HM Revenue and Customs

Ian Liddell-Grainger Excerpts

Wednesday 2nd March 2011 Commons Chamber

[Mr Tyrie]

I agree completely, and the next sentence of what I intended to say was to be along the lines of asking what the situation means for small business men. They are not experts in tax, they just want to get on with their job. We must constantly bear in mind the fact that when HMRC gets things wrong, its mistake can be a catastrophe for the taxpayer on the other end of the experience.

I want to tell the story of one such business man who has written to me, who wants to remain anonymous. His business was the subject of an HMRC investigation, and when it found no irregularities, it started an investigation into his personal tax affairs. As he says in his letter to me, “They investigated everything”, even challenging a gift of £15 to a nephew. He had the impression that the local tax office felt it had to find something, having invested so much time in his case. All that went on for five years—it was like being on trial for five years. Finally, a very senior manager at HMRC saw sense and transferred the case to another tax office, and a week later that small business man had an apology.

However, like so many similar cases, it is not a matter of “all’s well that ends well”. The collateral damage has been huge. That business man’s accountant estimates that his business has lost £7 million in the time and effort of handling the case, and on top of that the stress involved in such an experience would have been crippling for many people. It is not just that individual who has lost out but all those who depend on his business for their livelihood and all those who might have had jobs in it had it been able to concentrate on expansion rather than fending off HMRC. One case does not prove anything, but the sheer scale of complaints now pouring into MPs’ postbags suggests something.

[Mr Ian Liddell-Grainger (Bridgwater and West Somerset) (Con)]

Is my hon. Friend aware that HMRC is going to write off all open cases from 2007-08, which equate to just under £1 billion? It wants to sort out the overpayments, which of course affect the person whom he mentioned. The problem is that, under the four-year rule it is not sure how it can do so. Can he help me on that point?

[Mr Tyrie]

My hon. Friend makes a point that I was intending to make, and he makes it very fully. Because I want to give other people the opportunity to speak, I will not elaborate on it.

I wish to say a further word about HMRC as an institution. It has a very difficult job. Nobody likes the taxman, and it is easy to kick HMRC. I have no doubt that most people there are struggling to protect the revenue fairly and trying hard to do a reasonable job. Doing that job requires a strong sense of collegiality and loyalty to the ethic of the institution. When I was an adviser in the Treasury in the ’80s, I had a lot of contact with people in both the Inland Revenue and Customs and Excise, and I thought that they were the salt of the earth. They were immensely dedicated to their jobs and civil servants of the best sort. One had no doubt that they were a highly motivated group of people, or that morale was high.

What about now? The Cabinet Secretary runs an annual staff survey, which has been going on for many years. It shows that HMRC has the lowest morale of any Government Department. Some 25% of staff want to leave as soon as possible or within a year, and only 15% believe that the department motivates them to do their best. Only 12% say that the department is well managed, and the survey goes on with a similar litany. There is some good news, which relates to what I said a moment ago. The job content is still considered interesting by three quarters of staff, and more than three quarters say that they can rely on their colleagues. There is still some collegiality. Even that will not last unless we start to put right what has gone wrong. HMRC will become dysfunctional unless action is taken to bring to an end the string of disasters that has befallen it.

Let me give some examples. Last September, the Government were forced to announce that up to 6 million taxpayers were to receive letters informing them that they had paid the wrong amount of tax through PAYE. That had been caused largely by the introduction of a new computer system, which was simply not up and running in time, and it provoked a powerful Public Accounts Committee report, which detailed the failures. There was the matter of the incorrect PAYE notices in January 2010. That provoked even more critical treatment in the PAC report. Then there are the phone call response times—try ringing HMRC. The National Audit Office found that in 2008-09 only 57% of call attempts were answered. That disastrous performance declined even further for a time, before recovering recently. I could give other examples.

What is the root cause of the problems? Some clues probably come from that survey of staff morale. It shows that the collapse of morale appears to have coincided with the merger. I know that the survey on morale began in that form only at the time of the merger, but it charts a decline from then. I believe that the merger was probably a mistake, and I said, from the Front Bench at the time, that merging two institutions with such different cultures was unlikely to be worth the candle. However, now that the merger has occurred, I am equally clear that unscrambling it would also be risky.

In any case, the department is reorganising itself. It is moving from a regional structure, with customer contact based on local offices, to a centralised model. We have heard that before. The experience of the banks with that centralised model, whereby they got rid of Captain Mainwaring, was distinctly mixed. However, the die is cast on the move to a centralised model and, in HMRC’s case, the performance of the new centralised model is not entirely disastrous. Its figures suggest that overall customer satisfaction was 73% in September 2010.

