Orders of the Day — Commissioners for Revenue and Customs Bill

– in the House of Commons at 11:30 am on 8th December 2004.

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[Relevant document: The Ninth Report from the Treasury Committee, Session 2003–04, on The Merger of Customs and Excise and the Inland Revenue, HC 556.]

Order for Second Reading read.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 12:31 pm, 8th December 2004

I beg to move, That the Bill be now read a Second time.

The Bill implements the principal recommendations of the O'Donnell review of the revenue departments. It brings together the Inland Revenue and Customs and Excise to create a single new department called Her Majesty's Revenue and Customs. It also establishes a new, fully independent prosecutions office, the Revenue and Customs Prosecutions Office. This office will provide independent scrutiny of all Her Majesty's Revenue and Customs prosecution cases, and will conduct prosecutions where appropriate.

It is principally a machinery-of-Government Bill to implement sensible reforms to tax administration, and I was pleased to hear the shadow Chancellor support that when he said in the debate on the Loyal Address last week:

"The Treasury's Bill on the merger of the Inland Revenue and Customs and Excise carries our general support".—[Hansard, 1 December 2004; Vol. 428, c. 636.]

I therefore look forward to a constructive and useful debate on the detailed measures. Before I go on to discuss those, I should like to take a moment to thank members of the Treasury Committee for their excellent work, which culminated in the recently published ninth report, exploring the issues around the merger of Customs and the Inland Revenue.

Photo of Mr Teddy Taylor Mr Teddy Taylor Conservative, Rochford and Southend East

Will the Minister comment briefly on the employment implications of the proposals? Will they be substantial or limited? Can she give us any idea?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I shall address that in the course of my remarks. If the hon. Gentleman forgives me, however, I will continue to pay fulsome tribute to the Treasury Committee's report.

I welcome the Committee's endorsement of a pragmatic approach to legislating for the creation of the new department. I have carefully considered all the points contained in its thorough report and will respond to them. Although it is not a matter for the Bill, for completeness I shall quickly clear up one concern that the Committee raised about the clarity of ministerial accountability arrangements for the new department. David Varney, the prospective chairman of Her Majesty's Revenue and Customs, wrote to the Committee Deputy Chairman, who I am pleased to see is in his place, on 15 October to help with this matter. The position is clear. I shall be the departmental Minister for HMRC, and all Treasury Ministers have lead responsibility for specific matters. Such arrangements are normal in central Government departments. We regularly review such arrangements and, as suggested by the Treasury Select Committee, we shall review these arrangements as the merger progresses.

I shall return in more detail to the other points raised by the Committee in the course of my remarks and, no doubt, as we discuss the relevant clauses in more detail in Committee. As I have said, I am pleased that the shadow Chancellor and the Treasury Committee are not alone in their support for integration. Over the summer my officials have conducted a programme of consultation with representatives of the new Department's stakeholder groups to inform the development of the Bill. A summary of that consultation is reproduced as an annex to the regulatory impact assessment. I am pleased to say that support for integration was almost universal.

I shall explain what I mean by integration. I am talking about a major change in the way in which taxes and revenues are administered. This is not about shuffling a few Whitehall deckchairs, creating a new department and then assuming that the job is done. It is far more fundamental than that, as the Treasury Committee highlighted. I am talking about a process that goes beyond a simple merger of departments. It is a process of real integration, of bringing the two existing departments together and developing better new ways of working. It is about delivering truly joined-up services to taxpayers, and about creating an organisation that can meet taxpayers' needs because it can look across their affairs and tailor its services to their particular circumstances.

The question of meeting taxpayers' needs is a key one. That means that integration must mean different things in different parts of the business—another point touched on by the Treasury Select Committee—with parts of the business with very similar activities and remits merging in their entirety. For example, there are the corporate services; business areas with similar stakeholders or functions fully integrating their structures and activities—for example, the large business service—and other parts of the business that deal with a unique group of stakeholders not shared by other parts of HMRC connecting into the new Department structure. One example is some of the frontier protection work.

That sounds like a huge job and of course it is. Integration cannot be delivered overnight nor can it be delivered in this Bill alone. I shall give the House some idea of the scale of the task.

Photo of Andrew Turner Andrew Turner Vice-Chair, Conservative Party

Before the right hon. Lady moves on, I thank her for mentioning frontier protection work. The Bill proposes the saving of 16,000 posts by 2007–08. There is already considerable dissatisfaction with the extent to which our borders and ports are left open to smuggling. The Bill appears to be driven more by revenue than by the prevention of smuggling. Will the right hon. Lady assure me that our ports will be better protected as a result of the Bill and not less well protected?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

The hon. Gentleman confuses two subjects, one of which is not connected with the Bill. When he refers to reductions in staff across the Inland Revenue and Customs and Excise and to savings of 16,000 posts, he is referring to the Gershon efficiency savings, not the Bill. If the hon. Gentleman looks at the regulatory impact assessment, he will see that the proposals surrounding the merger are very different from those that he has suggested.

I hope to make it clear in the debate that the Bill takes every opportunity to protect the current functions of both departments. It involves a change in the machinery of government to allow the departments to start to come together and, over the period of integration, many issues will need to be addressed. However, I absolutely assure the hon. Gentleman that the figure of 16,000 that he quoted is not correct.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I will give way again, but if the hon. Gentleman looks at the regulatory impact assessment—I do not believe that he has it with him—he will see that figures are given for the expected savings across all the departments. They involve 100,000 staff and they will not have the impact that he fears.

Photo of Andrew Turner Andrew Turner Vice-Chair, Conservative Party

I am grateful to the right hon. Lady for giving way again. Among other things, the press notice issued by her Department on 23 November said:

"Through delivering a single Department, the Bill would . . . Enable the new department to meet its demanding Public Service Agreements and realise efficiency savings, with integration contributing 3,000 posts towards total savings of 16,000".

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Yes, but if the hon. Gentleman will allow me to make progress, I can specifically address that point. We are discussing the merger Bill today, not the efficiency savings that are in the agreements arising out of the Gershon review. My speech will touch specifically on the reductions in staff anticipated as a result of the departments being merged and duplication being removed. I will also touch on safeguards, efficiencies and the delivery of services. If the hon. Gentleman is a little patient, I will be happy to give way to him again if he feels that my remarks have not addressed the points that he has raised.

The Inland Revenue and Customs and Excise are among the oldest Government departments. The Inland Revenue can trace its history back more than 300 years—it is a rather junior partner in some senses—while a nationally organised customs system dates back to the 13th century.

The new department will have more than 30 million taxpayers and stakeholders, of which 4 million are businesses. HMRC will collect more than £400 billion a year in receipts and pay out over £25 billion in tax credits and child benefit. The costs of running HMRC will amount to some £4.8 billion a year, and the department will have nearly 100,000 staff; 20 per cent. of the civil service. It is a huge task and I very much understand the hon. Gentleman's point about the continuation of services through the period of change.

Given the huge task, it is not particularly surprising that the Treasury Committee has suggested that further primary legislation is required fully to implement integration. Of course, as we the start the process of integration, I cannot confirm what will be needed, but I can say that we will be doing further work with David Varney, the prospective chairman of the new department, to look at how it should manage its business. If legislative change is needed to support our conclusions, it will be brought forward in an appropriate form for consideration by the House.

Delivering real, meaningful integration is a process that should be measured in years, not weeks. That has been acknowledged by all those who have commented on the Bill. It must be an ongoing process of continual improvement; a process that identifies and responds to taxpayers' needs, involving proper consultation where appropriate to produce robust and effective new policies. It must develop and exploit new technologies and working methods to create the integrated, coherent and consistent approach that we all seek, and that taxpayers rightly expect.

The Bill is, and can only be, the first step in that process, but it is a vital step. It creates the organisational structures within which the process of integration can develop. Without the Bill, that process of improving the way in which we deliver services to taxpayers cannot even start in the systematic way that we all want.

I shall explain briefly why integration is so important. The O'Donnell review identified clear benefits from integration that will pay real dividends for people and businesses throughout the UK, and are vital to ensuring that this country remains a highly competitive place to do business. Foremost among those benefits are the improvements to taxpayer or customer focus that integration can deliver. The delivery of more joined-up services will result in a more consistent and coherent approach to taxpayers' affairs. Understanding taxpayers and taking a view across their affairs is essential to deliver a world-class service, built on support for taxpayers that is tailored to their needs.

We have already started identifying areas where this approach would be beneficial. The Chancellor's announcement at the pre-Budget report of a new small business unit at the heart of the new department is a key example. Improvements to the use of information within the new department should, as IT capability is developed, reduce the need for taxpayers to supply the same information several times over. The Chancellor's pre-Budget report announcement of work to develop ways of minimising the requirements on small businesses through, for example, a single tax return for all taxes and a reduction in the number of forms, is a key component of this agenda. Returning to the point made by Mr. Turner, that will bring efficiency savings for business and Government alike.

The same developments that will improve the taxpayer experience will also improve the effectiveness of revenue administration, helping to reduce the tax gap. Better use of information, built around an ability to look across a taxpayer's affairs, will allow for more effective targeting of resources to areas of risk. That will improve fairness, making it harder for those who seek to avoid their obligations to succeed, and reducing unnecessary interventions in the affairs of honest taxpayers. There will also be efficiency improvements. Through economies of scale and alignment of common areas of activity, integration will produce efficiency savings of 3,200 posts by 2007–08.

The Treasury Committee's report rightly suggested that a detailed analysis of the costs and benefits of integration would be helpful. The regulatory impact assessment published alongside the Bill sets out the costs and benefits of the legislation. Future substantive proposals for legislative reform will also be accompanied by regulatory impact assessments in the usual way, so that the costs and benefits of particular measures to effect integration can be considered. That further addresses the hon. Gentleman's point with regard to progress on integration over a period of time.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

The Paymaster General is right to say that the regulatory impact assessment contains some, but perhaps not all, of the costs relating to the merger. Will the merger result in a net cost saving over the period of the existing spending review? Will there be a total saving, taking into account all the cost savings and all the additional costs?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I shall make two points to the hon. Gentleman. First, the regulatory impact assessment includes an initial setting-up cost of £75 million for the department. If further costs are incurred, they will be identified in any subsequent regulatory impact assessment. Secondly, on savings, over the period to 2007–08, the reduction of 3,200 posts will produce a net saving in the region of £500 million—I will make sure that that figure is exactly right—by taking out duplication.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

Will the Paymaster General clarify whether the £500 million saving will come from the gross staff reduction, to which Mr. Turner referred, or from the 3,200 posts, because the saving sounds rather large for 3,200 posts?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

If I have not got the figure exactly right, I will make sure that it is corrected. The saving will result from the merger's taking out duplication in the departments as the services provided by the Bill are delivered more efficiently and effectively.

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General

Will the Minister clarify the time frame over which the £500 million will be garnered? When will we see the full benefits?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

The total annual efficiencies and the figure that I have quoted are by 2007–08; I thought that I made that clear in my initial comments. Savings across the department as it delivers both its public service agreement targets and integration will produce the required savings.

Turning to the content of the Bill, hon. Members undoubtedly will be pleased to hear that I do not propose to describe the detail of each and every clause today—that pleasure awaits us in Committee—but I want to take a moment to outline the key measures that the Bill introduces. I confirm that we will table a number of Government amendments later. That is unfortunately inevitable, because those technical amendments involve cross-referencing right across the tax system. However, with the exception of a measure, which is currently being finalised, to provide information gateways for the new prosecutions office, those amendments will be minor or technical drafting amendments; the Bill before hon. Members today is, in essence, complete.

The Bill establishes HMRC as a non-ministerial department, led by commissioners acting under the general directions of Treasury Ministers. That arm's-length relationship between Ministers and Revenue administration will maintain the existing convention that Ministers do not intervene in individual cases. The Bill transfers the statutory functions of the two existing departments to HMRC, and it provides for the manner in which the commissioners and their officers may exercise those functions. It also provides for the method of financing the costs of running HMRC, and creates a new framework for managing and accounting for the revenues, tax credits and other moneys that the department collects and pays out. That new framework includes measures to enhance parliamentary oversight of HMRC's finances; for example, it enhances existing arrangements for reporting daily revenue flows to the Comptroller and Auditor General.

The Bill introduces flexibility around the future functions of HMRC, putting it on a level footing with ministerial Departments to allow the transfer of functions into or out of HMRC by Order in Council.

Photo of David Heathcoat-Amory David Heathcoat-Amory Conservative, Wells

The Paymaster General has just said that important functions could be transferred out. Those important powers could include intelligence gathering, enforcement and criminal prosecutions, and the transfer would simply be agreed by statutory instrument, which, as she knows, are seldom debated and not amendable. Does she think it right that important powers on enforcement and criminal prosecutions should be transferred in that way? Surely the point of the Bill is carefully to circumscribe and limit powers, so that Parliament knows in advance and in primary legislation who will exercise those powers, which should not exercised by Ministers as provided for in this Bill.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

If what the right hon. Gentleman, who was a distinguished Treasury Minister, suggests were true, I would agree with him, but the Bill introduces flexibility without compromising either the integrity of the tax system or the principle that administration of revenues is held at arm's length from Ministers. The transfer from HMRC of taxes, duties, national insurance and tax credits work is not permitted under those arrangements, and the functions are the same as those of other departments. I assure the right hon. Gentleman that the Bill does not provide a gateway for transferring the responsibilities of the department without the proper scrutiny of the House.

Photo of David Heathcoat-Amory David Heathcoat-Amory Conservative, Wells

The Paymaster General has mentioned tax-gathering powers and tax credits, which will remain in the department, but I have mentioned other powers, such as intelligence gathering, prosecution and enforcement. She has not said whether there is a block on those powers being transferred. It would be different if those powers went from the new department, which will be headed by appointments by the Crown and therefore will be at one remove from Ministers, to Departments headed by individual Ministers. Will she give an assurance on those points?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I want to be as clear as possible in giving the right hon. Gentleman an assurance on that point. I want to make it clear that all the department's current functions associated with tax and tax credits cannot be transferred under the Bill. The department could collaborate with a devolved Administration or undertake particular work—for example, the collection of student loans—on behalf of another department, but that does not include the administration associated with any of its revenue collection or protection duties.

That leads me on to the department's powers. The Bill is, as I have mentioned, the first step in an incremental process of integration. It does not introduce substantive changes to the administration of regimes, and existing powers for enforcing regimes therefore will be transferred to the new department without any change to the way in which or purposes for which they may be used. The Bill achieves that by ring-fencing powers to prevent their inadvertent extension within HMRC.

Let me spell out what that means in practice. I think that Mr. Heathcoat-Amory will recognise this from the time when he was Economic Secretary. It means that a VAT inspector will retain all her current powers in HMRC, with no changes. Similarly, the powers of a corporation tax inspector in HMRC will remain as they currently are in the Inland Revenue. The Bill ensures that the VAT inspector's powers do not become available to the corporation tax inspector, and vice versa. That applies across all HMRC functions. Powers in the new department remain as they currently are in the separate organisations.

This is, of course, only a temporary position. As the Treasury Committee report acknowledged, delivery of integration in the longer term on the scale that I described is likely to require greater consistency of approach to enable effective working across different taxes and duties. To that end, I can announce today that the Government will issue a consultation document in January that will consider the suitability of the existing range of powers, including the requirement to provide information; interest and surcharge regimes for late payment; penalties for non-compliance and rights of appeal; and the modern regulations and practices that HMRC will need to be a high-performing 21st-century tax administration.

The Government intend that following that initial consultation and the completion of the Bill's passage, HMRC officials should enter into more detailed discussions with representative bodies. The consultation exercise does not aim to deliver reform in time for the creation of HMRC, but will be the beginning of a thorough review, with the aim of legislating where necessary in the 2006 Finance Bill.

In the meantime, to aid clarity on and public understanding of the powers available to HMRC for its different functions, an advice note on the powers available to officers of the new department will be published in time for the inception of HMRC. The Inland Revenue and Customs today placed a copy of the draft of that advice note on their internet site, seeking comments. It is also available in the Vote Office and the Library. The departments will also write to key representative customer and tax bodies to invite their comments.

This considered and incremental timetable for change has been welcomed by key representative taxpayer bodies, as well as by the Treasury Committee. I hope that the House, too, will endorse it.

The Bill confirms HMRC's authority to pool information internally so that information supplied for one of its functions can be used for any of its other functions. That authority is vital to deliver the joined-up services that the O'Donnell review envisaged and to capture the consequent benefits in service and effectiveness. Again, that has been recognised by key external commentators as a necessary prerequisite for the successful integration of services.

I stress that HMRC will of course take taxpayer confidentiality every bit as seriously as the predecessor departments; the importance of that was recognised by the Treasury Committee's report. There will be no let-up in HMRC's commitment to safeguarding taxpayer confidentiality.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

If the hon. Gentleman will allow me to finish the passage on confidentiality, I will give way to him then.

To that end, the Bill introduces a statutory duty for all officers to maintain the confidentiality of information that they acquire in the course of their duties. That replaces the Inland Revenue oath, and for the first time extends it across former Customs and Excise matters, giving statutory backing to existing duties of confidentiality under employment contracts, across a larger range of functions. To reinforce that duty, the Bill provides for a criminal offence of unlawful disclosure of confidential information about an identifiable person by an HMRC officer. That extends the existing provision for Inland Revenue and Customs staff to all functions of the new department. The Bill replaces the existing authority for commissioners in either department to authorise disclosure of information with a much tighter provision that restricts them to authorising disclosures in prescribed, limited circumstances where there is a public interest case for doing so, as defined in regulations. Those regulations will be available for Members to see before the commencement of the Bill's consideration in Committee.

The Treasury Committee identified the importance of maintaining taxpayer confidentiality where the Treasury and Ministers are concerned. The Government strongly agree with the Committee's view, and I can confirm that confidential information about identified taxpayers will continue to be kept in HMRC and will not be passed to the Treasury or to Ministers.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

May I take the Paymaster General back a paragraph or two to the streamlining of powers? Will she give the House the benefit of her initial views about how that will take place, particularly in relation to culture and tone, tax-gathering and co-operation, and policing-type functions?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

We need to consider whether powers are, for example, necessary, appropriate, proportionate, sanctioned by the correct level of authority, have a right of appeal against them, or are sufficient in a changing environment. The Bill and the consultation give us the opportunity comprehensively to consider those issues.

