involve redeploying up to 250 experienced debt pursuit staV to become front line debt pursuit telephone agents. We also plan to bring VAT into our main IT system for managing debt. This will enable more eVective telephone pursuit of VAT debts as well as helping our staV to link direct and indirect debts. — working with the private sector We are exploring options for piloting the use of private sector debt recovery agencies for some types of HMRC debt. — working with DWP We are exploring opportunities to join up debt pursuit processes with DWP. — PaceSetter We are improving productivity by rolling out HMRC’s PaceSetter programme. This focuses on developing better and more eYcient processes alongside improved management and leadership. As part of our overall strategy for managing debt we will continue to adopt a flexible and sympathetic approach to those that have genuine short term diYculties in paying the tax they owe.
Questions 50–51 (Mr Touhig): Would it be possible for you to provide the Committee with a note on companies by turnover and the liability and the ones that you are having persistent problems with. I am sure you will not want to give us the names. We have looked to see what information and analysis we have to hand that might be of help to the Committee and which we might be able to disclose without breaching our strict duty of customer confidentiality. We have concluded however that there is very little specific information that we can provide. It may however help the Committee if I explain that overall at any particular point, our debt balance is made up of relatively few numbers of high value debts and large numbers of relatively small value debts. Figure 7 in the C&AG’s report gives a breakdown. Our experience is that diVerent types of tax can induce diVerent behaviours and that there is also considerable variation between types of taxpayer. In general the largest companies and groups do tend to pay on time and without the tax liability actually being counted and recognised as a debt. This means that most tax debt by volume tends to be associated with small and medium sized businesses. In terms of persistence of default, the key taxes regimes aVected tend to be PAYE/NICdue from employers and VAT both of which have far more frequent payment deadlines. For large (more than 250 employees) PAYE schemes we have the Mandatory Electronic Payment regime which severely penalises late payment and this has led to very low levels of late payments in this group. In VAT the default surcharge regime also penalises persistent late payment by increasing the amount of the surcharge up to maximum of 15%.
Questions 84–85 (Mr Williams): (PaceSetter) It is not the concept at the moment; I am looking at the cost. Can you tell me what it costs. …..Can you let me have it in writing as evidence the background on the costing of the system that was introduced at a cost per consultant and so on. We knew we needed to invest in PaceSetter for it to deliver the results we wanted. Engaging expertise from other organisations has formed an important part of our strategy. In our Customer Operations directorate we have invested £18 million over a four year period. This has allowed us to make eYciency savings of £87.6 million during that time whilst maintaining, and often improving, our service to our customers. We are looking to substantially reduce the cost per consultant as we further develop and implement PaceSetter, having used a significant part of that initial investment in building an Academy structure and products to develop our own Practitioners. The internal leadership and technical practitioner capability that has been created is now being used to transfer skills to colleagues across HMRC. In time, the PaceSetter way of working will become the way we all behave and manage our business. The long-term goal is for everyone to have the tools and training they need to understand their role, their impact on the customer and how to go about delivering improved results. Our plans to complete the skills transfer to bring HMRC practitioners up to the best industry standards will be complete within the next three years. After this, we do not intend to buy in any outside consultancy and aim to be in a position to oVer our support to other Government services. Processed: 03-06-2009 09:28:35 Page Layout: COENEW [E] PPSysB Job: 428884 Unit: PAG1
Ev 16 Committee of Public Accounts: Evidence
Question 89 (Mr Williams): Have you any evaluation of PaceSetter? What sort of rate of return are you getting from it compared with the investment you have made? Towards the end of 2006 HMRC commissioned an independent research assessment of how elements of PaceSetter are working in our oYces—it confirmed we are on the right track. This was published in October 2007 (Dr Zoe Radnor report: http://www.hmrc.gov.uk/about/pacesetter-final-report.pdf). A new piece of research is currently underway in Customer Operations, the most mature PaceSetter environment, and is due to report later in the year. We have a continuous process within the Departmental Transformation Programme to evaluate and challenge the benefits returned for the investment made. We are currently getting a return rate of 5:1 in processing areas. Although we expect these to reduce in more qualitative work areas, we still expect a significant return, which will be monitored closely. We have seen the following real improvements in performance, which have been audited: — Quality: we are currently seeing our best ever results in SA processing. — Productivity has increased by a minimum of 30% in all areas where PaceSetter is working. — Growth in both the levels of staV engagement and the leadership capabilities of leaders at all levels. — Overall, improvement in customer service and value for money for the taxpayer.