The key question must be whether that reorganisation can be completed while cutting so many more staff. The hon. Member for Leeds East will consider that issue. I hope that it will be completed, but it would be the triumph of hope over experience, if we consider the history of other Whitehall Departments and their reorganisations.

Of course, the large firms with which HMRC engages will not feel the effects of the reorganisation. They will continue to receive a good service. They provide most of the tax yield, and I understand why HMRC devotes so many resources to focusing on them. However, I worry greatly about the small firms—those least able to absorb the turbulence whenever HMRC reorganises itself. I worry particularly that, while HMRC may make savings, it will merely shift the burden of administration to taxpayers and their accountants in small businesses. The effect on the whole economy will not be neutral. It is not a matter of £1 spent in HMRC transferred to the private sector—it may be worse than that, eroding overall business efficiency and bringing downward pressure on GDP.

In a recent evidence session, I asked the Institute of Directors and the main bodies representing the accountants to start to estimate a full compliance cost for firms that deal with HMRC. It has never been done before and it is not easy work. However, we must have at least some core figures to enable us to monitor over time the full compliance burden placed on firms by HMRC. There is no point—absolutely no point—in creating a leaner HMRC at the price of massive compliance costs in the private sector. My challenge to the institutions that represent the private sector is to find that true cost of compliance. I also want to allude to some challenges for the department and the Government.

First, all the evidence that the Treasury Committee has seen suggests that HMRC needs to communicate better with taxpayers—it must find ways of giving clearer and more accurate answers to reasonable queries, and to give those answers quickly. Secondly, it is vital that staff have the training and experience that they need to work with taxpayers. There is no earthly point in a call-centre culture that is based entirely on read-outs from computer scripts.

Thirdly, we need to consider incentives as well as penalties as a means of encouraging the right amount of tax to be paid. Some argue that HMRC should consider a general disclosure facility to encourage the disclosure of previously undeclared tax. We need to reflect on that. There is a risk with amnesties, which is the road down which that proposal goes, but it needs to be looked at.

Fourthly, we must accept that with PAYE coming under increasing pressure as more people develop a variety of sources of income rather than rely on employment from a single source, further changes to PAYE will inevitably be necessary, as well as the coming introduction of real-time information. Those changes must be made extremely carefully if we are not to have yet another major road crash, such as we have seen in the past few years.

I should like to end by offering one crucial, big challenge to the Government. Much that is wrong with how HMRC operates is not its fault, and nor is it the fault of taxpayers. Rather, it is the fault of us—legislators. Successive Governments have put ever more complex legislation on the statute book. In 2009, a leading legal database found that the UK had the longest tax code in the world. That is a charter for accountants and for evasion opportunities. Length means more complexity, and complexity means higher costs for all of us. In evidence to the Treasury Committee, the IOD told us that KPMG estimated the total cost to the UK economy of running the tax system at 0.4% of GDP. I wager that that is an underestimation, as I alluded to a moment ago.

My challenge to the Government is that we must have tax reform. I was struck by a point made in a discussion paper in the Mirrlees review on tax administration, which begins:

“Most of modern tax theory…completely ignores administration and enforcement. The policy formation process is not much better, too often addressing implementation only after reform has been determined”.

Of course, administration should be an integral part of the decision-making process, but in recent years, tax policy formulation has been travelling in the opposite direction. The 2004 O’Donnell report resulted in most decisions on tax policy being taken in the Treasury, with implementation done by HMRC. It is widely held that the policy-making function in HMRC has gradually been downgraded, but we must reverse that. I urge the Government to return to a situation in which there is much greater creative tension between HMRC and the Treasury on policy formulation. If we do not do so, there will be more episodes in which the implementation of policy—delivery—mysteriously turns out to have an unexpectedly high cost or to be unacceptably complex.

In that respect, I very much welcome the creation of the Office of Tax Simplification. However, that will not be enough. We must have better policy and a simpler tax system that gives greater certainty and stability. I hope that the forthcoming Budget will point the way on that. Business and the self-employed in particular are crying out for such measures. We need a series of tax-reforming and simplifying Budgets. In the long run, everyone will gain: HMRC will have a better system to manage, taxpayers will have something that they can understand and the UK economy will have a tax system that creates opportunities for better long-run performance.