It will be vital for taxpayers—for all of us as taxpayers—to understand exactly what is expected of us and what the sanctions may be if we do not discharge those obligations properly. It is important, in a new department, to try to ensure continuity of powers. This is a huge task, hence the need to consult instead of putting everything in the Bill. Because many of the powers have developed over a long period to deal with specific circumstances, it is much more appropriate that we consider them in the round.

Photo of Michael Fallon Michael Fallon Chair, Treasury Sub-Committee

The Paymaster General spoke about confidentiality. Although I welcome the clause on that, confidentiality was a matter of concern to the Select Committee. The department's officers currently have to sign a statutory declaration on taking up employment, and I hope that she will reassure us that including the welcome provision in the Bill does not necessarily relieve officers from signing that individual statutory declaration.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I assure the hon. Gentleman that officers will be required to sign the declaration. When he reads the points that I made, he will remember that I spoke about the employment contract for the new department. We have improved all the protections that currently exist. If the new department can start at the beginning of the next financial year—parliamentary process permitting—the new confidentiality requirements that I have identified will operate. I cannot express too strongly the importance that I personally—and the hon. Gentleman, the Treasury Committee and, I believe, every hon. Member—place on a clear and unambiguous commitment to protect taxpayer confidentiality with the necessary functions. It is vital for continuing compliance rates that taxpayers provide information to the Revenue departments. The bedrock of that process is the knowledge that their confidentiality is protected. We should guard that at all costs, and I hope that the hon. Gentleman believes that the Bill provides for that.

The Bill also introduces new arrangements for ensuring the highest possible standards in HMRC in relation to criminal investigations. As my hon. Friend the Economic Secretary announced in September, the Bill extends the remit of Her Majesty's inspectorate of constabulary to provide for it to inspect HMRC's compliance with the requirements of the criminal justice system. It also extends the remit of the Independent Police Complaints Commission, giving it a key role in considering allegations of criminal or gross misconduct by HMRC officers. Those two proposals will implement the recommendation of the Butterfield review that Customs identify how additional external scrutiny can best be introduced into investigation work. Given that the departments are merging, I hope that hon. Members agree that it is right to take the opportunity to ensure that the new department is subject to the highest standards of scrutiny and accountability.

The Bill provides for obstruction, assault, or impersonation of HMRC officers to become a criminal offence, thereby consolidating existing provisions that relate to the Revenue and Customs. That ensures that officers can perform their functions within the protection of the law and protects the public from the unlikely event of unscrupulous people passing themselves off as officers.

The Bill aligns the penalties for those offences with their police equivalents, helping to deliver coherence and consistency throughout the criminal justice system. It also restricts the officers who could previously arrest for such Customs offences, so that only officers authorised by the commissioners to exercise the power of arrest for the offences can do that. That tightens arrest arrangements and will remove the power of arrest for the offences from several Customs and Excise officers who currently have it legally but do not need it in their current jobs and are therefore administratively barred from using it.

The Bill establishes a fully independent prosecutions office—the Revenue and Customs Prosecutions Office—to provide independent scrutiny of criminal cases investigated by HMRC. The creation of that office was a key recommendation of the Butterfield review. The director of the prosecutions office will be accountable to the Attorney-General, ensuring a clear separation of responsibilities from HMRC.

Photo of Mr Teddy Taylor Mr Teddy Taylor Conservative, Rochford and Southend East

The Paymaster General has spoken for 45 minutes and interested us with many of her comments. Will she refer to the Bill's employment implications at some stage?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I referred to the employment implications when I identified staff savings of 3,200 by 2007–08. There was an exchange between several hon. Members and me about that. I went on to demonstrate how that would be achieved in some cases by removing duplication and moving forward on several reforms. I gave the example of the pre-Budget report announcements on the Small Business Service and allowing one tax return for all taxes.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

I am grateful to the Paymaster General for giving way again so graciously. She is obviously learning from the Chancellor. Will she confirm that the figure of 3,200 is a working assumption, been taken from the example of other mergers, or does it follow detailed work examining specific aspects and estimated savings that might be made?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Of necessity, it is a working assumption at this stage. The merger, the preparation for it and the commitment to spend public money to begin the process cannot start—the two departments do not have the authority to undertake that work—until the completion of Second Reading. I have therefore been advised of the figure by the prospective chairman and management of the new department. I know that hon. Members will keenly follow the implications. However, hon. Members have also pressed me on many occasions over the years to remove duplication, simplify the system and allow one contact point whenever possible for information for a taxpayer—I gave the example of a taxpayer's having to give the same information to several different components of the existing department. When we achieve that, we will be more effective, but it is inevitable that fewer staff will be required.

Let me revert to the fully independent prosecutions office. As I said, the director will be accountable to the Attorney-General, thus ensuring a clear separation of responsibilities. The creation of such an office is an important contribution towards maintaining public confidence in the criminal justice system, because it ensures the independence of the prosecutor from the investigator in cases that require criminal proceedings.

That independence matters because it ensures that the prosecutor can conduct a fully impartial assessment of the merits of a case before it reaches the courts. Independence does not, of course, mean distance. HMRC and the new office will work closely together to ensure that the prosecutor's expert and independent advice can be called on to provide guidance on the requirements of the criminal justice system at all times.

This constructive approach to prosecutions, with clearly defined and distinct roles for the investigator and prosecutor, will ensure that the quality of criminal justice work undertaken in HMRC and by the new office is of the highest possible standard.

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

Will the new arrangements make it easier or more difficult to sustain convictions? While billions of pounds are being evaded or avoided each year, it is important to ensure that the system is able to sustain convictions and that the Exchequer receives the maximum possible benefit from them.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

My hon. Friend is absolutely correct. It is vital to ensure that a case has all the information and evidence required to secure a prosecution. These recommendations arose from the Butterfield report, which was commissioned by my hon. Friend the Economic Secretary, and will ensure that investigations will be able to benefit from the expert advice of the prosecution service, which will then take a decision on whether the evidence supplied by the department would secure a prosecution. It is also important that we set a high standard for operations in this area, in order to maintain confidence and to ensure that the tax system works as it should.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I have given away many times, but I shall give way once more. I realise, however, that I must be testing the House's patience by speaking for so long.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

I do not think so: many of us are extremely interested in what the Paymaster General has to say. I have been bellyaching for years about taking the Inland Revenue prosecution service and the Customs prosecution service and putting them under the aegis of the Attorney-General, and I very much welcome this provision. As she knows, the Butterfield report related to a Customs case, and things have not been too happy in that prosecution service for some time. I should like to know the answer to one or two questions that might superficially sound mundane but are not. Will staff regularly transfer from the Inland Revenue to the prosecution service; and will the prosecution service be housed away from the Inland Revenue premises?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

With regard to the staff, the necessary expertise currently in the two departments will transfer to the prosecution service. As the Bill states, the appointment of staff will be a matter for the director. I do not know exactly which office block the service will eventually be housed in, although I am sure that we can find out before we reach the winding-up speeches. From memory, I think that it will be in separate accommodation, but I do not want to mislead the House on that. I honestly cannot remember, but I will ensure that the hon. Gentleman has a reply to that question before we conclude our debate today.

The Bill establishes the office under a director, who will carry out his functions under the superintendence of the Attorney-General. I think that that will be widely welcomed. The director may designate appropriate members of his staff as prosecutors, who will enjoy the rights and responsibilities necessary to enable them to conduct prosecutions on his behalf. All staff of the office, including prosecutors, will be subject to the director's instructions.

Confidentiality remains as important an issue in the prosecutions office as it is in HMRC. The Bill therefore places a duty of confidentiality on RCPO staff, and backs this up with a criminal sanction for unlawful disclosure of information. The prosecutions office will operate to the highest possible professional standards. In order to provide independent assurance of those standards, the Bill provides for the office to be inspected by the Crown Prosecution Service inspectorate, and in a reflection of this focus on standards, the Bill sets out clear minimum requirements for qualifications, which all RCPO prosecutors must satisfy in order to be appointed to the role.

The Bill is modest, although the task that it sets in train is not, as it will involve a very substantial programme of reform and change, which will deliver incremental improvements to services over the coming years. A key challenge for HMRC management throughout the integration process will be to ensure ongoing, consistently high standards of service to taxpayers, and to ensure that the delivery of business as usual is not compromised. Indeed, this very point was identified as a risk in the Treasury Committee's report, and we are very alive to it. The House and the Treasury Committee will be pleased to hear that it is a challenge that HMRC management are absolutely committed to meeting, as am I.

The O'Donnell review acknowledged the importance of strong leadership in managing the transition process, and I am confident that the management team led by David Varney will maintain an absolute focus on business results alongside the delivery of the new departmental structures and processes. I have equal confidence in Inland Revenue and Customs staff, who have delivered, and continue to deliver, high standards of professional service in their respective departments.

We can trace a nationally organised customs service back over 800 years, to the time of King John. In 1671, King Charles II put the service into the hands of commissioners. In fact, anyone who visits Customs headquarters can see the swords that have been blunted, once used—I do not know what for—as a testament to the long history of the department. Direct taxes, in the sense of a contribution from the local community to royal expenses, are also ancient, but the modern national administration is much the younger of the two departments, dating from the introduction of income tax in 1842 and the creation of the Board of Inland Revenue in 1849. In all that time, the staff in both departments have served the House and the taxpayers of the United Kingdom to their greatest ability, and their professionalism is beyond question.

The formation of HMRC will build on the proven track records of people across Customs and the Inland Revenue, to deliver a world-class organisation that is truly fit for the 21st century. The challenge is significant, but so too is the potential for delivering real improvements in the way in which the new department does business. The Bill is a crucial first step towards delivering those improvements, and I commend it to the House.

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General 1:28 pm, 8th December 2004

I shall carry on more or less from where the Paymaster General left off, although I shall not try to match her symphony of heavenly length. That was partly because she gave way so generously that she had to make such a long speech, but I shall try to make mine in about half that time. I should like to thank her for inviting me, my hon. Friend Mr. Francois and the Liberal spokesman, Mr. Laws, to the Treasury to discuss the Bill. We found that briefing very helpful.

I really will carry on from where the right hon. Lady left off in one particular regard. She talked about the culture of the departments. The Revenue departments come in for a lot of criticism, both from individuals and businesses—and sometimes from me—particularly when they fail to use common sense and end up making my constituents' lives a misery. Customs, in particular, has come in for a rough ride in recent years.

At the outset, however, I want to say that we are lucky in this country with our Revenue departments. In many ways, they are the salt of the earth. They probably provide the least corrupt revenue service of any major country in the world, and are assiduous in protecting the Revenue. Above all, they have a sense of collective loyalty and duty that only the best organisations can hope to nurture.

Some might think that I say all that because I might be sitting on the other side of the House shortly, so it would be handy for the early part of my tenure to have said it. As it happens, I say it because I believe it, having worked closely with both departments in the 1980s. I would like any criticisms and reservations that I and my party might express about the departments in the weeks ahead, as we consider the Bill, to be put in the context of those remarks.

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

I agree strongly with the hon. Gentleman's remarks, but does he agree that sometimes when the Revenue and Customs and Excise come in for flak, it is because of the bad legislation that they have to implement, or the absence of clear rules, particularly on the importing of alcohol and tobacco from the continent of Europe, on which we never quite know where we stand?

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General

I shall not get drawn on the alcohol and tobacco point, but I agree with the hon. Gentleman's comment that a high proportion of the problems of Government departments are caused by politicians getting in the way and trying to run things, rather than getting out of the way and reducing the size of departments to enable the rest of the country to get on with their jobs.

The Opposition will not force a Division on this issue tonight. Our primary concern is not that, in principle, there are no benefits to be had from merger, but that in practice, we are not yet convinced that the Government have thought through fully how to capture the benefits of merger, or even tried to measure them much.

Although we have had the O'Donnell report, a regulatory impact assessment, a Bill and its explanatory notes, rafts of evidence to the Treasury Committee and much else, we have not yet obtained clear thinking from the Government on why we are merging these departments. The nearest that I have found to a clear summary for the reasons for merger is in Gus O'Donnell's March report—a very long report, which I have here—particularly in paragraphs 1.18 and 3.41. It would be far too tedious to read it all out, but I shall try to provide a summary, which I think the Paymaster-General will agree is connected to what she said earlier.

Mr. O'Donnell says that there are four benefits of a merger: first,

"more complete information and analysis to improve risk management across the tax system"; secondly,

"better and more flexible use of resources"; thirdly,

"a more focused approach to compliance across the tax system"; and fourthly, "better deterrence" through increased

"compliance allowing greater targeting of the non-compliant."

I was not much the wiser having read that.

In a speech only a few weeks ago, Gus O'Donnell had a go at his predecessor, Lord Bridges: he read out a passage of Lord Bridges's prose, which he described as something of which Sir Humphrey Appleby would be proud. I think that I have worked out what Gus O'Donnell meant in his passage. Great man though he is, he seems to have fallen into a similar mandarin trap.

Much more worrying, however, is the lack of clarity in some of these documents about why the departments are being merged, which may conceal a lack of a sense of purpose in doing it. My concern is not just that it is not explained, but that those who are doing it may not be clear in their minds about why they are doing it.

I sat down and tried to work out what tests we should use to measure whether a merger would be a success. Those can be much more simply stated than anything that I have seen in these documents. If the Paymaster General disagrees with what I say, I shall give way to her, and if I miss out a major item I am sure that she will be able to leap in.

The primary task of a revenue department is to get the money in. Therefore, task No. 1 is to protect the yield. Will this merger get more money in with fewer mistakes? If so, how much? That is the first issue that needs to be measured.

The second objective must be to reduce the hassle for millions of individuals, and hundreds and thousands of businesses throughout the country—the so-called compliance burden. Will that go up or down with this merger? The Paymaster General implied that it would go down. If so, by how much? What is her estimate?

Two consequential questions flow from those two simple ones, and they also need answering. Are we confident enough about the possible gains in extra yield and better compliance to be able to justify what everybody agrees would be transitional costs? I refer not only to the £75 million in the explanatory notes but to the enormous disruption that will take place—the Paymaster General implied at the end of her remarks that the merger was a Herculean task, with which I agree, and that will also impose a substantial transitional cost. Are we confident that the extra gains in yield and compliance are greater than those transitional costs?

Finally—this relates to a point that I made at the beginning—we need to have in mind a long-run strategic objective. Even if the benefits outweigh the costs, are we confident that we can achieve that without a decline in the high standards that Revenue departments have set themselves, including their duty of confidentiality? Will the morale of the departments suffer in the long run? In particular, we must bear in mind that both departments, particularly Customs, face major criminal efforts at evasion.

I have set out my four tests for attempting to measure the success of a merger. I agree that other considerations may be relevant, but the Paymaster General has not leapt to her feet to suggest that anything that I have said is mistaken or that I have missed out something substantial.

Let us try to move forward. As we now have some intelligible yardsticks, how does the merger measure up to them? The first port of call should be the regulatory impact assessment, a relatively thin document for such an important issue. I can find in it no overall estimate of the effects on the yield. Virtually the whole of the economic costs and benefits are dealt with in five very short paragraphs. On efficiency savings, we are told that there will be 13,000 staff savings, but when we consider that carefully, and as the Paymaster General clarified earlier, more than 9,000 of those will come anyway under the Gershon review, even without the merger, and only 3,000—3,200 now, I think—as a result of integration. Incidentally, those figures have moved around a bit as they have been examined.

The Treasury Committee did a very good job generally on this subject. It is sensible, particularly with regard to subjects that are not absolutely urgent and immediate, that debate should take place on the basis of thorough scrutiny by Select Committees. The Treasury Committee also did a good job on this specific point, and I commend Mr. Plaskitt, who is in his place, and John Mann, who showed in questions in Committee just how much the numbers on potential savings had moved around.

We have arrived at the point of agreement that the Government are saying that staff savings directly from the merger will be about 3,200—just over 3 per cent. of the total work force. That is scarcely the sort of number that could justify what amounts to one of the biggest mergers in Whitehall, or indeed between any two organisations. No private sector institutions would go through all the administrative hell and business risk of a merger to secure 3 per cent. staff savings, but if we take the regulatory impact assessment at face value, that is what the Government appear to be saying as to why we should support the Bill.

At least, that was the position in all the documentation until today. Today, the Paymaster General came up with a variation: she told us that the total merger savings amount to £500 million. I should be grateful if she could tell us whether that £500 million is directly connected to the 3,000 staff saving, or whether it is also connected to the further savings that will result from the Gershon review.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I do not want to try the patience of the House. I was clear about the Department's efficiency savings, and my hon. Friend the Economic Secretary will deal with the hon. Gentleman's points in his winding-up speech.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

Is the hon. Gentleman concerned about the lack of clarity on a point as important as whether the savings relate to the total Gershon staff savings or the merger? In his answer to the Chairman of the Treasury Sub-Committee, David Varney said:

"We have a series of targets over the 2004 settlement, where we have got to produce efficiencies of 507 million cumulatively and save 12,500 jobs net".

Does that not suggest that the figures cited by the Paymaster General relate to the total staff savings, not the merger?

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General

That is a good point. I think that that is what we shall find, but we shall have to wait until the winding-up speech for clarification.

If the savings are based on the combined value of the 3,000 from the merger directly and the 9,000-odd from the Gershon review, we are talking about confusion between two quite different things. The merger is not necessary for the Gershon savings, so the £500 million does not represent savings from the merger. Only a small fraction of that amount should be attributed to it. I hope that issue will be clarified later, but it illustrates a point that I was trying to make at the beginning. The true costs and benefits, and why we are going about the merger now, are not clear in the documentation before us.

The most important single question in the case of any Revenue department is "What will happen to the yield?" I can find no answer to that anywhere, but my best guess is "Not very much". That is why, although paragraph 3.43 of the O'Donnell report refers to the tax gap—which is another way of talking about the same thing: the difference between the amount that should be collected and the amount that is collected—there is no estimate of what will happen to it as a result of the merger. I think that that should have been addressed in some of the documentation.

While we are on the subject of staff, I want to refer to the slightly broader issue of relocation. I should be interested to know how many staff will be relocated out of London as a consequence of the Gershon review. I note that the Lyons review proposed the relocation of 500 from Customs and Excise and 1,450 from the Revenue—about 2,000 in all. How many extra jobs, if any, will be relocated as a specific consequence of the merger?