Further supplementary memorandum from HM Revenue and Customs on additional questions supplied by Mr Alan Williams on PaceSetter 1. Why was Unipart employed to introduce PaceSetter rather than developing in-house? Unipart were employed via a tender process that was conducted after an initial Lean pilot/trial in 2004–05. In house resource has always worked with the experts from Unipart, but we did not have the volume of experience necessary in house to support the number of teams being coached through PaceSetter. It is now our aim to provide total in house support for PaceSetter by 2012.
2. What knowledge do Unipart consultants have of tax systems or collection methods? None, their expertise is in Lean business systems. In using the tools that Unipart have helped us develop to support Pacesetter, we guarantee the engagement of our own people in improving tax and collection processes.
3. Unipart and the staV evolved SOP (Standard Operational Procedure) a good practice, standardising everyone’s way of working. It was intended to be colour-coded to make it easier to follow. Why was the colour coding dropped? During development, Standard Operating Procedures (SOPs)/Standard Work Instructions (SWIs) were printed locally and there was no access to colour printers. As development continued, the issue of colour coding became more complex due to the number of SWIs eg 19 for one process. A decision was therefore taken to use a numbering system instead of colour coding.
4. Is it not a waste of working time to have to record every hour what staV have done in that hour? This is done on a wipeboard. 15 minutes is spent every day discussing what is recorded. Is this not a waste of working time? Managing performance visually and in real time throughout the day via Performance Boards is at the heart of PaceSetter philosophy. The 15 minute daily Performance Review meeting allows teams to review how well they are delivering for the customer and, most importantly, engages everyone in how to continually improve our service. Meeting daily enables teams to implement improvements quickly on the same day or the next. 6 March 2009
Letter from Chief Executive, HM Revenue and Customs HMRC: Management of Tax Debt—Hearing 28 January In advance of the hearing on the C&AG’s recent report on the Management of Tax Debt which is due to be held on 28 January 2009, I thought it might be helpful to the Committee if I provided some information on HMRC’s Business Payment Support Service. This new service was launched by the Chancellor in his Pre Budget Report as part of a substantial package of support to business in the current economic downturn. It is designed to assist all businesses, small and large, as well as self-employed individuals that will be unable to pay their tax. It covers tax, National Insurance, VAT, PAYE, some other duties and other payments due to HMRC. Processed: 03-06-2009 09:28:35 Page Layout: COENEW [O] PPSysB Job: 428884 Unit: PAG1
Committee of Public Accounts: Evidence Ev 17
On contacting the service, otherwise viable businesses in genuine but temporary financial diYculty are oVered a fast and streamlined service for arranging to pay their HMRC tax bill to a timetable they can aVord. HMRC will oVer further practical help by not imposing additional surcharges on the tax within a Time To Pay arrangement although interest will continue to be payable on those taxes where it applies. The service has been up and running now for over six weeks. HMRC debt advisers are available seven days a week to take calls. The number is 0845 302 1435. Lines are open 8am to 8pm during the week and 8am to 4pm on weekends. In the majority of cases HMRC’s specialist advisers have been able to give a decision on the Time To Pay request during the telephone call—within about 10 minutes. Some businesses will have larger or more complex aVairs and it may not be possible to deal with the matter with one phone call. In these circumstances, we undertake to get back with a decision within 4 working days. From its launch at PBR to 11 January, the service has taken more than 36,000 calls and agreed over 20,000 Time To Pay arrangements worth over £350 million at the time the request was made. Some 50% of Time To Pay agreements have related to VAT and 13% to PAYE due from employers. The response to this HMRC service both from our customers and the media has been very positive. HMRC is continuing to work actively to further raise awareness of the service. HMRC is acutely aware of the pressures people face when they are in financial diYculty—especially in the present situation. HMRC have always taken a sympathetic and flexible approach to businesses—and individuals—facing temporary financial diYculties, and we recognise that this is particularly important in the current financial climate. Where appropriate we aim to come to an arrangement with businesses to give extra time to pay if this is needed and to avoid taking action that would lead to an otherwise viable business—or individual— becoming insolvent. HMRC’s experience is that this approach provides a better long term return to the exchequer than—for example—forcing insolvency. I hope that the committee will find this update helpful. I will endeavour to provide an update to the figures I have provided when I appear before the committee on the 28th. 14 January 2009
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