The tax system loses the respect of taxpayers, however grudging, when it becomes as complex as the one that it looks as if we are developing. Once we have arrived at that point, the country has a big problem. We will be on the slippery slope towards wide-scale evasion and an erosion of the tax base. I will not name the EU countries that are on that slippery slope, but there are quite a number, and we all know which they are. It is partly with that in mind that the Treasury Committee has launched an inquiry into the principles of tax policy that are needed for such reform. We will be reporting shortly. If we in the UK get those principles right, many of the problems that we have heard about today will diminish, and a more prosperous economy and stable society can result.

[Mr George Mudie (Leeds East) (Lab)]

I thank the hon. Member for Chichester (Mr Tyrie) for his kind remarks. When Lord McFall left the Treasury Committee, no one thought its work could be kept at the same level, but I think that it has improved—that is, if one can improve on Lord McFall’s performance. As Chairman, the hon. Gentleman has already gained the respect—even the fear, I think—of witnesses appearing before the Committee, which is a good sign. He also serves a useful purpose for me, because when I go on one of my northern, regional rants, he will translate it for the southern gentlemen before us, and I sometimes get an answer.

As expected, the hon. Gentleman has dealt with this issue on a policy level that I could not match. I take a more pragmatic view towards the department, because although there is an argument for having a look at policy—tax definitely needs simplifying—we should not necessarily do things at that level to suit a vehicle that is dysfunctional; rather, we should ensure that the vehicle is functional. At the moment, I fear that the department is in a disappointing state. To give some background, we on the Treasury Committee, and on the Treasury Sub- Committee under the hon. Member for Sevenoaks (Michael Fallon), see HMRC every year, and we have had one or two inquiries over the years. In 2006, the Committee published a report on the efficiency programme. We identified concerns that reductions in the headcount were leading to falling service standards, and we made certain recommendations. We have returned to that issue in our current inquiry—we are halfway through it—into the same subject as this debate, and we have sadly discovered that nothing has been done along those lines. Indeed, in our 2009 review of administration and expenditure in the Chancellor’s Department, we noted

“a 7% increase in total recorded customer complaints”.

We asked HMRC to square that with its submission that strong progress had been made.

[Mr Liddell-Grainger]

The latest figure from HMRC is that complaints have gone up by 33% in the last two years, so the hon. Gentleman’s figures are a bit light.

[Mr Mudie]

They probably are, but the report that I am quoting is a couple of years old.

The other thing that we highlighted—the hon. Member for Chichester referred to this—were the dire results for HMRC of a cross-government staff survey. We expressed deep concern about employee engagement at HMRC and its effect on performance, along with the severely low morale, which has been referred to. What that amounts to is this. The problem could be a passing phenomenon, but it is not. It has been consistent for a number of years and it has to be faced up to. What are the reasons for it? We cannot move away from that dismal performance without accepting that severe staff cuts in the department are a major—if not the major—contributory factor. The work force has gone down by 30% since 2005. There might be some excuse in that the merging of two departments—Customs and Excise and the Inland Revenue—provides scope for rationalisation, but not for losing 30% of the staff. There is worry that with the spending review, another £2 billion might be taken out—or £3 billion, with £900 million going back. In addition to seeing those 30,000 jobs, another £2 billion is to be taken out of its resources, and we cannot anticipate a better performance in the years ahead.

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[Mr Mudie]

I am sorry that you stopped the hon. Gentleman, Mr Deputy Speaker, because his was a better speech than mine. I do not think that he needed to use the word “parochial”, or even to apologise if he thought that he was being parochial. In fact, he was being regional. Here in London, it is assumed that any region above Watford can be written off. The hon. Gentleman has made an extremely valid point.

I know that my hon. Friend the Member for Cumbernauld, Kilsyth and Kirkintilloch East (Gregg McClymont), who is sitting behind me, is a strong supporter of tax office staff. However, I agree with the Chairman of the Select Committee about the number of telephone calls that are not answered. At one stage, the figure was 43%. One of the professional witnesses who gave evidence to the Committee said that an HMRC tax manager had been in his office and observed that it took 12 minutes for a call to be answered and seven minutes simply to change a tax code. That simple transaction took 20 minutes. That is a witness’s statement, and a very good one. I am sure that the Minister has read all the evidence given to the Committee, and has noted that that particular witness described his experiences brilliantly.

[Mr Liddell-Grainger]

The hon. Gentleman is well aware that the two companies charged with this task by the Government, Capgemini and Accenture, have been at it for a decade. The system that they were asked to use a decade ago is not the system that they use now and is not capable of doing the job, although it is starting to throw up problems that we saw a couple of years ago. Does the hon. Gentleman agree that both companies’ contracts should be upgraded to a level that is appropriate to the 21st century?