I hope that the Paymaster General and the Economic Secretary will forgive a hint of scepticism from the Conservatives about the relocation issue. After all, is it not the case that far the biggest relocation so far is that of 1,575 staff who have moved from the Inland Revenue office of Somerset house in the Strand to the Treasury building in Whitehall? I do not think that that is the kind of relocation initiative that the Chancellor wanted us to have in mind when he announced—I will not try to reproduce his blathering rant—

"I am publishing department by department plans to relocate civil service jobs out of the south east".

A move from the Strand to Whitehall does not quite match that.

Photo of Michael Fallon Michael Fallon Chair, Treasury Sub-Committee

I hope my hon. Friend has observed from the Treasury's own efficiency technical note that the Chancellor proposes to relocate only 11.5 of the 1,000 people he employs in his own Department to Norwich.

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General

I was not aware of the 11.5 full-time equivalent jobs going to Norwich, but that makes my point.

Let me return to the broader theme. The first of the two tests that I mentioned at the beginning was that of "getting the money in". We have virtually nothing from the Government to help us to assess the merger. What about the compliance-burden test? That is covered at length in the O'Donnell report, which points out that companies may obtain benefits from being able to engage with only one Department to fulfil their requirements for all their taxes. Here again, however, I have not been able to spot any figures, I suspect because most of the gains—although possibly there in the long run—are extremely difficult to capture. That is because the Inland Revenue and Customs have fundamentally different sets of skills as organisations, and are trying to collect two completely different types of tax—which is why the merger did not take place decades ago.

The Inland Revenue deals with organisations retrospectively. It is trying to capture income flows on which there is usually a great deal of ready documentation. Its approach is analytical. Customs, on the other hand, is dealing with transaction taxes. Its role is, of necessity, partly forensic—quasi-legal. It needs to capture the transaction as it happens. That is why it may not be easy for the new department to deliver the compliance gains that we should like for its customers. There is also a real danger that each organisation might find its skill sets diluted, to the benefit of neither. Of course there is the opportunity to get the best out of both skill sets, but that is easier said than done. It is a big undertaking. I think it will be particularly difficult to achieve in the next year or two, because both departments already have their hands full.

The Inland Revenue is grappling with the task of transforming itself from a revenue collection service into a very different institution: a tax and benefits agency. As we know, it has already been a bumpy ride. Customs has its own problems. It is about to install a massive information technology system, and we know the Government's history on those. I shall return to that subject later.

Explanation and justification of both those crucial issues—the effect on the yield and compliance—is pretty thin. To its great credit, the Treasury Select Committee has tried to elicit some by asking questions about long-term savings, but that has not helped us to obtain a better regulatory impact assessment. When David Varney was questioned by the Treasury Committee on the gains of merger, he said that it was impossible to answer without knowing the details of the sequencing—the timetable. The Government must have done the work required to establish that by now. Will the Paymaster General give us a quantitative analysis of the costs and benefits?

I have tried to describe how to assess whether the merger is really worth it by providing some basic yardsticks. We will of course have a couple of days in which to examine the Bill in detail in Committee, but a number of points should at least be alluded to now.

First and most important, the Minister has been at pains to stress—it is stressed in the documents—that this is a minimalist Bill. The Paymaster General has told us that, and the regulatory impact assessment assures us of it. The regulatory impact assessment tells us of two other possibilities that the Government rejected: a more comprehensive early Bill that would make substantive changes in relation to powers, and a fully comprehensive Bill in a later legislative Session. However, I am a little worried—we will explore this issue in Committee—that the Bill might have included provisions that fall into the category of a comprehensive Bill. I noted carefully that the Paymaster General sought to provide reassurance about powers of arrest, but an initial reading of clause 29 does not give me that reassurance. It appears to extend the power of arrest to new HMRC officers.

I was very grateful to the Paymaster General for making it clear that she will publish proposals on the powers in January; we will of course develop the proposals when we are in government. It is important that this issue—the one to which many pressure groups will pay the most assiduous attention—be given a full airing, and I am pleased that there will be a consultative document as early as January. The advice note on powers has only just been published, so I was unable to read it before today's debate, but I shall read it carefully as soon as I can.

Another significant issue, which the Paymaster General hardly touched on, is policy formulation. My best guess is that the lion's share of the 1,500 people who are moving from the Strand all the way to the Treasury will be doing policy work. In justifying the new policy arrangements, Mr. O'Donnell has sought to distinguish between strategic policy and policy maintenance. I have thought quite a bit about this distinction. Is it really helpful? Perhaps it is in theory, but I am not sure that it will be in practice. The current arrangements work reasonably well. I could not help feeling that the ghost of Sir Humphrey—or perhaps I should say Lord Bridges—was lurking in Mr. O'Donnell's lengthy description of the distinction between strategic policy and policy maintenance.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

Does the hon. Gentleman believe that we have good reason to be confident about the origination of tax policy in the Treasury in recent years? Can he cite any evidence to suggest that it has been doing a good job in developing tax policy in that time by, for example, simplifying the tax system?

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General

As I have said, it is the politicians, not the officials, who should be blamed. Tax policy can be dramatically improved and the tax system dramatically reformed if politicians have the will to do so. The system has become far more complicated and it has set the economy back some way in the medium and long term. Eventually, it will have a corrosive and sclerotic influence on the economy's performance. I do not want to blame Treasury officials; rather, I put the blame fairly and squarely at Ministers' door. In many cases, these often distributional reforms have been pushed through with the best of intentions, but in the long run they are likely to have the opposite effect to the intended one. If one presses the right buttons in respect of the officials, one gets the right results. I am sure that the new arrangements can be made to work—a way will be found to make them work—but I am simply trying to point out that I am not absolutely sure that this apparently major reshuffle will make much difference to the overall quality of policy work.

There are a few more issues that I want to touch on, and which we shall discuss in more detail in Committee. The first is information sharing and confidentiality, to which the Paymaster General referred. Clause 16 and schedule 2 enable the use of information acquired by the Revenue and Customs in connection with a function for any other function. Before integration, information could be passed between the Revenue and Customs only through statutory gateways. As I understand it, the Bill will enable the new department to pool all its information, irrespective of the purpose for which it was originally obtained. That issue could also be of concern, and we need to examine it carefully in Committee.

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

If this provision makes it easier to collect the revenue that the country so clearly needs, is it not a good thing?

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General

The hon. Gentleman is right: that is why the gateways were created in the first place. The question is, are we confident that relaxing them is either necessary or desirable? As I said at the outset, if it can be shown that relaxing the gateways could increase yield, such a provision might be worth considering carefully, but it must be balanced against the consequential risk to confidentiality.

It is vital that nothing in the Bill threatens taxpayer confidentiality. If people do not have confidence in the Revenue department, they will not share information and the tax yield will suffer. According to clause 19, information can be disclosed "in the public interest", but the explanatory notes provide little clarification. I should be grateful for an explanation of the meaning behind this apparent widening of the disclosure provisions.

On reading the O'Donnell review, I was also somewhat apprehensive at discovering that the new Bill provides

"an opportunity to consider gateways with other departments, such as DWP."

I should be grateful if the Paymaster General would tell us to what extent the opening of gateways to other Departments has been considered and what decision has been arrived at.

I am surprised and disappointed by the Government's decision to abolish the oath that officers are expected to take and to read out in front of a witness—it is properly known as the statutory declaration—thereby impressing on them their duty of confidentiality. The Law Society told the Treasury Committee that there would be advantages in restating the Inland Revenue oath in legislation, so that it is made clear that officials keep taxpayers' information confidential. I agree, and I am really perplexed by the Government's decision to abolish it. It is used in courts for witnesses, and we swear the Oath of Allegiance before we can take our seats in the House. The oath has previously been the subject of much controversy, but many hon. Members feel that it should be used even for witnesses who appear before Select Committees, particularly during major investigations; in other words, they feel that the use of the oath should be extended. Keeping the oath of confidentiality would certainly do no harm, and might even do some good. I find it difficult to justify its removal.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

I thought that the Paymaster General said earlier that the oath would appear in contracts of employment.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

Does the hon. Gentleman think that sufficient, in addition to the Bill's provisions on confidentiality?

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General

I shall listen very carefully to what the Government have to say on this issue, but I am inclined to say no, I do not think it sufficient. I want to stay on the road that we are currently on, which is keeping the oath. In fact, we should extend the Revenue oath to all members of the new department. However, let us discuss this issue in Committee.

Let me say a brief work on IT systems. Although not the most crucial questions, two important ones are: to what extent can these systems be merged, bearing in mind the different needs of the two departments; and what savings are to be made from such a merger? As David Varney said in giving evidence to the Select Committee, the new department will have 250 major IT systems and 3,000 staff working them. It will

"put out 170 million forms a year and run 100,000 desktop computers."

I was not at all surprised to see that, in its report, the National Audit Office told Customs that contingency plans were needed to deal with the O'Donnell review. Are the Government prepared to put into the public domain the necessary information to reassure us that contingency planning has indeed been conducted? Do the Government have a contingency plan for weaknesses in IT that they could publish, and can we please have it before we consider the Bill in Committee? I hope that the Government do not think that I am wasting officials' time by asking Whitehall to produce a document or amend an existing document before January.

IT systems are never easy, but the truth is that the Government's record on them does not inspire confidence. My hon. Friend Mr. Francois will discuss it in greater detail later, but let me give a few brief examples. The Child Support Agency's computer system, which cost nearly £500 million, recently failed and staff at the Department for Work and Pensions were unable recently to process new benefits and pension claims for several days because the system went down. The computer systems of the Passport Service, the Criminal Records Bureau and National Air Traffic Services have also had problems. And so we go on.

Photo of Mr Ivan Henderson Mr Ivan Henderson Labour, Harwich

We inherited those problems.

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General

Actually, what the hon. Gentleman says from a sedentary position is not true. I checked every one of those before I mentioned them and they have all been substantially altered or completely renewed under the present Government.

I would like to say a few words about the law enforcement provisions. I support in principle the creation of a new prosecuting authority, but we need to look carefully at the detail in Committee. That new authority is, in its way, the single most important direct, clear and visible change made as a consequence of the merger. Outsiders will see it and it is extremely important that we get it right. Rather than go into detail now—I notice that I have been going on for more than half an hour—let us leave that for examination in Committee.

I want to make a general point before concluding. Many business people say that when they deal with the Inland Revenue at its best, they are having a conversation with someone who is thinking carefully about the needs of the business as well as a narrow calculation of the yield. Both parties know that accounting practice can vary and that recourse to the law will probably not help very much. The idea that they should always pay exactly the correct amount of tax in any one year needs to be taken in the light of the fact that accounting practices vary and companies' decisions can alter liability in any particular year. The Revenue knows that most companies do not want to break the law and do not want to find themselves on the wrong side of the Revenue, so a modus vivendi delivers the yield.

We should compare that with Customs. As the Paymaster General said, anyone who walks into its headquarters—I have not done so for a few years, but my opportunity will come shortly—is confronted with a wall laden with cutlasses. That shows that its history and approach are closer to that of a police force than a revenue service. The Revenue has had many decades of dealing with reluctant but honest men and women. Customs has had rather more experience of chasing dishonest men and women. It is still chasing smugglers and other highly organised criminals who seek to evade the excise. I spoke earlier about the blending of cultures and it is crucial that we pick up the best of each. In many ways, that means the Revenue showing Customs what can be achieved on the basis of its culture, whereby dealing with basically honest but often busy business men brings about more co-operation and yields more tax.

This has been a long speech—probably longer than I thought it would take to deliver, but still a good deal shorter than that of the Paymaster General.

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General

I agree. I am sure that the right hon. Lady is pleased that I also gave way a good few times.

The merger of the two Departments was first described by a royal commission in 1887 as an "old question", and a Select Committee had looked into the matter 15 years before that. Gladstone was first against it and then, as with so many issues—home rule, the great Reform Act, extension of the franchise—eventually in favour of it. It took him about 20 years to change his mind about the merger of the Departments, but this Government have stood on their heads in a mere four years.

The Government's response to the Select Committee's first report on the matter in 2000 said that they believed that the synergies

"can be achieved without the risks, upfront and opportunity costs and structural upheaval which merger would inevitably entail . . . Thus, while the Government accepts that merger might bring some of the benefits outlined by the Committee, it believes that they can be achieved without the disbenefits of merger through a dynamic and focused programme of closer working."

That is official jargon for saying that it is not worth the candle. Four years later, we are told that it is worth the candle. Why the volte-face? I hope that it is because the Government have done a good deal of backroom work, which they have not yet published, and that they will shortly show us that the real benefits of the Bill relate to protection of the yield and reduced compliance. I hope that they will be able to add some numbers and some substance to their claims and be able to quantify the so-called synergies in order to produce a sensible estimate of the full benefits of the merger.

I hope so, but I fear not. I fear that the Government have not been feeding on the pure milk of administrative common sense, but have taken a dose of raw politics. They have sharply increased the size of the civil service. In the Revenue departments alone, the number of civil servants has increased by more than a third in seven years, from 73,000 to almost 100,000. The public—the Labour party's focus groups will have told them this—made it clear that they did not believe that they were getting value for money, and they were probably right. So the Chancellor had his Gershon review, and subsequently put the whole recruitment drive for the civil service sharply into reverse. But he could hardly go around telling other Departments to put their recruitment into reverse without having a look at his own. I believe that that matter explains, at least partly, the timing of the Bill.

There may be some benefits from the merger, but they are not necessarily great. The two Departments have developed different styles and different cultures for very good reasons. As a result, capturing the benefits will take a long time and will not be easy. There are attendant costs and risks. Conservative Members will not oppose the Bill, but we would like to see much more evidence that the Government have carefully thought through what they are trying to achieve with the Bill and what their ultimate objectives are. We would also like to see more evidence that the Government know how to accomplish them, but we have not heard much evidence today.

Photo of Mr Nigel Beard Mr Nigel Beard Labour, Bexleyheath and Crayford 2:08 pm, 8th December 2004

The merger of Customs and Excise with the Inland Revenue was proposed by the previous Treasury Committee and has been welcomed by the current one. On the face of it, as Mr. Tyrie touched on, it is a peculiar coupling. Customs and Excise has an image of speed boats and James Bond activity in remote inlets of the coast, whereas the Inland Revenue has the Bob Cratchit quill-pen image of someone at home in a dusty office with ledgers. That is not how it seems to many business people, who deal with one set of people to pay VAT and another set to pay company and income tax.

Bringing those two cultures together with compatible IT systems will ostensibly lead to savings, as already mentioned, but realising the potential benefits that are pointed out in the O'Donnell report needs managing—indeed, a degree of management that has not always been apparent in the past. That said, we must not lose sight of the wood for the trees. The dominant and primary objective of this merger is not cost saving in organisation: the overriding aim must be to reduce the gap between the potential revenue to the Government from tax and what is realised. That tax gap is too large.

The touchstone of success of this merger is not some recondite measure of administrative efficiency—it is the reduction, virtually to elimination if possible, of tax evasion. The amount of tax currently not paid by those who should pay VAT or company tax or income tax would make a significant contribution to the national accounts. At the same time, we must foresee and minimize the impact of new tax policy on the competitiveness of businesses.

In that context, I welcome the proposal for retaining an ability to assess the business impact of tax proposals within the new organisation, while at the same time strengthening the Treasury's ability to assess the overall effect of tax policy. If there are to be adverse effects of new taxes, at least we should expect that they were known about and weighed against the benefits of the tax. Normally, we should expect that adverse effects are anticipated, and eliminated as much as possible.

Above all, we must avoid the costs that honest organisations face in complying with tax law. I know very well that the CBI goes on and on, boringly, on the subject, as though all tax were an unnecessary imposition, and Digby certainly does moan an awful lot—but he is not always wrong.

There is no real reason why the basis for calculating income tax, for example, should be slightly different from the basis for calculating national insurance contributions and so involve a different set of calculations. More generally, the accounting needed for tax purposes could be brought nearer to the principles involved in normal company accounts. I hope that the new tax policy unit will home in on such issues.

A great gain for many businesses will be that they will have to deal with one inspector only for VAT, company tax and income tax. However, the primary measure of success of this reform will be the reduction of tax evasion, and the record is not good in either detection or prosecution.

The case of the London bonded warehouse was a scandal that could be presented theatrically as a farce. Duty-free spirits were donated to the back doors of public houses throughout south-east England on a grand scale. They left the bonded warehouse heading for the continent, and so no duty was paid on them. However, they had a regular habit of turning round at the sight of the channel and returning to London. Once that was spotted, an exercise was established for acquiring the evidence needed for prosecution. The Exchequer lost the unbelievable sum of £670 million just in the process of gathering the evidence.

Then there was the case of Regina v. Doran, a large-scale drug dealer. He was caught redhanded in possession of a huge haul of class A drugs. Someone had to try really hard to allow him to avoid due punishment, but the case failed because of a legal mix-up in mounting the prosecution. After those two cases, the Roques report looked into the management and administration of Customs and Excise, and the Butterfield report analysed whether Customs and Excise should have its powers to mount independent prosecutions taken away.

The Treasury Sub-Committee was assured that the findings of those two inquiries had now been acted upon. That is no doubt true, but I should like an assurance from the new chairman, Mr. Varney, that he is personally satisfied that these events could not be repeated in the new organisation. The Sub-Committee was not reassured when the previous Customs and Excise chairman was asked for an assurance that staff vetting procedures were such that no one with a criminal record could be employed in Customs and Excise. The answer was no, he could not give us that assurance.

Likewise, action against cigarette smuggling is not reassuring. A few years ago, no duty was paid on one in four cigarettes sold in Britain. That 25 per cent. has been brought down to 18 per cent. but many cigarettes are still being smuggled, at a cost to the Exchequer of around £2.5 billion per annum.

The cigarettes in question were not made of mud and brick dust in a shanty town. They were made by three major UK companies—British American Tobacco, Gallahers and Imperial Tobacco Ltd, with the Government health warning printed on the side of packets. The total estimate of smuggled cigarettes in 2002–03 was about 12 billion, out of a total consumption of 75 billion. With duty avoided on that scale, I cannot believe that no one in those major companies knew what was going on.

At a recent meeting of the Treasury Sub-Committee, we were told that progress had been made and that the companies involved had signed a memorandum of understanding to co-operate in reducing cigarette smuggling. So three major companies have decided that they are willing to co-operate in enforcing the law of the land, but that leaves rather up in the air the question of what went on before the memorandum. No doubt all will be revealed in due course.

Mr. O'Donnell, the permanent under-secretary to the Treasury, said when he was commending this reorganisation that

"you need an organisation which is capable of managing different cultures within itself. For honest taxpayers you want a culture that is customer friendly. For dishonest taxpayers and, where there is fraud going on, you need a very tough, ruthless approach."

I agree entirely that that is a good principle of operation, but we seem to have seen too little of the tough and ruthless approach. If anything, the approach seems to have been lackadaisical and benignly indulgent. The great fallacy would be to assume that, because we are setting up a new organisation, all the observations in the Roques and Butterfield reports would be complied with immediately. They will not be, unless there is a clear determination, and a management ethos, to crack down on the cheats and frauds mercilessly.

The message that I should like to see go out from this debate to Mr. Varney, the chairman, and to his management team is that he should stick to the customer friendly approach for the honest taxpayer, but use every power available against the dishonest ones. If he does not have enough powers, he should come back and ask for more.

There is a heavy dependence on management to put right the inadequacies that I have outlined. Legislation is not enough. The management arrangements of the Inland Revenue, as evidence to the Treasury Sub-Committee has shown, do not lead to unqualified confidence. The sale of all the Inland Revenue's properties on lease-back to a company registered in a tax haven did not imply a management with a highly developed sense of the ridiculous. Nor was a sense of worldliness obvious when a so-called comfort letter was given to the buyer that breached Treasury directives that apply to every Government Department. The then head of the Inland Revenue was not told about it, and neither was the Minister.

The Treasury Sub-Committee has welcomed the steps taken to tighten management in the new organisation. We have supported the introduction of a framework document setting out who is accountable to whom, and for what. We also welcome the proposal for my right hon. Friend the Chancellor to issue an annual remit to the executive chairman outlining the organisation's new and continuing tasks. However, the proposal for the executive chairman to report to three different Ministers on different aspects of the organisation is a formula for confusion, delay and blurred accountability. It is important that the new organisation hits the ground running and puts the past behind it. A first year with management distracted by a flurry of memos around Treasury departments and fruitless co-ordination meetings will not achieve that. I hope that the Sub-Committee's recommendation that this arrangement should be looked at again will be acted on, not when the confusion has happened but without delay.

This Bill is a good basic framework that recognises the inadequacies that have arisen in the past in both Customs and Excise and the Inland Revenue. However, it must not be seen as a ritual incantation that in itself will provide a revenue and customs service relevant to the 21st century. It needs complementing by a highly motivated staff, who are managed to make full use of their abilities, directed to achieve clear objectives and provided with investment in technology. All that is vital to them ensuring that the taxation that this House votes for is fairly levied on everyone who has a lawful duty to pay. I am sure that the good wishes of this House go out to all who will be involved in an endeavour that is so fundamental to the life of this country. They will not be thanked by their customers: let us thank them in anticipation of their services.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury 2:20 pm, 8th December 2004

I join Mr. Tyrie in thanking the Paymaster General and the Economic Secretary for the briefing that they gave us a week or so ago. In particular, I thank the Paymaster General for returning to me an item of clothing that I left in her office at the end of our discussion. [Hon. Members: "Oh!"] I should clarify that it was a coat. Her generosity in bringing it back to the House was welcome, especially as it was a cold day.

I also join the hon. Gentleman in broadly welcoming the Bill. We share the view of Martin Taylor who, in the evidence that he gave to Gus O'Donnell's report, which was produced in March, said that the separation of tax-gathering departments is anomalous in a modern economy. That is an accurate assessment of the position and I pay tribute to those bodies, such as the Treasury Committee, whose Chairman and other members have been in their places today, for their work in drawing attention to the potential benefits of merger. I am especially pleased that they have indicated that they will continue to track the progress of this merger over the next few years, because that will be important.

We share many of the detailed concerns that the hon. Gentleman outlined and I shall set out some of those in a minute. I am also pleased that Mr. Beard, who is also a member of the Treasury Committee, emphasised in his contribution the importance of addressing the tax gap through the merger of the two departments. The Paymaster General gave a long, detailed and helpful speech, but the one area on which she was a little light was an emphasis on how, over time, the merger will seek to address that important issue. I am glad that the hon. Gentleman put it at the centre of what the Government strategy should be.

Although I started by saying that we broadly welcome the Bill, we also share the concerns expressed by Mr. Tyrie and by many of the professional bodies about how the merger will work in practice, and we share Martin Taylor's view—set out in his submission to Gus O'Donnell—that the change will be risky, perhaps very risky. We also share the view of the Law Society that major gains could be made from the merger if it is conducted well. The devil will be in the detail and the delivery of the changes. If the Government and those people responsible for delivering and implementing the merger get the detail and the delivery wrong, what could be a triumph—in the Government's mind—could turn into a disaster. It is the risks on which I shall concentrate, bearing in mind that the Bill is essentially a modest mechanism to get the merger up and running, leaving some of the important decisions about powers for consultation and implementation to a later date.

I shall start by setting out the points of agreement with the Government. The first is that although there are many areas in the Inland Revenue and Customs and Excise with no obvious overlap in responsibilities, we can see the potential for cost savings within the new department and in compliance for businesses. We also believe that there is a potential for improving action against tax evasion and avoidance. In our view, and as the Treasury Committee concluded—the Government appear to agree—those gains are more likely to be secured by a merged department than by keeping the two departments separate and trying to institute measures to ensure co-operation between the departments, including some of the measures that have been in place in recent years.

The second reason we support this change is that although it will lead to considerable overhauling of the two departments and, potentially, some disturbance to their activities in the next few years, I would be very surprised if it did not expose the scope for doing business considerably better and at less cost. When I was in the private sector, one particular company used to refer to Spanish practices that built up over time and institutionalised inefficiencies. I am not sure that it is politically correct to refer to such practices in that way now, but I am sure that the merger will reveal areas where things could be done considerably better.

Thirdly, we welcome the mechanism through which the Government will deliver the merger. The O'Donnell report clearly set out different options for the Government in proceeding with the merger, including legislating rapidly for the new department on issues such as its powers or taking a more leisurely approach and allowing plenty of time for consultation on the powers of the new department. The Government have taken a sensible approach in introducing this modest enabling Bill and leaving time and scope for consultation. We share the welcome voiced by the hon. Member for Chichester for a consultation paper in January that will allow people an early chance to feed their views into the Finance Bill for 2006, regardless of which party will then be in power.

The fourth area of agreement is on the establishment of a new Revenue and Customs Prosecution Office. As my hon. Friend Mr. Burnett said earlier, he has argued for such a body for some time, and it was also proposed in the Butterfield report. It is a sensible change.

The fifth and final area is one in which I differ from the hon. Gentleman, although I acknowledge that he has more experience and skills in such matters, so I may be making a mistake. Nevertheless, I welcome the fact that the Government will take back some control over strategic leadership on tax policy from the two departments and put it in the Treasury. That is where it belongs.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

The Paymaster General may not nod so enthusiastically at my next point. I believe that considerable weakness and lack of coherence has been evident in tax policy for a long period. There has been a lack of assessment of the costs and benefits of new tax proposals. Tax changes have appeared to follow short-term political imperatives and the initiatives brought forward by the Chancellor, or have followed attempts to plug tax loopholes as they emerge, no doubt on the sensible advice of the two Revenue departments, rather than being part of a coherent, long-term tax strategy.

I pray in aid the O'Donnell report, which said that

"the precise formal role of each department is"— in other words, has been—

"ill defined."

That refers to the two Revenue departments and the Treasury. On page 99, the report also implies that at present Treasury officials—and the Treasury as a whole—may be more reactive than proactive in relation to tax policy. The report talks of ministerial policy initiatives and the co-ordination and presentation of overall tax policy—an important part of the Government's work on tax—but says little about setting a broad tax strategy. I hope that the new approach to management of such matters will leave much of the expertise in developing tax policy in the new merged department, especially in relation to anti-evasion and avoidance activity. I hope that it will also lead to a more strategic perspective in the Treasury. This is certainly an opportunity for a more strategic approach to tax policy, which many businesses would welcome. It would also bring about an obligation to be more strategic on tax policy and to simplify taxation.

As the Chartered Institute of Taxation said in its paper on the benefits of the merger for business:

"We consider that merger creates an additional need for simplicity"; not least if the staff in the new merged department are really able to interact with customers, particularly business customers, as part of a one-shop stop. In that regard, Martin Taylor, in his submission to the O'Donnell report, said that

"integration of tax administration would be more likely to succeed if backed by a Government commitment to simplification as part of the enterprise agenda".

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General

I agree with much of what the hon. Gentleman has just said, but surely the lack of high-quality cost-benefit analysis for tax changes, the increased complexity of the system, the need for more simplicity, the obsession with tax avoidance and many other things are the responsibility of Ministers not of administrators. It is to blame administrators for decisions taken by politicians to suggest that a reorganisation of the structure can solve the problems to which he has alluded.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

The hon. Gentleman is right: ultimately, Ministers have accountability for determining tax strategy and pursuing it. I am sure he is also right to say that revenue Departments and Treasury officials, if given clear and helpful advice about how Ministers want the tax system to develop, would deliver the necessary policies. However, my sense of the way things have worked in practice over recent years is that that has not actually happened, partly perhaps because much of the tax policy expertise has been in the individual revenue Departments rather than centrally. I may be naive in thinking that this reform will change that aspect of the system, but I live in hope.

As we debate the detail of the Bill, we must remember that many people outside in the real world, especially in the business world, will not be as interested in the small elements and small changes in the Bill as in what it will mean over time for the tax system as a whole. David Frost, the director general of the British Chambers of Commerce, summed up the general view of tax practitioners and business men about the British tax system when he wrote recently:

"Britain's tax system has come into being piece by piece over the years . . . often without regard to the complexity of the whole. Our tax system is already over-complicated, but each year brings new additions and alterations. Tax simplification is often identified by the government as a goal, but progress is rarely achieved."

I hope that setting up the merged department will be the opportunity for a more coherent tax strategy and that it will galvanise the Government into simplifying the tax system, because without simplification the benefits of merger will be much less than they might otherwise be.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

As usual, my hon. Friend is giving a powerful speech. I fully agree with what he says about the necessity for a more co-ordinated approach to tax strategy. With that, of course, will come responsibilities for Treasury operators to accept the level of confidentiality that will be imposed on members of the Inland Revenue.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

I agree with my hon. Friend. He is absolutely right to suggest that change in the location of the policy-making bodies for tax should in no way compromise taxpayer confidentiality. The Government have already given certain guarantees about that and we shall obviously be able to probe them in more detail in Committee.

I have covered the points of agreement in our approach to the Bill, so now I want to consider some of the aspects that are of greater concern to us and to pick up some of the points raised by the hon. Member for Chichester. I shall start by focusing on the Government's objectives in introducing the Bill and the problems that are likely to arise in its implementation. I share the concerns of the hon. Gentleman about whether the Government have a clear sense of the ranking of the achievements and objectives they want to secure through the Bill. At least three have been mentioned frequently: increased efficiency, reduced compliance costs for business and more effective tax gathering. Do the Government have a clear sense of the ranking of those priorities?

Over recent months, we have heard much from all political parties about the need to make savings in Government expenditure. Indeed, we have heard a lot from both the Government and the Conservative party about the need to make administrative savings in Government expenditure. Much of the context for the announcement of the Bill focuses on efficiency savings and job cuts but not on the possibly bigger issue raised earlier by the hon. Member for Bexleyheath and Crayford—the tax gap. Is the Chancellor giving short-term cost reduction too high a priority, or giving it too high an emphasis over more important objectives? Concern about that seems widespread not only among employees and their representatives—we should expect them to be worried about reductions in staff numbers—but also among professionals who have commented on the Bill.

Those people are right to be concerned about whether the Government's focus is simply on securing efficiency savings. After all, when the Chancellor announced the merger of Customs and Excise and the Inland Revenue in his 2004 Budget statement, he did so in the context of securing value for money, as he put it, in a section of his speech where he announced—with, I understand, no previous consultation with employee groups—a gross reduction of about 54,000 staff in the Department for Work and Pensions, Customs and Excise and the Inland Revenue. As one of the witnesses to the Select Committee said,

"any private organisation which had announced job cuts in that way would be vilified".

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

The hon. Gentleman is absolutely wrong to say that there was no discussion with representative bodies of the two departments before the Budget announcement. My hon. Friend the Economic Secretary and I, as the Ministers with responsibility for those departments, had long discussions with the unions on how to modernise, and how to make savings and efficiencies to move forward in those departments. On the very day that the announcements were made, we briefed them on that matter, so what the hon. Gentleman says is not true; the discussions were of long standing.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

I am grateful to the Paymaster General for clarifying that point and obviously I accept her comments, but will she accept that many Inland Revenue and Customs and Excise staff learned about the plans through hearing them announced on the radio or on television or by hearing the announcement made in the House of Commons? It appeared to many people that the plans were driven by the Government's political need to face down many of the criticisms made by the Conservatives about wasteful public expenditure rather than by a focus on the best way to manage the important resource of staffing in those departments.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

The hon. Gentleman is wrong again. Both departments have a good history of partnership working with the representative trade unions. As the Gershon review was being worked on—not just on the day of the Chancellor's speech—my hon. Friend the Economic Secretary and I ensured that at each point the representative bodies knew the nature of the discussions and the likely progress that would be made.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

I do not want to get bogged down on that particular point. Having discussed the issue with local representatives of the Inland Revenue offices in my area, I can tell the Paymaster General that they seem to feel strongly about the way in which the announcement was made, and the Government should be acutely aware of that in terms of taking staff on board for a strategy that will mean considerable change.

To return to the Government's presentation of the matter, on 23 November, the Gracious Speech announced the merger in the context of

"reducing bureaucracy and the costs of Government".

In other words, the focus was very much on efficiency, costs and the staffing savings that could be made rather than on the tax gap—the point raised by the hon. Member for Bexleyheath and Crayford earlier.

As earlier exchanges in the debate showed, and the hon. Member for Chichester highlighted, there is considerable uncertainty about what the economics of the merger are. I hope that the Economic Secretary will be able to clarify an important point about the £507 million savings when he sums up the debate. My understanding is that the savings of £507 million over the spending review period relate to the total reduction in staff numbers, now set at 12,500 jobs net—16,000 jobs gross—rather than the 3,200 job cuts that relate specifically to the merger of the departments. I should think that 3,200 job cuts equate roughly to savings of £75 million or £100 million a year, cumulating upwards over a period of time as the cuts take place. I do not see how the Government can get to a figure of £507 million over the spending review period, unless they are doing what the Paymaster General earlier criticised Mr. Turner for doing—conflating the general Gershon savings with the impact of the merger savings.

We also know from the Government's regulatory impact assessment—thin though that is on the monetary costs and benefits of the merger—that certain costs will arise as a consequence of the merger. The Government put those costs at £75 million for the two years 2004–05 and 2005–06. Presumably, that is just a small portion of the costs that will arise as a consequence of the merger, particularly given that the figure relates to two years and that not much expenditure will be incurred in the first year, 2004–05.

Standing back, as the hon. Member for Chichester sought to do, and assessing whether the Government will make any such efficiency saving at all over the period of the spending review and, indeed, over the rest of the decade, I have considerable scepticism about whether any net saving will be made from the merger. When the Economic Secretary replies to the debate, I would welcome any clarification on whether he expects any net saving during either the period of the spending review or the rest of the decade from the merger.

My confidence in the Government's lack of clarity about such things is reinforced by the O'Donnell report, which says on page 63, in section 3.99:

"when Jobcentre Plus was created the benefit of providing a unified contact point . . . in terms of efficiencies, job outcomes, and reductions in fraud and error, were projected to equal the investment cost within seven to eight years."

In other words, it may be well into the next decade before any net annual saving is made from the merger of the Departments.

Does it really matter whether the Chancellor of the Exchequer and the Gracious Speech are rather over-hyping the potential to make efficiency savings, while the Government quietly, sensibly and rather elusively indicate in their own assessments that there may not be any net saving? I am not sure whether that is simply an issue of presentation, about which we should not concern ourselves. If the Government in presenting the merger and its justification put a great premium on the possible staff and efficiency savings and the Government are competing with other parties in the run-up to the general election to promise reductions in civil service numbers, a great deal of pressure could be put on the new department to make savings in staff numbers that might not be borne out by the sensible economies that the department would implement if left to its own devices.

That point marries with the point made by the hon. Member for Bexleyheath and Crayford, and it was made very effectively in an article in The Tax Journal by John Davidson of Baker Tilly on 19 April 2004, where he says:

"If the motivation for the merger is to save money and to cut jobs, it could be to the long-term detriment of the Revenue and the taxpayer. It will save a large sum of money. At the average salary cost, the loss of 10,500 will give a saving of £267 million. This, however, is just 0.08 per cent. of the revenue raised by the two departments".

In the year that he cited, that revenue was £338 billion, and I think that I heard the Paymaster General say earlier that it was rising to £400 billion over the period that we are considering. The article continues:

"If job cuts cause a 0.1 per cent. loss of revenue, the savings"— even those excluding the cost of the merger—

"will not have been worthwhile."

The importance of the contribution made by the hon. Member for Bexleyheath and Crayford is underlined by the similar point that Martin Taylor makes in his contribution to Gus O'Donnell's report. He says:

"the reduction of the tax gap is far the bigger prize, and should be the priority rather than costs . . . this should be made clear to the new management, who should not be judged primarily on the attainment of secondary objectives."

That is exactly right, and the Paymaster General very helpfully and honestly acknowledged—she need not look worried when I say that—in her earlier comments that the 3,200 staff reduction figure from the merger is itself a guess.

The Inland Revenue officials who gave evidence to the Treasury Sub-Committee, which is chaired by Mr. Fallon, were clear that the 3,200 figure was taken from guestimates of previous changes, including those in the Department for Work and Pensions. So it could be that the 3,200 figure is unlikely to be delivered and that Mr. Varney could find himself working to promises that he has given to the Government to deliver staff reductions that he would not want to bear out in practice. I hope that when the Economy Secretary replies to the debate, he will give us a clear undertaking that he and the Paymaster General will advise the chairman to focus on reducing the tax gap and compliance costs and only to reduce staff numbers when the Government can be sure that doing so will not damage those two other objectives.