[Mr Mudie]

That is an interesting point.

I am using up time rapidly, but let me mention in passing another feature of call centres. Telephoning 0845 numbers can be very expensive for pensioners—indeed, for everyone. The fact that people have to hold on for so long does not help, but in any case it is not the right way to decide complex matters. It is best for people to deal with those face to face. The best people in the whole business are the agents, as they are the professionals. They take the frustration and get angry about it—and they have given good evidence. The ordinary individuals are in the worst position, however. The professionals get used to things and can get on with other tasks, yet, as the professionals said, those who are not represented get the worst deal, and with office closures, cutting hours, and relying increasingly on telephone calls, e-mails and letters, the whole system knocks out a fair number of the population. That is what is happening. Plenty of Members want to speak, and they will spell out their constituents’ experiences.

Does the system need to be improved and will it be improved? I do not think it will, first because it goes against the grain—I will explain that. Sadly, every time witnesses from HMRC have appeared before us, they have been in a state of denial. If someone has a problem, there is no chance of their dealing with it unless they own up to it and accept it. I sympathise with them in a way, however. The hon. Member for Chichester said we are to blame and that is true; we are to blame, in particular the Ministers. It is hard for a civil servant to go before a Select Committee and say, “Yeah, I admit it; we can’t do this because we don’t have the people.”

We look for loyalty and a straight bat from civil servants, but the way we are doing things is not generally the best way to get a real dialogue. Therefore, when we have them before us in a couple of weeks, I am not sure that Dame Lesley will do anything other than give us the Geoff Boycott treatment, or even do a Pietersen and knock us out of the ground a couple of times. Because she and the management are in this state of denial, I cannot see things happening unless the Minister takes some steps. I really do think this comes down to staff and resources. Unless they are in place, we cannot load new jobs on.

Finally, let me describe a few points that should push the Minister to want to have a fresh look at resources. One of them is to do with what the Chairman of the Select Committee said about the integrity and reputation of the system, and real tax compliance in this country. If we frustrate and ignore people, and make it difficult for them to get explanations, one way or another, non-compliance will grow. There will be increasing disrespect for the system and the people in it, and a growing feeling that they are not here to help. The tax inspectors and staff are adamant that they are here to help however, and that has always been my experience at that level—when we can get to speak to someone, they are helpful.

If something is not done and we treat people in this way, they will respond in a manner that I think is natural, which is to say, “Get on with it”—I almost said “Sod it”—and “I am not complying.”

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[Ian Swales]

I can express a personal opinion, which relates to what I was just saying: we should not judge efficiency savings at HMRC without reference to the tax that is collected. We cannot judge it simply according to headcount reductions and those sorts of changes.

[Mr Liddell-Grainger]

Is my hon. Friend aware that 194 million national insurance accounts are not rectifiable even though they are scanned twice a year? HMRC does not even know how much money is in those accounts. Does he think that that is equally a problem, in that the morale has gone because people do not understand what is going on within the system?

[Ian Swales]

Judging by the evidence that the PAC received, there seems to be a lack of control over the trail of cases. All the changes have resulted in less focus on individual companies and taxpayers. I certainly recognise that sort of story.

There should be a constant watch in HMRC on the business case for investment in it. I welcomed the announcement of £900 million in extra funds to address avoidance, but I remind the House that it is targeted at collecting £7 billion, although the tax gap is £42 billion even according to HMRC’s estimates. How have we arrived at the figure of £900 million, and how do we know it is the right amount? As a taxpayer, I would be happy to invest any extra money that could be proved to produce a positive return.

The department has recognised that it has lacked detailed information on the costs and returns of different types of enforcement activity. At present it does not know the costs of, or returns on, civil investigations, or the point at which further investment in a particular type of activity would produce diminishing returns. It is therefore very difficult for it to decide how best to deploy its resources. Its management and senior officials need to show strong leadership and pay close attention to the morale of staff if those problems are to be overcome. The headcount at HMRC should not be reduced further until efficient new systems and ways of working are properly established. The department urgently needs to manage its resources effectively to optimise the tax take. The current system is obviously not working effectively for people either inside or outside HMRC. At a time such as this, when everyone across the country is having to tighten their belt, it is unacceptable that HMRC is failing to collect such a large amount of money through inefficiency and mismanagement. I urge the department and the Government to put this right.

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[Gregg McClymont]

I thank my hon. Friend for that information. As a member of the Treasury Committee, he is well known for his interest and expertise in this area. What he said sounds not only plausible, but likely.