I take some hope from David Varney's contribution to Gus O'Donnell's report, where he wrote:

"It will be a challenge to keep a long-term focus on the effectiveness prizes and not fall prey to the temptation to substitute short-term cost reduction objectives."

David Varney knows very well what the priorities are, and I hope that the Economic Secretary and the Paymaster General will strongly support him in ensuring that those are the priorities. I wonder therefore whether the Economic Secretary could give us more information about those very important issues that relate to the merger's economic costs and benefits. Will he give us a time scale for the reduction of 3,200 jobs in the merger; or is that figure so uncertain that no time scale can be offered?

Will the Economic Secretary be absolutely clear with us about whether the £500 million savings relate to the merger or to the Gershon savings? Can the Government give us any guestimates of what the net savings will be from the merger over this spending review period, let alone any further round? Can the Economic Secretary give us any indication of whether there will be any net saving over the spending review period?

Will any of the 3,200 job losses result from outsourcing in the two departments? I understand that Customs and Excise and the Inland Revenue have different arrangements governing the extent to which they outsource work. I am sure that the Economic Secretary would not want any pressure to be put on the new department artificially to reduce job numbers by outsourcing, rather than doing what is in its best economic interests. In particular, is there any plan to outsource the debt collection facility of the combined department?

On the number of total employees, is the Economic Secretary confident that both departments are able to carry out their current work, particularly with tax credits, which have caused a lot of problems recently, not least because of the huge backlogs at the call centre. Is the Economic Secretary confident that, despite the job losses, the combined department will be able to introduce the new proposals on child trust funds?

The hon. Member for Chichester is right to draw attention to the fact that the job numbers at the Inland Revenue and in the combined department appear to have increased quite a lot since 1997–98, but the O'Donnell report makes it clear that all the increase in job numbers at the combined department is a consequence of additional burdens imposed on the department in relation to issues such as tax credit, while the underlying number of staff who carry out the work that was done before 1997 has fallen slightly. We want to ensure that the staff are there to do those important jobs, particularly in relation to tax credits on which the lowest income people in the country depend.

I want to probe the Government's thinking on a couple of other issues. Following the concern about the lack of clarity about costs and staffing, the second issue is the Government's expected improvement in compliance-related activity. It was clear from Gus O'Donnell's evidence to the Treasury Committee that even the Government accept that there is currently a huge tax gap in the United Kingdom. Mr. O'Donnell's evidence indicated that that gap was likely to be around 8 to 10 per cent. of revenues, which is in the order of magnitude of £30 billion or £40 billion.

It is unusual for such an estimate to be volunteered by a senior Government official because the Government tend to be sensitive about acknowledging the extent of the problem of tax evasion and tax avoidance. Given that that figure has been put into the public domain and that Mr. O'Donnell was willing to acknowledge that the figure for uncollected VAT alone is estimated by the Government as 12 per cent.—£12 billion a year that would be collected if people adhered to the letter of the tax law—I am interested to know whether they anticipate that the tax gap will be closed in any way by the merger of the two departments.

I should have liked the Paymaster General to say more about the detail of how the Government plan to close that enormous tax gap, which after all is the central purpose of the two departments. We can talk as long as we want about improving service to customers, but, as Mr. Heathcoat-Amory pointed out robustly in the evidence taken by the Select Committee, ultimately the purpose of the departments is to collect revenue for the Government's public services and other priorities. If £30 billion or £40 billion is going missing, it needs to be a high priority for the new department to tackle.

On compliance, the new department must focus on those entities who are in the black economy, and who are probably avoiding contact with both Customs and Excise and the Inland Revenue, rather than simply focusing all efforts on the largely compliant group of businesses and taxpayers, which could be easier targets for it. Have the Government recently estimated the compliance cost to business, one of the recommendations by the Treasury Committee in its report in 2000? Will there be an opportunity, either now or in the year ahead, to estimate the savings to business from the reduction in compliance activity? Has the Economic Secretary considered whether the tax system, in particular the business tax system, can be simplified to reduce the compliance burdens on business?

Photo of Michael Spicer Michael Spicer Chair, Conservative Party 1922 Committee

The hon. Gentleman mentions the 2000 report. I chaired the Sub-Committee that produced it. Does he accept, both in the context of efficiency and the tax take, that part of the answer to his question depends on whether the Inland Revenue or Customs takes the lead in the merger? One of the things that we encountered was that Customs was a much less effective and efficient organisation than the Inland Revenue.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

I am grateful to the hon. Gentleman for that. He speaks with great expertise, having chaired that particular inquiry. One thing that came out of the inquiry as it related to simplification was that merging the two departments, with their different histories, traditions and knowledge base, would work only if the individuals in the combined department can handle the complexity of the tax system. That requires the Government to ensure that the tax system is simplified.

We could no doubt speak for some time about the problems with IT systems throughout government. The hon. Member for Chichester referred to those. That will also be an enormous challenge for the new department, potentially at a huge cost, which was mentioned a number of times in evidence taken by the Treasury Committee.

To sum up, there is an enormous job to be done if the planned merger is to realise the promised benefits. This small Bill is a first and rather simple step down the route towards a merged department. We shall scrutinise the detail in Committee, but its delivery and implementation will determine whether, in the years to come, it is a great triumph or a terrible disaster. The way in which it is implemented, and the way in which Treasury Ministers and those in the new department lead the merger, will have a massive impact on whether it is a success or failure.

We are glad that the Treasury Committee has undertaken to continue to monitor the merger. We will also watch it closely. The Government have our support for the Bill as a whole, but only if they allow managers to focus on the big potential prizes, and not if the process is driven simply by their short-term political imperatives or the need to outbid the Conservative party in cutting back on the jobs of those people who work in the public services.

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North 2:55 pm, 8th December 2004

I am sorry that I missed the first part of the speech of my right hon. Friend the Paymaster General, but I heard the other speeches, and very good they were too. I compliment in particular my hon. Friend Mr. Beard, whose speech was excellent.

My concern is whether the Bill will close the tax gap or have the opposite effect. Given Labour's commitment to public services, anything that brings in more revenue to the Government is important. Some commentators have suggested that the Chancellor has a bit of a revenue gap. I would not necessarily argue that, but if he has, the extra revenue will help in the coming years.

There is also talk of staff cuts. I have close relations with the civil service union, the Public and Commercial Services Union, which is worried about employment. Its members are dedicated public servants who are committed to the broad common good. The union wants the new department to do its job properly and wants it to be properly resourced.

I hope that the new arrangements for prosecutions will also help to close the tax gap. If prosecutions are more effective, that will encourage those who are evading or avoiding tax to pay their taxes, as all good citizens should, so that we have more to spend on essential public services. However, the staff cuts worry me.

I have some anecdotes of my experiences. Three or four years ago, I took it on myself to visit our local VAT inspectorate. I was impressed with what I saw. It was explained that had it got more staff, it could collect more revenue. The rough estimate was that every additional VAT inspector collected five or six times his salary in VAT every year. I wrote to Treasury Ministers, suggesting that we should have more inspectors because we could clearly bring in far more to the Exchequer than the cost of their salaries, which would be a good thing in every way. I got a bland reply, mentioning staff costs. I am afraid that I did not get a positive response.

I also took it on myself a little while ago to visit customs officers at Luton airport. Again, the same story. They were doing a good job of catching people who were involved in smuggling drugs in particular. They wanted more staff so that they could do an effective job because they were stretched. Again, I wrote off, saying the same thing.

PCS members and officers tell me that the same is true of personal and business taxation. With more tax officers specialising in those fields, they could collect more revenue, at a multiple of their salaries, so more staff rather than less would be good. It may be that other staff who are not inspectors and who are not directly concerned with tax collection could have their jobs modernised with IT systems or whatever, but inspectors can collect many times their own salaries. I ask my hon. Friend the Economic Secretary to give that serious thought.

I also had the experience—again, this is an anecdote, although I am sure the experience is not uncommon—of returning from the continent 15 years ago. As one does when returning from holiday in France, I had a certain amount of wine in my car.

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

Very much so.

The limits at the time were less than they are now, and I had rather more than the limit. Trying to be a good citizen, that night I drove through the red line, which said "Something to Declare". Everyone else was going through the green line, which said "Nothing to Declare". There was no one present at the red line, so I got out of my car and had to walk a considerable distance. I looked about 20 ft upwards to find the only customs officer on duty, who was waving people through the green line. I said, "Excuse me." He said, "What do you want?" I said, "I would like to pay my duty, please. I have a certain amount of wine above the limit." The officer was astonished. I had written out what I had bought and where I had bought it. I even had those documents that are called factures, which people are supposed to have when they transfer wine across France.

I wanted to do the right thing. I did not wish to be prosecuted. As I have said, there was only one customs officer on duty. That suggested to me that Customs was under-resourced. It may have been that all the other officers were off sick or that Customs was not efficiently organised, but that was not my impression. My impression was that one man had been left at the port all night to wave the people through the green route. I am sure that things are better now than they were then. I am talking of 14 years ago when a public expenditure-cutting Conservative Government were in office, not a proper Labour Government who would know that we have to fund public services properly.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I assure my hon. Friend that I, as a solicitor, always tried to be scrupulously honest in the same regard. I had the same experience as my hon. Friend, but there were three customs officers on duty.

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

It was obviously a larger port or a good day. I do not know.

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

It was a larger port. I was at a small port.

I have the greatest admiration for Customs and Excise officers and for income tax officers. I have never found any fault with the Inland Revenue. I only wish that my ability to complete my tax form was half as good as the Inland Revenue's in checking it. Customs and Excise does a splendid job. It is vital to ensure that the Government get their revenue, which they can spend on public services and salaries for all our public servants. We must ensure that that revenue is collected.

I am concerned about the failure to collect taxes. The failure to bridge the gap means that there is effectively a culture of petty criminality among people who are finding ways of avoiding or evading paying tax. That is particularly the case when importing cigarettes, other forms of tobacco and alcohol from the continent of Europe. That is not a good thing. We are a law-abiding society and I think that people like to obey the law. If we fail to police the taxation system and Customs and Excise properly, over time, we will allow that culture of petty criminality to develop.

Allowing vast amounts of tobacco and alcohol to enter the country, illegally or legally at cheaper prices than would be charged in the UK, runs counter to the Government's public health agenda. We should maintain the price of cigarettes and, I suggest, alcohol at the levels that we think are appropriate in Britain. That is a way of constraining people from excessive consumption. We think that the continent has got it wrong—I do, anyway. If it is serious about dealing with alcohol and smoking, it should introduce higher prices. Alcohol prices, as a proportion of disposable income, are now half what they were in the 1970s. Floods of alcohol are coming in from the continent that are not effectively policed or constrained.

The money that is lost by failing to collect duties and taxes on those items is of fundamental importance to the Government. I want the Government to spend money on many other things. For example, free long-term care for the elderly could easily be financed just by collecting the tax on tobacco that is coming in from the continent illegally.

That is an equation that I make frequently. I hope that the Government will take the point seriously. I hope also that the Bill will make a big difference in closing this tax gap. I hope that the Government will not use the measure only as a means of cutting the numbers of civil servants in the Departments, especially as the civil servants that we are talking about, above all, are the ones who collect money. They do not spend money. Their salaries are as nothing compared with the amount of money that they bring in. If we need more of them to collect more money to narrow the tax gap, we should appoint more of them. I hope that the Government will take a positive view of these fine and honourable public servants and not look to every opportunity to cut their numbers.

There have been numerous problems with IT systems in the public sector. Is it not time that we looked to have more in-house IT systems rather than relying on what are clearly unreliable private companies? The contracts have gone wrong on so many occasions. Surely it is time that we looked seriously at an in-house public sector IT facility or brought in-house as much as we can of IT systems and services.

I hope that the Government do not seek to outsource any of the services that are undertaken by the Inland Revenue and Customs and Excise. Above all, we need people in these services who have a sense of dedication to the public sector and who believe in and feel that public service ethic. They are people on whom we depend for the civilised society in which we live. It would be a mistake to push them into the profit-making sector. I hope that they will be kept as directly employed public servants and that they will continue to collect the £30 billion or £40 billion that we have heard about so that we can have more to spend on the health service, education and all the other fine public services.

Photo of Michael Fallon Michael Fallon Chair, Treasury Sub-Committee 3:06 pm, 8th December 2004

The House will be impressed by the integrity of Mr. Hopkins, given his vignette about his return from France. He spoilt it only slightly by suggesting that under a Conservative Government there were fewer customs officers on duty. It is true that, under the Conservative Government, duty was much lower than it is now.

The hon. Gentleman made some important points about jobs, to which I shall return. It is important that Ministers address seriously the argument that the PCS has advanced. It has been put to the Treasury Sub-Committee. I am grateful for the kind words that have been said about the report of the Sub-Committee, which I have the honour to chair. The Committee, as my hon. Friend Sir Michael Spicer reminded us, has been on this track for some time. It was in 1999, when he chaired the Committee, that it first recommended that a feasibility study should begin of the prospects of merging these two great and historic Departments. It was a year later, after taking evidence about other countries that had merged the two services successfully, and notably Canada, that the Sub-Committee made its final report in April 2000, recommending a full merger between the two Departments.

That recommendation was rejected by the Government, as has been said. One of the things that puzzled the Sub-Committee when we came to consider the merger again was why the Government had changed their mind. It is important for the Government to declare why they have now accepted the recommendation.

I was alarmed by the permanent secretary's reply when he was asked why he had changed his mind. He pointed to the record of other bits of Whitehall being merged. He pointed to the emergence of the Department for Work and Pensions. I do not think that it is necessarily the case that the functions carried out by that Department are demonstrably better carried out now than they were when they were distributed among other Departments.

Secondly, the permanent secretary suggested that the creation of the Financial Services Authority, which had taken on the functions of a number of different regulators, had also encouraged the Government to think again. I am not sure about that parallel either. Regulators are much smaller than the bodies that we are now considering.

Photo of Michael Spicer Michael Spicer Chair, Conservative Party 1922 Committee

My hon. Friend is making a strong point about the Government changing their mind. Perhaps an even stronger point is that we have had a change of Ministers between the two decisions. I think that the Paymaster General was in office at the time.

Photo of Michael Fallon Michael Fallon Chair, Treasury Sub-Committee

My hon. Friend makes the point. We were surprised when we heard the announcement a year ago and it is worth trying to probe the Government on the reasons that they put forward. The evidence that we took from the Institute of Chartered Accountants of Scotland pointed to a very different parallel. It said:

"From past experience of the merger of the Inland Revenue and the Contributions Agency, the proposal to merge the Revenue and Customs does not inspire confidence."

It pointed out that, five years on, those two bits of the Inland Revenue still cannot properly exchange information on their computer systems. That is why it is important that this merger, which I welcome, is justified on genuine grounds. It is not enough to say that it is simply strategic or that such mergers have worked elsewhere in Whitehall.

Photo of David Ruffley David Ruffley Opposition Whip (Commons)

In the course of my hon. Friend's Sub-Committee's inquiry, was he furnished with any statistics showing the greater cost and efficiency savings that should be delivered by the merger?

Photo of Michael Fallon Michael Fallon Chair, Treasury Sub-Committee

We probed hard on that point and I will come to the costs and benefits, but first I want to deal with the reasoning behind the merger. As I said, it is not enough to say that merging two departments like the ones covered by this Bill has worked with other departments or that the decision is simply strategic. In the business world, that would not justify a merger. I should remind the House of my business interests. One usually becomes involved in a merger in business because one can convince the board or shareholders that a merger will add value, reduce costs and make organisational sense. I had hoped that the Ministers behind the Bill and the Chancellor would have set the case out more clearly.

To be fair to Ministers, they have set out some reasons. First, they have said that they hope that the merger will improve taxpayer compliance to close the tax gap. Several colleagues have already mentioned that important point. Secondly, Ministers have said that the merger will reduce the cost of compliance and, thirdly, that it will reduce the costs of collection. If those are the three stated objectives behind the merger, we should, as my hon. Friend Mr. Ruffley implied, perhaps have had a stronger indication of the exact savings that can be quantified.

Any merger in the private sector—David Varney has been involved in a number of mergers in the private sector—would have been preceded by a proper cost-benefit analysis. We pressed the permanent secretary and Mr. Varney hard on that point and, although it is hard to be sure, there appears to have been some attempt at quantifying the actual costs and benefits. However, that attempt seems to have been abandoned. We recommend in our report that such analysis should take place as soon as practicable. Even if we believe that the Government's explanation that we cannot properly cost the savings until some of the second-order issues are resolved, we are still entitled to ask for the cost-benefit analysis to be carried out as soon as possible.

Photo of David Ruffley David Ruffley Opposition Whip (Commons)

Is that explanation not puzzling given that, under the Gershon review, very detailed numbers have been given for efficiency and cost savings? Is there not a contradiction there?

Photo of Michael Fallon Michael Fallon Chair, Treasury Sub-Committee

There is a contradiction and I would have expected the Sub-Committee to have been presented with more detailed analysis than we received.

The explanatory notes on the Bill contain a particular figure. It is tucked away in paragraph 284, which tells us that integration

"will lead to initial costs of around £75 million over the two financial years 2004/2005 and 2005/2006."

At least we have some indication of the initial costs.

The Paymaster General has also told us today— I think for the first time—that there will be savings of £500 million by 2007. It is still not clear where those savings will come from: whether they result from the 3,200 posts that will be scrapped directly, from the Gershon exercise or from a combination of the two. When the Economic Secretary winds up, I hope that he will be clearer with the House about the figure of £500 million. As Mr. Laws said, it seems a large figure if we are simply talking about the 3,200 posts. I am not clear whether it is a cumulative figure—the Government have previously counted things several times—or whether it is the actual figure that directly relates to the cost savings.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

Is the hon. Gentleman suspicious, as I am, that the Paymaster General may have muddled up the savings from Gershon with the savings from the merger? Is he particularly suspicious given the answer that David Varney gave to his question in the Select Committee hearings? David Varney said that there would savings of £507 million over the spending review period and a saving of 12,500 jobs net, a figure that clearly relates to total job savings and not just to the merger itself.

Photo of Michael Fallon Michael Fallon Chair, Treasury Sub-Committee

I am not clear on that point and it falls to the Economic Secretary to clarify the figure of £500 million when he winds up. He must tell us how it has been arrived at, whether it is cumulative, whether it includes the 3,000 posts, whether it excludes Gershon and whether it relates to annual savings.

The only other hint of further costs, rather than savings, is the reference on page 10 of the regulatory impact assessment. It suggests that there may be further costs to integration resulting from changes to join up some of the services that the two departments currently provide. It states:

"These cannot be quantified until the associated policies have been agreed."

We are not quite clear what those costs are, but it is clear that they are costs and not savings. The Economic Secretary owes us a further explanation of the costs and benefits and I hope that he will reply to our specific recommendation—I do not think that the Paymaster General quite did—that the costs and benefits should be quantified as soon as practicable when the integration policies are agreed and brought back before the House.

The hon. Member for Luton, North raised the important issue of jobs, which is well documented in the PCS's submission to the Sub-Committee. We are told that, as part of the Gershon review, 12,800 full-time posts will be scrapped and that, as a result of the merger, 3,200 specific posts will be lost. That is a rather one-dimensional view of efficiency savings. When one asks Ministers and David Varney about the savings that will result from merging these two great departments, they respond only in terms of the number of posts to be scrapped.

As someone more distinguished in the Treasury keeps saying, it is not the job title that one holds but what one actually does that matters in government. It is not right simply to consider efficiency savings in terms of the number of jobs that will be scrapped. Instead, I would have expected to hear from the Government how the work load of the two departments, once merged, would be handled more efficiently.

I would have liked the Government to have responded much more vigorously on the whole issue of reducing the costs of compliance for business. If it is true that a merged customs and revenue service is going to result in reduced compliance costs for individual taxpayers or for business, I would have expected the Government to have set themselves more vigorous targets.

In an earlier Sub-Committee report, we said how impressed we were by the Finance Ministry in Holland in which officials have been set a specific target of reducing by 25 per cent. over four years the costs to business of complying with taxation. It has introduced modelling for the smallest businesses that enables it to measure the actual costs to small businesses, shopkeepers and medium-sized firms of filling in tax forms and of complying with the tax burden. Some 17 people in a unit in the Finance Ministry are dedicated to reducing the costs of compliance. I hope that Ministers will set the new service a much more specific target for reducing the costs of compliance for business.

I turn to the Bill itself, which is only the first of two Bills. I have two problems with that. Because the Bill is so minimalist, there is a risk, as the regulatory impact assessment pointed out, that its scope is inadequate. Because it is so minimal and has been introduced so quickly, it may not fully cover the arrangements that need to be put in place. I was alarmed to hear that we are to be faced with Government amendments to the Bill as soon as it starts in Committee. I very much hope that when choosing the two-stage minimalist approach, the Government have drafted the Bill correctly.

There does not appear to be a firm commitment to the second stage. The Department said:

"More substantive change, and change requiring further legislation, will be considered as part of a longer term programme of work."

That does not sound like an explicit commitment to a second-stage Bill, although I understood the Paymaster General to say earlier that there was a commitment to produce the second stage in 2006 or 2007. Perhaps the Economic Secretary could clarify that. It is worth some clarification, because we have some experience of two-stage reform. We are still waiting for the second stage of House of Lords reform, which still has not emerged some years after the first stage was introduced.

Secondly, there is the issue of powers. I welcome the non-transferability of powers to prevent any inadvertent widening of powers in the new department. That will need to be scrutinised in Committee. It reinforces the need for further legislation and for that to be forthcoming reasonably early, to ensure that the powers are appropriate, proportionate and fit for purpose. If the Government are committed to those tests—that the powers they are taking are to be appropriate, proportionate and fit for purpose—they need to get on with the consultation and get the new powers into statute as soon as possible.

One specific power that will concern anyone who scrutinises the Bill in detail is the power in clause 10 requiring officials to comply with

"any directions of a general nature given to them by the Treasury."

The explanatory notes are helpful. They state that that excludes directions on the day-to-day management of the service or on operational matters. The intention is fine, but the clause is not sufficiently tightly drafted. It might be helpful if the Government specified exactly what those

"directions of a general nature" might cover. It might seem odd to ask for a general direction to be specified, but it would be helpful if we knew what kind of directions Ministers had in mind, given that the drafting of the clause is so wide.

I turn to confidentiality, on which I intervened on the Minister. That is a matter of concern to me and the rest of the Sub-Committee. We should always be concerned about confidentiality. I welcome the strength of the Paymaster General's view this afternoon. A further reason for concern is that the departments are being merged into the Treasury building. That puts into sharp relief the question whether we can ensure that officials who are using the same building, sharing the same cafeteria and meeting in the same corridors are properly separated from the Ministers and special advisers who have the more political function.

Given that point, I hope that the Economic Secretary will clarify the downgrading of the oath and statutory declaration. We were told in evidence that it is no longer an oath but a statutory declaration. But, as my hon. Friend Mr. Tyrie said, a statutory declaration made and witnessed at the beginning of each official's employment has some solemnity about it and brings home to the person making the declaration just how serious the matter is. It is therefore not sufficient to write the terms of the declaration into the statute. How many officials taking up office will read the Act? Ministers ought to look again at that and reassure the House. If it is part of the employment contract of staff of the new department, there could still be a case for making that a statutory declaration in front of witnesses, as part of the employment contract. That may be Ministers' intention, but it was not clear from the remarks of the Paymaster General. I think that she appreciates the concern and I hope that the Economic Secretary will clarify the matter.

Finally, on the Bill, I turn to accountability. When we first heard about the merger a year or so ago, I expected that a single department would report to a single Minister. It now appears that the new merged department will report mainly to the Paymaster General, but also to the Economic Secretary on excise duties and green taxes, and to the Financial Secretary on stamp duty, taxes on savings and taxes on pensions. This is not a political point. Mr. Beard made the same point. It is cumbersome for a new single merged department to report to at least three Ministers. The Treasury Sub-Committee will want reassurance that the lines of accountability are not blurred and that everything possible is being done to narrow accountability to one particular Minister, who I expect to be the Paymaster General.

I shall touch on two other issues that are not directly referred to in the Bill, but that flow from the merger proposal. The first is the department's estate—the buildings that it will occupy. I make no apology for returning to the issue of Mapeley, which has preoccupied my Committee and the Public Accounts Committee over the past two or three years. Because the departments are being merged, the case for rationalising the estate and being clear about the costings of that estate is all the more obvious and important. That brings us back to the Mapeley costings. As the House may recall, the National Audit Office estimated that the facility price—in other words, the cost that the departments will pay Mapeley, the private sector consortium looking after the offices—should have averaged out at about £170 million a year over the 20 years from 2001. In a letter on 24 November, the Paymaster General told me that the payments to Mapeley in the first three years were £235 million in 2001–02, £306 million in 2002–03 and £311 million in 2003–04. Those payments were significantly higher than the NAO expected, and we must ask why. One would expect more rationalisation from a merger, and even after the Mapeley contract was signed—we will not go into the sad history of its offshore sourcing—one would have expected some variation to the contract to have been sought to reduce the number of offices occupied by the merged department.

In her letter, the Paymaster General explained why the NAO price of £170 million a year is nowhere near the £300 million a year that she now pays:

"NAO modelling is based upon initial pre-contract modelling assumptions and as such would not be expected to capture changes in the profile of the estate due to new legislation or changes in the departments' business model."

Why not? The merger will provide the department's new business model and changes in the legislation.

One would have expected some rationalisation, but instead we have costs. I accept that the costs are for the first three years of a long contract, but they are now running at nearly twice the NAO assessment of the facility's price. The point of putting offices under private sector management is to get away from the department's business modelling and forecasting and into the real world, where people experienced in estate management and commercial property can weigh up matters and make the required savings. In the private sector, such a merger would yield immediate savings by sharing offices, rationalising space and utilising fewer, not more, square feet. In other words, the price paid to Mapeley should be falling, not rising.

In the end, the Bill is about improving the service that the customer gets. In rather a chilling phrase, the Paymaster General said that she wants "to improve the taxpayer experience". Over the past few years, taxpayers have had much experience of paying more and more taxes. Taking her comment at face value, it is important to focus on the aim of the exercise, which is to improve the service to individual taxpayers and, indeed, business taxpayers. The record over the past few years is not particularly good.

The tax credit fiasco, on which my Sub-Committee reported, is not an encouraging precedent. The scandal of deficiency notices that are issued late or not at all again shows that the follow through is not particularly good when changes are made in Whitehall. Evidence is also emerging that the Revenue is not as good at running the benefits system as it was at running the tax system. We must focus on the service that the customer gets. From my experience of constituency casework, the Revenue and Customs must re-examine their interface with customers. For example, the helpline service is not nearly good enough and needs improving.

I am not sure whether people—perhaps even hon. Members—are sufficiently aware of the function of the adjudicator, who rules on complaints against the Revenue and its various sub-departments such as the valuation office. Last year, the adjudicator investigated 374 cases in the Inland Revenue and 98 cases in Customs and Excise, which is not an awful lot. We should use the opportunity presented by the merger to revamp the way in which the Revenue and Customs treat those who pay for them and rely on their services—the situation could and should be better.

Let me sum up. The merger was recommended by the Sub-Committee and is probably a good idea, but it needs to be driven by set objectives and against measurable benchmarks. I welcome this initial legislation and wish Mr. Varney and his team well in implementing it, but I put him, and Ministers, on notice that this is not the end of the story as far as the Treasury Sub-Committee is concerned. We will return to the merger at six-monthly intervals to see how it is getting on, because the stakes are very high indeed.

Photo of Peter Atkinson Peter Atkinson Assistant Chief Whip, Whips 3:35 pm, 8th December 2004

It is a great pleasure to follow my hon. Friend Mr. Fallon, who, in his position as Chair of the Treasury Sub-Committee, has done a very thorough job in picking over the bones of this dry but important Bill.

There was not much levity in the debate apart from that provided by Mr. Hopkins, who described his experiences in trying unsuccessfully to pay duty on wine. Sadly, he has left the Chamber; I was going to advise him that if he really wants to be done over by Customs on arriving back in this country, he should not look so honest and should drive a white van laden to the springs with wine.

Another moment of levity came from the Paymaster General during her rather long and sombre speech, when, as my hon. Friend the Member for Sevenoaks said, she told us that she wanted to improve the taxpayer experience.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I am not bothered what the hon. Gentleman thinks about my speech or its tone, but I gave way endlessly to hon. Members, mainly to his hon. Friends, out of courtesy, and to rebuke me for that seems a bit foolish, as it will not encourage me to do it again.

Photo of Peter Atkinson Peter Atkinson Assistant Chief Whip, Whips

I am sorry that the Paymaster General is upset, but she leaped to her feet a little too soon. I understand why she spoke so fully—it is a detailed matter and she had to deal with many interventions—but I merely wanted to ponder on her use of the term, "taxpayer experience". That almost sounds as if dealing with one's tax is a form of entertainment—there is a tourist attraction in Ayrshire called the Tam O'Shanter Experience—and I had a vision of the Paymaster General trying to make taxation more exciting.

Photo of Peter Atkinson Peter Atkinson Assistant Chief Whip, Whips

She obviously does not agree.

The main unanswered question about the Bill is what lies behind the renewed enthusiasm for the merger. Until now, it has been a classic example of something that lots of officials think a good idea, so it gets taken off the shelf, dusted down, put back, forgotten about and eventually taken back down again. I would be rather worried about an idea that Mr. Gladstone considered and rejected. We missed out some of the history, because Prime Minister H. H. Asquith had a nibble at it when he merged Customs and Excise.

As my hon. Friend Mr. Tyrie said, another unanswered question is whether the exercise is worth the candle. We will find out as the Bill progresses. I suspect that my hon. Friend was on to something when he suggested that the Chancellor wants to do this to set an example before he starts to lay about Government Departments. He could have triggered it through a series of timed statutory instruments; indeed, he could have postponed secondary legislation almost indefinitely. The merger is to proceed so incredibly slowly that it does not need to have a great deal of effect, but it enables him to say to other Ministers, "We've put our house in order—now put yours in order."

Another unresolved matter, which I hope will be resolved shortly in the winding-up speeches, concerns how many staff will be involved. The figure seemed to change almost daily between the Chancellor's first announcement in March and the evidence given to the Treasury Sub-Committee in October.

Some years ago, the Conservative Government considered what to do about the Inland Revenue and Customs and Excise. It was the subject of much discussion. One suggestion was that the Inland Revenue should merge not with Customs and Excise but with the then Department of Social Security. That option has not been considered. As the Inland Revenue increasingly becomes a tax and benefit-paying operation, it almost makes sense for it to be part of the Department for Work and Pensions rather than merging with Customs and Excise, which, as we have heard, has a different philosophy from the Revenue.

The original Excise men were military figures, with their cutlasses and armed ships. Indeed, they chased the forebears of my constituents who had a readily available supply of illegal whisky stills in the Northumberland hills. The Excise men would wreck the stills. It was said that they were given a reward if they found a still, so when a still burned out, its owner would tell the Excise man who then "discovered" it and collected a reward. The distiller would receive half, which helped him to build a new still further up the hills. That was Northumbria a long time ago—but it is rightly said that the philosophy of the two departments differs greatly.

Customs and Excise clearly has much more of a policing role. That is well set out in the various submissions to the Treasury Committee by the Association of Chartered Certified Accountants, which is worried, probably rightly, about the gung-ho mentality that exists in the Customs service, as opposed to the gentler, more considered approach of the Inland Revenue. I know from experience of running a disorderly business—in its early days—that the VAT man was a sight tougher than the tax man. Anyone who fell behind with VAT payments had little leeway, whereas it was always possible to negotiate some settlement with the Inland Revenue. There are genuine concerns about the different attitudes.

Let me comment on the problems that the Revenue experiences in paying the tax benefits. I am sure that all hon. Members have had constituency cases of overpayment of tax credits that are now being reclaimed, in some instances with a great lack of care for the victim. Obviously, some people must have realised that they had been overpaid, but others did not. They read the forms and thought that they were getting it approximately right. I have a constituent who received £150 in tax credits and has had the sum reduced to £30 a month. That has made a serious difference to her life. To echo my hon. Friend the Member for Sevenoaks, it is almost impossible to get through to the helpline. My constituent came to me to circumvent the difficulty of contacting the helpline.

Photo of James Gray James Gray Conservative, North Wiltshire

My hon. Friend is right. I have a constituent who is being asked for £7,500 that was wrongly paid to him, despite the fact that he phoned the Revenue on every occasion to check that the calculation had been done correctly. He was assured that it was correct until the final occasion, when he was told that a glitch in the computer system had resulted in an overpayment of £7,500. His wife is pregnant—they had planned to expand their family based on the department's errors.

Photo of Peter Atkinson Peter Atkinson Assistant Chief Whip, Whips

That is a graphic illustration of the trouble that overpayment causes. It has affected many vulnerable people, who now need help because of the mistakes in the payment of benefit. There have also been computer problems and difficulties with the private finance initiative deal, which has also been mentioned.

I remain in favour of considering the merger, but hon. Members need more information about its objective. What are the costs and benefits? Will it improve the service and make the promised substantial savings? Or will it usher in a long period of confusion and muddle, which will cause considerable difficulties to the customers of Customs and Excise and the Inland Revenue?

Finally, there is an issue of accountability that still needs properly to be resolved. The commissioners of the Revenue and of Customs and Excise are appointed by the Crown and are responsible to the Chancellor. Lord Bridges, the archetypal Sir Humphrey, when trying to examine the relationship between the Revenue, Customs and the Government, said:

"The Inland Revenue and HM Customs and Excise are responsible to the Chancellor, and are subject to a measure of Treasury direction. This however means Ministerial direction. The officials of Revenue and Customs do not take orders from Treasury officials."

That was an interesting, if slightly Sir Humphreyish, statement for Lord Bridges to make at that time, and I wonder whether that will continue to be the case under the new regime, or whether Treasury officials will give instructions to the commissioners of the new joint organisation.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs) 3:45 pm, 8th December 2004

As my hon. Friend Mr. Laws said, we welcome the thrust of the Bill and the principle of merging the Inland Revenue and Customs. However, we temper our welcome with the important caveat that there will be much more detail in the draft regulations, which we look forward to receiving in plenty of time before we debate the Bill in Committee.

I have for some time advocated the subsuming of the prosecution functions of the Inland Revenue into the Department under the aegis of the Attorney-General, and I strongly support what is now happening in that regard. I also strongly support the establishment of a separate, independent prosecution service and the fact that it is to be inspected regularly by the Crown Prosecution Service inspectorate. I presume that there will be some financial consequences, but it is difficult to judge what they will be. Since January 2003, the Customs prosecutors have come under the Attorney-General, and I wonder what additional staff—or perhaps whether fewer staff—have been employed since that time, and whether that has involved savings or additional costs.

I welcome clauses 23 and 24. The recent establishment of the Independent Police Complaints Commission goes a long way towards answering the impossible question: who will guard the guardians themselves? It appears to be settling down well, but there are bound to be resource implications for the IPCC taking on this additional work. Do the Ministers have any idea what those implications will be? Some indication would be welcome. My second question relates to a difficult point. The IPCC is, and should be, independent, and it is up to the commission to run itself. However, it would be interesting to know whether the Ministers have a view on whether the police function within the IPCC should be separate from the Revenue and Customs functions.

I want to refer to the matter of tone and culture, but before I do so, I want to say to the House that we shall debate information sharing and confidentiality in Committee, and that we shall also return to the necessary matter of powers. I am grateful to the Paymaster General for setting out just a few of the important points of principle. This impinges on what my hon. Friend the Member for Yeovil said about the Treasury having a function on the macro side of setting tax policy. I hope that clear guidelines—there are already some—in relation to absolutely solid and enforceable duties of confidentiality will be provided for anyone who, under this Bill, has access to Revenue information As has been said, the Revenue has an enviable culture, and the vast majority of people do not want to break the law. Tax law, however, is extremely complex, taxpayers often do not have a clue what the law is, and it is difficult for small professional firms of advisers to keep up with the complexity of the law and its changes.

In my experience, the Revenue is helpful, in so far as it is accessible locally and reasonably willing to give sensible advice—obviously, its view is not necessarily the correct one, but it is helpful. I hope that such local delivery will be a model of the new department, so that Customs specialists will also be at hand in local offices and will accept Inland Revenue practice.