I am suggesting that short-term savings in HMRC could reduce the Government’s ability to maximise tax revenue in the long run. They reduce the likelihood that HMRC will be able to attract and retain the talent necessary to administer complex systems and crack down on fraud, and the hon. Member for Chichester and my hon. Friend the Member for Leeds East alluded to that aspect of the argument. It seems to me that there is a danger not only that revenue will be lost to the Government, as has been made clear in previous contributions, but that reducing services to the public means that the costs will be passed on to the public and to businesses, particularly small businesses. If HMRC is harder to contact or slower to rectify errors, costs for the public and business will increase. The hon. Member for Chichester eloquently set out the dangers for small businesses of this process of HMRC reform or cutbacks, or whatever we call it. It is clear to me that those costs will disproportionately harm those with the least resources.

[Mr Liddell-Grainger]

Is the hon. Gentleman aware that the Revenue has just been fined £1.6 million for sloppy data handling and processing? When people asked why that had been a problem, they were told that it was too expensive to find out what the problem was. The hon. Gentleman is right. Is the problem due to a lack of skills, a lack of training or a lack of people? It must be one of the three, or perhaps all three.

[Gregg McClymont]

The hon. Gentleman makes a good point. My suspicion is that it will be a combination of all three. I will come to the skilling aspect, which it seems to me is important alongside the issue of number. If the costs are passed on to taxpayers, I suggest that they will fall disproportionately on those with the least resources—small businesses and poorer taxpayers.

To allude to a point made by my hon. Friend the Member for Leeds East, pensioners and other vulnerable groups will have to pay to phone 0845 numbers and will struggle to get through. Beyond the financial cost, there is the psychological anxiety caused by respectable working men and women having to worry that the taxman feels that they are not following the law. The psychological burden on vulnerable groups is worth considering alongside the burdens on businesses and other organisations.

I will focus for a moment on small businesses, although I will not take long as the hon. Member for Chichester somewhat shot my fox on this point. It is clearly okay for the big boys in business and the big organisations that can afford the finest tax accountants money can buy, but for small businesses every minute spent on administration, doing a tax return or conversing with HMRC is a minute less spent running their businesses. Usually, small businesses have much less slack to operate with. As the saying goes, “Time is money”, and any shifting of the burden back on to the taxpayer is likely to be deleterious in the extreme to small businesses and vulnerable groups.

Several Members have referred to efficiency and effectiveness, and that brings me back to staff morale, because staff motivation is particularly important in such a profession—the efficient and effective collection of taxes on behalf of the taxpayer. Inevitably, many of the savings that the Government wish to make will be made through redundancies and restructuring, but the Government approach that package of restructuring and redundancies in the context of an HMRC where staff motivation and industrial relations are already fairly poor.

The figures from the capability review that the Cabinet Office published in 2009 have been quoted, and, as we know, HMRC was the subject of heavy criticism. The review found that only one quarter of HMRC staff, compared with 61% of senior civil servants, were proud to work for the department. Perhaps senior civil servants are not the best comparator for HMRC staff, but 25% satisfaction is not very impressive. The survey also found that only 11% of staff—the hon. Member for Chichester said 12%; I am prepared to meet him halfway and say 11.5%—and 17% of senior civil servants felt that change was well managed in HMRC.

I worry that the combination of low staff morale, which the Government inherited but are contributing to, and further funding cuts might be a perfect storm that leads to more problems at HMRC. After all, if we think about it for a moment, we find that enforcing the payment of tax is not necessarily an easy job. No one likes paying tax, and HMRC staff—disproportionately, I suspect—deal with people who are particularly unhappy about the tax return with which they have been presented.

Staff in my constituency would have been greatly reassured and better able to serve the public if HMRC and the Government had worked together sooner to develop an implementation plan for cost savings, so anything that could be done to reduce the anxiety that they have felt for a reasonably lengthy period would be very welcome. It would reduce the worrying gap between the announcement of cuts and people’s knowledge of where they will fall. Anxiety among staff—particularly given the job that they do—is bound to undermine their effectiveness in serving the taxpayer and the public more widely. Given the importance to our country of effective tax collection, I urge the Government to do everything they can to reduce that anxiety.

My final observation touches on several contributions to the debate. As I have suggested, tax collection is not always an easy or, at times, pleasant job. People do not generally like paying tax, and in a profession such as tax collection, esprit de corps—a sense of public service and duty—is especially important. Previous Governments were not blameless in this respect, but this Government must be careful that, in the quest for short-term savings, they do not further damage the thread of professionalism, duty and pride in the job, without which an efficient tax collection system is unlikely to be possible.