On training, I refer the Economic Secretary and the Paymaster General to Mr. Justice Butterfield's conclusions. Two particular points should be noted from that Customs inquiry, as hundreds of millions of pounds in duty were lost and an unfortunate series of bungled prosecutions occurred. First, Mr. Justice Butterfield recommended that there should be regular refresher training for investigators, and secondly, that investigators should be subject to systematic external scrutiny. In Committee, we will examine these matters in some detail, and we will want to hear exactly what has happened since the Butterfield report, and on what standards of training the new department will insist. I know from experience that the inspector of taxes course is of high quality and is also recognised in the private sector.

To conclude on the question of culture and tone, I practised as a tax practitioner for 25 years, and I do not believe that in the course of that period I ever had cause to complain about the conduct of members of the Inland Revenue. I hope that, in 25 years' time, practitioners will be able to say exactly the same of the new merged organisation.

Photo of David Ruffley David Ruffley Opposition Whip (Commons) 3:53 pm, 8th December 2004

This Bill on the merger of Inland Revenue and Customs and Excise carries the general support of the Opposition, although we remain concerned, as the House will have noted, about its practical implementation. We are dealing with two organisations that have between them 250 legacy computer systems and some 13 million customers. It is no mean feat to put those two together, and we will want to examine the details extremely carefully, not just during consideration of the Bill but in the first few months and years of the merger.

I had the privilege of sitting on the Treasury Sub-Committee in 2000, which was then chaired by my hon. Friend Sir Michael Spicer. In the course of our inquiry, we came to some conclusions: that the possibility of a merger had not, by 2000, been examined properly by Ministers; that differences in the functions of the two bodies were not insurmountable obstacles to a merger; and that a merger was in fact desirable.

Our 2000 report noted several concerns relating to the closer working programme, which—I should say in all fairness—had been developed not since 1997 but since 1994. We concluded that the programme had not been a great success. There seemed to be no general philosophy or rationale underpinning the various areas chosen for closer working between the two departments. The witnesses whom we consulted could cite few specific benefits to businesses as a result of the programme, and Customs and Excise gave us no clear idea of how it intended the programme to develop in the future. We agreed with the programme's aims, but did not feel that it was achieving its objectives. When we examine the way in which the two departments have tried to co-operate so far, we do not see a happy set of antecedents.

We were rather disappointed by the Government's response to the report. The possibility of a merger was rejected, and the explanation given was this:

"while the Government accepts that merger might bring some of the benefits outlined by the Committee, it believes that they can be achieved without the disbenefits of merger through a dynamic and focused programme of closer working."

The Government have clearly done some more thinking during the three or four years since that statement was made. Like other Conservative Members, I am prompted to ask the reason for the turnaround—the sudden Damascene conversion—especially in the light of the paucity of statistical information and data about cost and efficiency savings in the medium term.

We know that there will be transitional costs upfront, but although the Government seem to have moved to the right side of the argument, we have not seen enough of their working. Some indications of why their views had changed were given in the O'Donnell review, which concluded that a merger would be a good idea—although it noted at the same time that risks were involved in the "business as usual" tax collection model, and that the disruption of projects already planned could attend any merger.

I wonder whether the rather sad events of spring and summer 2003 might have prompted the O'Donnell review. As we all recall and as was mentioned earlier, a computer system that was installed did not deliver, and the fiasco of the working tax credit and child tax credit payments ensued. The Treasury Committee, of which I was a member, took evidence that revealed an unfortunate set of management relations at the Inland Revenue. We also discovered that when the national insurance contributions office was taken away from social security officials in Whitehall and merged with the Inland Revenue, the left hand did not know what the right hand was doing. That led to the shambles of the deficiency notices: Ministers were not aware that they had not been issued, and large parts of the civil service did not know either.

That brings me to two of my concerns, which have not been dealt with by my hon. Friends' trenchant criticisms of other aspects. They relate to information technology. The Treasury Sub-Committee noted the views of the Institute of Chartered Accountants of Scotland:

"From past experience of the merger of the Inland Revenue and Contributions Agency, the proposal to merge the Revenue and Customs does not inspire confidence. As organisations, the Contributions Agency and the Inland Revenue had different computer systems and five years after the merger had been completed they still have computer systems which cannot exchange information and accordingly duplicate enquiries and impose unnecessary additional costs on taxpayers in general."

In speaking to the Treasury Sub-Committee, David Varney made clear the scale of the IT problem for him and the associated risks. Indeed, he was very up front, and it might assist the House if I give a flavour of what he said:

"We have 250 major IT systems, and we have 3,000 staff" working in IT.

"It is a huge expenditure . . . We, per year, put out 170 million forms and we run 100,000 desktops. So this is a big issue for us. I think what we are bringing in"— in the recent recruitment of a chief information officer—

"is expertise of somebody who has a track record of managing change in IT and delivering business benefits. We also have to get smarter at our pre-risking and big risk minimisation projects, talking through both the IT risk and the operation."

Amen to that. The Paymaster General will doubtless work closely with Mr. Varney on the implementation of change in the IT systems.

However, I offer a strong word of warning. When the computer failures occurred that were responsible for the working tax credit and child tax credit shambles, and for the deficiency notice problem—without even considering the Mapeley problem, which is different in qualitative terms—the chairman of the Revenue came before my hon. Friend Mr. Fallon and I, and said that the Revenue take this issue terribly seriously. He said that a lot of time had been spent stress-testing the system before putting it in place. He acknowledged that it was very complicated, and said that they would spend a lot time ensuring that they got it right.

The problem is that warm words are no use when the system crashes or fails to work in an optimal fashion. Who suffers? The taxpayer suffers, and bad governance is the result. That does no good for the Government of the day, or for democracy and our constituents.

I pray in aid the National Audit Office, which noted in its recent report:

"Contingency plans are needed to handle any changes resulting from the O'Donnell review."

I have great regard for the Paymaster General, who gets into the interstices of her brief. I hope that she will put contingency plans in place, and she will doubtless ask her officials to speak to the NAO and other stakeholders. We need to bear in mind the huge risk involved. We do not want a repeat of the IT shambles.

My final point, to which reference has already been made, concerns enforcement and the culture of the departments that will be merged. I welcome the placing on a statutory footing of the new Revenue and Customs Prosecution Office, which will undertake all the new department's prosecutions. However, I am not entirely clear as to how it will be staffed, or how the varying expertise of the current Inland Revenue and Customs and Excise prosecutors will be melded.

In 1999 and 2000, my hon. Friend the Member for West Worcestershire and I examined how the experience of the Canada Revenue Agency compared with ours, and we discovered that it was similar. To put it bluntly, the expertise of those in the revenue departments here and in Canada is of a higher quality than of those in the customs and excise departments. That is simply a cultural difference. Melding the two to achieve an optimal solution is what this is all about. However, the most recent Select Committee report—the proceedings were chaired by my hon. Friend the Member for Sevenoaks—stated that

"witnesses were concerned about the different approaches of the revenue departments and how this might impact on the new department."

Those concerns were summarised by the Association of Chartered Certified Accountants, which said:

"The Inland Revenue is more prepared to negotiate and has a more human face. By contrast, mention Customs investigators to accountants and businesspeople and exasperation sets in. Once the Revenue has made a ruling, it generally sticks to it. VAT offices change their minds more often—partly because they tend not to commit themselves in writing."

There is clearly a culture problem and I hope that, when the matter is put to bed, we adopt a pretty robust approach to change management. Ministers should adopt a hands-on approach to ensure that the execution of the merger takes the different cultures into account, but not use that as an excuse for things not going right. We need people to get thinking the right way and to do so quickly.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

Does the hon. Gentleman agree that one aspect of the co-operation between taxpayers and the Inland Revenue is the fairly widespread system of clearance procedures? It would be interesting to incorporate that approach rather more frequently in customs matters.

Photo of David Ruffley David Ruffley Opposition Whip (Commons)

I am sure that those implementing this huge change will reflect on the good point that the hon. Gentleman has just made.

Mr. David Varney said that there is a need to look further into the different powers and cultures of the current Revenue and the current Customs and Excise. He said:

"I think the proposition we will be putting, if the Bill is introduced, will be to keep the powers that each individual tax activity has in place and to accept that when" the new department

"is up and running we will look again at the question of proportionality of powers in the context of broader institutions that exercise powers of enforcement."

It will be incumbent on the House and associated Select Committees carefully to scrutinise how well the powers vested in the merged department are meshing together. Clearly, there are different kinds of powers and a different enforcement culture in the two departments pre-merger.

For all those reasons, it is fair to say that this side of the House welcomes the merger in principle. Some of us have argued in favour of it for four or five years. We wait to see whether Ministers will clarify whether some of the savings that they talk about are Gershon savings or other savings. What are the medium-term savings and what are the short-term transitional costs? We look forward to greater clarification of those matters.

Finally, we expect the Paymaster General to make two specific undertakings. First, she or her successors should not come back to the House with rather poor or lame explanations for why the IT has not worked. That will simply not be good enough. She and her officials must redouble their efforts, and not lapse into some alibi society as they did with the working tax credit computer model, when they said that they stress tested it, that everything was ready to go and that they simply could not understand why it was a dog's breakfast on the day it went live. No more excuses of that sort will be acceptable to the House.

Secondly, in view of the different cultural mores of these organisations, new uniform management and working together will have to be forced through. We cannot allow excuses such as saying that organic change takes a long time. We want the merger to work and to work as soon as possible. I therefore give a qualified welcome to the Bill on Second Reading.

Photo of John Martin McDonnell John Martin McDonnell Labour, Hayes and Harlington 4:09 pm, 8th December 2004

First, I apologise for attending the debate so late. I had a constituency engagement, the Ealing Family Housing Association annual pensioners' Christmas dinner. When they reached the Christmas carols, particularly "Oh Come, All Ye Faithful", I thought that it was time to come to the Chamber.

Normally, out of politeness to the House, I would not intervene in a debate that I joined so late. However, I do not appear at risk of being trampled to death by other Labour Members wishing to speak so, in my capacity as chair of the Public and Commercial Services Union all-party parliamentary group, I shall make some comments about staffing matters.

I want to begin with a general point about how legislation is considered these days, and what information is provided to the House in connection with staffing and manpower issues. Over recent years, the consideration of Bills has been refined. The explanatory notes accompanying a Bill now contain detailed assurances in respect of costs and compliance with human rights legislation. They also refer to staffing implications—that is, the impact on public service manpower.

That information enables the House to try and identify individual costs and, in some cases, potential savings, but the system gives us a minimum amount of information about manpower issues. The one sentence on the topic in the explanatory notes for this Bill states:

"There will be a net reduction of approximately 3,200 posts as a direct result of the integration."

Admittedly, the Treasury Committee looked in more detail at the staffing reductions consequent to the Bill, but even then the information provided was fairly peremptory. It identified that about 3,000 jobs would be cut as a result of this Bill, in the context of the other staffing reductions that were taking place. About 8,000 jobs will go as a result of the Gershon review and other studies, but the losses implied by the Bill will bring the total of jobs lost in the relevant departments to something like 12,500.

Elsewhere in the public and private sectors when departments are rationalised and merged on such a scale, or when an organisation is reviewed or restructured, it would be expected that some significant detail about the new staffing levels would be made available. In addition, matters to do with staff structures would be covered in a report from the human relations department involved—what used to be called the personnel department—setting out the range of posts that would be lost, and the responsibilities that rested with those posts. Such a report would also outline the new structures being established, and possibly offer some detail about new posts and their functions. As a result, people could use that report to determine whether the new structures would be workable, in comparison with what had gone before.

Interestingly, only a minimum amount of information on staffing implications has been provided with this proposal. More importantly, however, we know in some detail what went on before. The Treasury Committee has conducted many reviews and produced many reports over the years. Those studies have made it clear that both Customs and the Inland Revenue are world-class services. There is no doubt about their probity and the efficiency of their tax collection in many respects, but it is also clear that both services are open to innovation.

I compliment the Government on their spend-to-save and spend-to-raise initiatives, which are proving exceptionally successful, and have enjoyed cross-party support. That success has been highlighted by the Treasury Committee.

I pay tribute to Mr. Fallon, as the Treasury Sub-Committee has also been very frank about mistakes that have been made. That may have embarrassed the Government, but the Select Committee has a job to do and it has done it effectively. To be candid, it is clear that most failures in the past have not been blamed on staff at Customs and Excise or the Inland Revenue. To a certain extent, we as politicians have to take the blame for some of the failures, because some of the policies were wrong and certainly some of the initiatives that we thrust on the staff were ill thought through. At no time has the Treasury Committee made extensive criticisms of the staff and their professionalism. Indeed, the reverse is true: the Committee has been complimentary.

If we know that the existing staffing structures and levels work effectively—indeed, provide a world-class service—we need to be careful when we seek to adjust, review, revise or change those structures. Anyone who has gone through a merger, in the public or private sector, will know what turbulence it can cause in an organisation. Mergers can lead to breakdowns in efficient delivery of services. My anxiety about the proposals is that it is almost impossible to judge from the information that we have been given about staffing whether the proposals will be effective.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

I am not sure whether the hon. Gentleman was in his place earlier when the Paymaster General acknowledged that the reduction of 3,200 in staff numbers as a consequence of the merger was a guess—it does not come from a precise analysis but from examining how such mergers have been managed in the past. Does he think that it is sensible to produce such numbers, which are very sensitive for those people affected, in such a manner?

Photo of John Martin McDonnell John Martin McDonnell Labour, Hayes and Harlington

We can always rely on my right hon. Friend the Paymaster for her integrity and honesty. She gives straightforward answers to questions and, although I missed that part of the debate, her response does not surprise me. Indeed, that was the flavour of the discussion in the Treasury Committee and it is contained in the report. At different times, we have had different figures. The overall number of staff savings has been a moveable feast, and that is an issue not only for this merger, but for Gershon.

I have some anxiety about this proposal—not in principle, because the merger may prove to be successful. My concern is that if the merger takes place with a predicted number of more than 3,000 job cuts, without detailed information on how the organisation will work, posts may be cut that will be needed later. It might be that we rely on some of the Gershon proposals for savings, especially in relation to the introduction of information technology, but Members on both sides of the House will have their own views on our past performance on IT contracts.

I am concerned that we may lose a large number of professional staff on whom we have relied in the past. We are about to create turbulence within departments that will reduce efficiency of service delivery. We may lose some professionalism in the process, at some cost to us all. That may all happen just at the time we need to collect more revenue because of the taxation gap that has been identified. Is that the time to introduce instability into the system? I would have thought that rather than pluck a figure for job reductions out of the air, which then becomes a target, it would be better to plan the merger, develop the staffing structures, and bring the information back to the House. We should plan for investment in staff rather than reductions in staff.

The evidence that the PCS provided to the Treasury Committee set out the objectives of the service effectively and showed a real commitment on the part of staff to make the process work. However, I would not like to see the merger driven through on the back of staff cuts in a way that alienates a dedicated staff. Should we alienate our employees at the same time as launching what some have described as an attack—the Government call it a review—on other rights that they have had for a long time, especially their pensions?

In the public sector, and in that particular part of it, we shall see the build up of a disgruntled staff who face job cuts and a review on reducing their pension entitlements, yet on whom we are putting an increased burden of tax collection due to the Government's overall fiscal problem with the taxation gap. Instead of a successful merger, we shall have produced something that will be counter-productive to everything that we all want to achieve on the efficient delivery of service.

I am especially concerned about the loss of expertise. A managed merger of this sort must be handled extremely carefully. When we have undertaken such exercises in the past—not just mergers but privatisations, too—we have found that it has taken, literally, a decade to overcome the loss of expertise. We debated the railway industry earlier this week. That is a classic example: the system was privatised, staff numbers were reduced and we lost the very experts on whom we should have relied to develop the new service we wanted to deliver.

Staffing and personnel issues must be handled with incredible care. I cannot accept that blanket job cuts of 3,200 are rational at this stage, before we have even examined the merger and staffing structures in detail. At the end of the day, the cuts will prove counter-productive to the Government's overall policy of increasing tax collection and tackling tax avoidance.

Many Members have mentioned the tax credits experience. As constituency MPs, we all highlight the need for a human being at the end of a telephone to explain benefits and the taxation system, rather than some impersonal computerised system. If the Bill goes through, we are about to lose 3,200 human beings who are desperately needed to explain the system and support our constituents; we should not be putting them on the dole queue where they, too, will have to claim some form of tax credit.

There is support for the Bill, but not for the proposed post reductions. In future, when we consider Bills of this sort, we need much more detail, as a matter of course, about the staffing implications, rather than merely a sentence in the explanatory notes.

Photo of Mr Teddy Taylor Mr Teddy Taylor Conservative, Rochford and Southend East 4:22 pm, 8th December 2004

I want to make some brief comments along the same lines as those of John McDonnell.

I interrupted the Paymaster General twice during her opening speech to ask about the employment implications of the changes. She courteously indicated that the figure was 3,200, and that was that.

When I entered the House more than 40 years ago, I had great problems, like many MPs, about which party it was right to go along with. I had the impression then, which was right, that the Conservative party was the party of efficiency, which went for change and would look after public money carefully. From the financial point of view, it was probably the party that best served the interests of the community. On the other hand, there was no doubt that the Labour party was the party that cared for people and had more concern for them, and that influenced me. However, having listened to MPs over the years, there is no point in hiding the fact that what worries me now is the impression I have received from recent statements by Ministers, including the one we heard today, that the Labour party is forgetting its care for people.

I live in Southend-on-Sea and meet many people who work there in one of the biggest Customs and Excise operations—our VAT office, which has a fine tradition—so, in all sincerity, I can tell the Paymaster General that I know many of those people. I go to church with them, I go to meetings and dinners with them and they are very worried indeed about their future. Will they have jobs? Is the organisation to be changed dramatically? Will there be transfers to other places? That is a particular concern in a place such as Southend-on-Sea, which has traditionally had more unemployment than elsewhere in Essex and the south. The Paymaster General is a courteous and decent person, so I ask her, please, to realise the extent of the worry and concern that those major changes are causing.

My second basic point is that all the efficiency changes made by the Government are not working terribly well for people. The one big change that we had in Southend-on-Sea was the closure of our social security office and the transfer of the work to Jobcentre Plus or to the new pensions office in Norwich. I can assure the Paymaster General that, whereas pensioners used to like visiting the office in Victoria avenue to talk someone about their problems and to ask for help to fill in their forms, they now face the nonsensical situation of making contact with Norwich.

If the Paymaster General would like to phone that number herself, she would find out about all the nonsense involved in being switched from one place to another and hearing a voice that tells people what to do. In addition, the system is subject to long delays. Bearing in mind the number of people who have come to my surgery—I hold a weekly surgery—that is a horrible state of affairs for the pensioners, because they are not getting the same service and they are very distressed about that.

I hope that the Paymaster General appreciates that the VAT office is one of the major sources of employment in Southend-on-Sea. We have only two major employers: one is called KeyMed and the other, of course, is the department. When an earlier proposal was made to transfer the office to another place, it was accepted that Southend had such a long-standing unemployment problem that some special measures should be taken for us.

What are we trying to do? Of course, it would be easy to say, "Let's scrap all these new plans and leave things as they are." That is difficult for the Conservative party, which works in the interests of efficiency. The Paymaster General should appreciate three things. First, it is desperately important that the local staff should be fully informed of what is happening, when it will happen and whether it will have a major impact on their employment. Secondly, facilities should be provided for meetings and discussions involving employees and trade unions. Frankly, unless that happens, people are simply being treated with contempt. Thirdly, the planned changes should take account of the fact that some areas have a tradition of high unemployment and special provision should be made for them.

Although I would in no way suggest that the Paymaster General is a difficult person or is being unkind, I hope that she appreciate that there is sometimes a danger of forgetting people in the rush for efficiency and change. I also hope that she will appreciate that the people who work in that office are very worried indeed and that they are simply looking for some assurances.

This issue was raised by the Treasury Committee, as the Paymaster General will probably know, and page 7 of the report that was made available today refers to a man called Mr. Varney, who is a Mr. Big in the organisation. He was asked what will happen if the redundancies take place. He was also asked whether the 9,000, 10,000 or 12,500 proposed staff cuts—the figures vary—that result from spending review settlement will involve job losses. He replied that he could not rule out redundancies, but he would try to avoid them. Frankly, a married person buying a house with a mortgage, with two or three children at school, who is suddenly faced with the possibility of being made redundant does not have much to look forward to. If people are made redundant, I hope that the Government will go out of their way to try to ensure that they are offered advice about the alternatives or another form of employment.

I can appreciate the Government's desire to move towards greater efficiency, but as a local MP, I do not particularly like it because I found from the other changes that people previously benefited from personal contact with individuals and that they do not like the fact that they have to contact a remote office in Norwich and must do so by phone and by pressing buttons. That is not an improvement in the service for local people, so I hope that the Government will accept that such changes do not necessarily provide better services. In fact, because of all the problems with computers, people may get a worse service. The main thing is, however, that the people themselves do not think that it is better. They think that it is much worse. I hope the Government also realise that for those who face the possibility of redundancy is it frightening, horrible and cruel. I hope that they will go out of their way to reassure people, in particular those in areas of Southend, where this civil service work is a desperately important part of our local economy.

Photo of Mark Francois Mark Francois Shadow Economic Secretary (Treasury) 4:30 pm, 8th December 2004

It is a pleasure to sum up for the Opposition after what has been a high-quality debate. I pay tribute to the Paymaster General. It is true that she spoke for nearly an hour, but the principal reason for that was that she was generous in giving way to hon. Members on both sides of the House. We should acknowledge her courtesy.

I join my hon. Friend Mr. Tyrie in thanking the Paymaster General for kindly giving us a briefing on some of the detail of the Bill at the Treasury recently. We were grateful for that. We were also grateful for the whistle-stop tour, following the briefing, of the refurbished Treasury, but we resisted the temptation to pause and measure up the curtains. We felt that that might have appeared gauche. Nevertheless, it was kind of her to take us on the tour, which we enjoyed.

In a thoughtful speech, my hon. Friend explained that we do not oppose the Bill in principle, because it is designed to facilitate the eventual merger of two large Government organisations. However, we are concerned about how the proposed merger is likely to take place in practice, and I shall concentrate on that in summing up our position.

Before I do that, I want to refer to some of the contributions that we enjoyed. Mr. Beard, who served as a member of the Treasury Sub-Committee, spoke knowledgably on the subject. He provided us with some of the background to the proposed merger, including the genesis of the Butterfield report. We are grateful to him for adding that element to our deliberations.

Mr. Laws spoke from the Liberal Democrat Front Bench. He, too, broadly welcomed the Bill, but like us expressed scepticism about the ability to generate material savings over the spending review period. There has been quite a lot of to and fro about that, so we would all welcome clarification of two things. First, what are the specific savings that the Department estimates will result from the merger itself? I am not talking about Gershon in the broader context, but how much public money will be saved as a result of the merger. Secondly, over what precise timetable do the Government expect those savings to be realised? In which year can we expect the full-year effect of those savings to have kicked in? If, for any reason, the Government cannot answer those two pertinent questions on Second Reading, they are in trouble from the word go. We look forward to the Economic Secretary clarifying those two points.

Mr. Hopkins told us about discussions with his local trade unions relating to the merger, including during a recent visit to Luton airport. He amused the House with his valiant attempts to pay duty some years ago on his return from an enjoyable trip to France. As he mentioned consulting the unions, and as that sparked off a spat between the Paymaster General and the Liberal Democrats, perhaps the Economic Secretary will summarise what consultation has taken place with the unions to date, so that there is no confusion. Perhaps he could also say a few words about how the consultation process is likely to be taken forward with the trade unions as the merger rolls out. Given the comments that we have heard this evening, it seems that Members on both sides of the Chamber will be grateful for that clarification.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

I agree that we need answers on these points. I suggest that the hon. Gentleman might add a further question to the Economic Secretary. Given the vagueness about the figure of 3,200 job losses, perhaps the Economic Secretary can let us know whether, in his discussions with the unions, he will be clarifying with them whether the Government will seek 3,200 staff cuts or a figure close to that, or whether that is, as the Paymaster General indicated earlier, just a broad assessment or guesstimate of what the savings might turn out to be.

Photo of Mark Francois Mark Francois Shadow Economic Secretary (Treasury)

That seems a pertinent point. Rather than repeat it for form's sake, I am sure that the Economic Secretary has heard it and will do his best to respond to it.

My hon. Friend Mr. Fallon chairs the Treasury Sub-Committee. We should pay tribute to the thorough and detailed job that that Committee did. On the basis of that work, he spoke knowledgeably about the proposed merger. He, too, argued for more specific information on the likely savings and how they are expected to be realised in practice. I hope that the Minister, having heard the Chairman of the Sub-Committee, has now well and truly got the message and that we will hear clear answers from him.

My hon. Friend Mr. Atkinson has had something of a grin on his face ever since the result of the north-east referendum. I think that he still has that grin today, particularly when he was contemplating the taxpayer experience as some permanent exhibition. I do not know whether that will ever be established in practice, but if it were, I fear that it is the sort of thing that would have to be propped up with lottery money. The ticket sales might not meet the original estimates.

My hon. Friend also talked about problems arising from the maladministration of tax credits. He made some pertinent points on the basis of the real experiences of real individuals. I shall return to that subject in more detail.

We also heard from Mr. Burnett. He brings to the House his experience as a tax practitioner over 25 years, I think. If I heard him correctly, he also said that, over those 25 years, he never had cause to lodge a material complaint about the Inland Revenue. I am not certain whether all our constituents could provide such a blanket guarantee but I echo what my hon. Friend the Member for Chichester said from the Opposition Front Bench, which is that we pay tribute to the sometimes difficult work that members of the Inland Revenue and Customs and Excise undertake. I emphasise that some of the criticisms that I shall come on to relate to their senior managers and to Ministers rather than to staff at the coal face who are doing the job from day to day.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

I thank the hon. Gentleman for what he said. I think that I said that I had not had cause over 25 years to complain about the conduct of the Inland Revenue. I specifically said "Inland Revenue". I had many disagreements with it, but its conduct was, in my view, beyond reproach.

Photo of Mark Francois Mark Francois Shadow Economic Secretary (Treasury)

I am sure that the hon. Gentleman spent a lively 25 years in dealing with the gentlemen of the Inland Revenue. I am sure also that the House knew what he was driving at, and I wanted to acknowledge the point that he made.

We then heard briefly from John McDonnell, who raised the staffing implications of the merger. He made an important point on what is now becoming, in some respects, the impersonal nature of the system and the remoteness that many of our constituents feel when they have to deal with a call centre, especially when they cannot get through to the same person more than once. He introduced an important point and it is one to which I will return.

We also heard from my hon. Friend Sir Teddy Taylor, who is my parliamentary neighbour. He raised particular concern about the staffing implications of the merger. I can well understand that because Customs and Excise has a major facility in Southend. I already know from our informal discussions that he has made representations on this matter on several occasions, as I believe has my hon. Friend Mr. Amess. The issue affects Southend as a whole. The House will have heard what my hon. Friend the Member for Rochford and Southend, East said this evening on behalf of people in Southend. I hope that his points will be taken carefully into consideration as the merger proceeds.

I also wish to refer to the remarks made by my hon. Friend Mr. Ruffley. He served with distinction on the Treasury Committee and was often a thorn in the side of Ministers. To a degree, he has achieved that in this debate. He spoke with particular force about the problems of information technology and how they cause difficulties for our constituents. I now turn to that subject.

Given recent events, we have a strong concern about the risks that might arise from the IT aspects of the proposed merger. Between them, the Inland Revenue and Customs and Excise have about 250 different legacy computer systems and deal with 13 million customers, including 3.75 million businesses of varying sizes and complexity. The departments already experience more than 250 million contacts a year, ranging from tax returns, letters and telephone calls to e-mails. The scale of the merger in IT terms alone is therefore huge, as is the potential risk to the Government's revenue stream if it all went wrong.

Unfortunately, even a brief examination of the Government's track record in managing major IT programmes is very far from encouraging. There are already serious problems at the Inland Revenue itself even before the merger commences and several hon. Members have touched on that issue already. The Revenue is now responsible for the administration of the Chancellor's complicated system of tax credits. The computer system designed for that purpose has been exposed as being prone to error, including a particularly unhelpful tendency to overpay tax credits to people in one year and then try to claw them back in the next. My hon. Friend the Members for Hexham and for North Wiltshire (Mr. Gray) made that point.

The Public Accounts Committee, which examined the performance of the Inland Revenue in this respect, came to a damning conclusion. In a press release of 22 April 2004, the Committee's Chairman, my hon. Friend Mr. Leigh, commented:

"The problems that arose when the Inland Revenue introduced the New Tax Credits scheme are well known. It was nothing short of disastrous, with hundreds of thousands of claimants not paid on time, inevitable hardship for some, inconvenience to employers, and disruption to other parts of the Revenue's business. The Revenue should have been more realistic in setting the timetable and have put in place better contingency arrangements."

That is a sword of Damocles to hold over the Government's head.

In facilitating the proposed merger, it will also be important to learn lessons from the recent problems—some of them very serious—at the Child Support Agency. By way of comparison, several years ago the Government decided to transfer CSA cases on to a new bespoke computer system known as CS2. The new computer cost almost £500 million of taxpayers' money but, according to an article on the BBC News website entitled appropriately, "Basically, it doesn't work", operators could be working on the system when it would suddenly lock them out without warning. It would take weeks before the case file could be electronically reactivated and properly dealt with. According to a briefing note from the Library, up to 150,000 cases are now stuck in the CSA system in this way and are effectively unable to proceed.

Ministers are still wrestling with whether to try to fix the existing system or write off a great deal of public money and start again with an alternative. This has been a fiasco, and it led to the resignation of the chief executive of the CSA. Such events must be avoided in the merger that we are discussing, particularly as the merged entity would have to deal not just with individuals but with companies.

It is important to remember that we are not just dealing with statistics, even though some of the numbers for the problem cases involved are very large. I say in all sincerity to the Economic Secretary that these are real people, many of whom rely on receiving money for which they have budgeted in all good faith, but which fails to reach them through no fault of theirs.

Commenting on the syndrome of Government computer failures, the National Audit Office, in its November report on improving IT procurement, a copy of which I have, concluded that the failure of public sector IT contracts is due to a number of key factors, including a lack of a clear link between the project and the organisation's key priorities, a lack of effective engagement with stakeholders who will need to use the system, and a lack of clear senior management and ministerial ownership and leadership. That is a damning indictment from the NAO, in addition to the previous one from the PAC.

As the merger is implemented, it will be important to try to avert what might be described as ordeal by Government call centre. Too many of our constituents experience a substandard service because the Government switch work into call centres backed up by inefficient or unreliable computer systems. The syndrome, which is all too familiar to many CSA and Inland Revenue tax credit customers, can be summarised as follows.

The Department's computer generates a letter that is incorrect on an account that was previously operating well. The aggrieved constituent telephones the number on the letter and is put through to a departmental call centre. After the electronic rendition of "Greensleeves" or whatever the music happens to be, they get the inevitable menu of options. Having fought their way through that, they are eventually put through to a member of staff. They give their reference number and the details, and attempt to explain the specifics of their case. That is all taken down and the caller is told something like, "I will send an e-mail to our computing department and have it sorted out for you. Don't worry."

Two or three weeks later the constituent receives another letter showing that nothing has happened and nothing has changed. Frustrated, they ring up the call centre again, are put through to a different person and go through the whole saga a second time, only to discover a fortnight or so later that again the problem has not been put right. The problems with tax credits and overpayments are a perfect example of the syndrome. Eventually, in a state of high dudgeon, the constituent arrives at their Member of Parliament's constituency surgery to vent their wrath. I am sure a number of hon. Members have had that wonderful experience already.

Photo of Mark Hoban Mark Hoban Shadow Minister (Education)

My hon. Friend is outlining a problem that many constituents have experienced. Constituents of mine have been advised by the person at the call centre to ring their MP, as that is the quickest way to get their problem resolved. That demonstrates the problems that constituents face with the computer systems already in place, dealing with the CSA and tax credits. The Paymaster General shakes her head, but that is a common concern that constituents raise with me. They are told that the MP is there to sort things out.

Photo of Mark Francois Mark Francois Shadow Economic Secretary (Treasury)

I thank my hon. Friend for that pertinent intervention. I did not intend to mention individual constituency cases, but I, too, have had people who have come to see me at my constituency surgery because someone at a call centre has advised them that the only way they will get their problem sorted out is to see their Member of Parliament.

In fairness to the Minister, it appears to be the Child Support Agency that is the worst offender, but the Inland Revenue is not far behind with its maladministration of tax credits. I know that Ministers do not like to hear it, but that is stark reality.

Photo of Mark Francois Mark Francois Shadow Economic Secretary (Treasury)

I remind the Minister that the system is supposed to help people and provide them with value for money, not to drive them mad. We must do better than we are doing at present. People out there deserve better than they are getting from people in here. I cannot stress that strongly enough to the Minister.

In conclusion, we are not opposed to the Bill per se, but we are concerned about how its provisions will be implemented. Specifically, we are worried about the degree of risk inherent in the information technology aspects of the merger, given that the new system will be expected to handle more than 250 million contacts in any one year. Were there to be another foul-up on the scale of the Child Support Agency, the threat is not just that it would cause widespread confusion among the taxpayer and business community, as it undoubtedly would do, but that the Government's revenue stream would start to dry up as a result.

For this merger, we will need a combined system that provides a high-quality service to both taxpayers and companies and ensures that they receive genuine value for money in return for the considerable capital costs that are likely to be involved. Crucially, we need evidence of clear ownership and leadership by Ministers. When that falls to future Ministers in a Conservative Government, we will endeavour to provide it.

Photo of John Healey John Healey The Economic Secretary to the Treasury 4:49 pm, 8th December 2004

This has been a full debate, and I shall try to do full justice to the detailed contributions made by nine hon. Members from both sides of the House since my right hon. Friend the Paymaster General opened it earlier this afternoon.

The Bill is important and will bring important changes. It concerns the machinery of government, but it matters to 30 million HMRC customers, including 4 million businesses around Britain. It enables the early steps in bringing together the Inland Revenue and Customs and Excise—full integration is a long-term, large-scale undertaking. As my right hon. Friend said, the process goes beyond a simple merger between two departments.

Between them, the two departments collect £400 billion in revenue each year. They pay out £17 billion in tax credits and a further £9 billion in child benefit, and they handle almost 40 million telephone contacts. The two departments employ 100,000 staff, operate from more than 300 locations, run 250 separate IT systems and carry out a wide range of functions from traditional tax gathering and assurance to enforcement of the minimum wage, payment of tax credits, facilitating British exports and securing the UK's frontiers. Between them, Customs and the Revenue have a proud history of more than 1,000 years' service to the British state and the British people. I pay tribute to their professionalism, their technical expertise and their commitment to the public service ethos, which have been the special hallmarks of both departments over the years.

Some have questioned the case for integration. Earlier this year, Gus O'Donnell, the permanent secretary at the Treasury, produced the O'Donnell report, which examined not only the case for integration but a couple of other options not involving integration. It set out the clearest conclusions on the case for integration, and I refer hon. Members on both sides of the House to page 6:

"The case for organisational change rests on potential improvements in customer service, effectiveness and efficiency. It results from an analysis of

* international experience, which has shown that the current separation of direct and indirect taxes in the UK, as opposed to organising around functions and customers, is behind best practice;

* the functions of the revenue departments, which shows that there are benefits from bringing them closer together;

* the experience of closer working between the departments since 1994, which has been promising but limited in its results; and

* the success of the creation of the Department for Work and Pensions, with the formation of several customer-oriented agencies, including the integration of benefits and employment advice in Jobcentre Plus".

The Treasury Committee has been in no doubt about the sense in creating a single Revenue department. I, like others, pay tribute to Mr. Fallon, who led the work on the recent report, and to his colleagues, both past and present, who have contributed to this afternoon's debate. Last month, the Sub-Committee produced its report, which welcomed the decision to merge the two departments and reminded us, as the hon. Member for Sevenoaks did this afternoon, that the Treasury Committee, under different chairmanship, recommended a merger in 2000.

The Sub-Committee observed that witnesses believe that the merger should produce benefits for both taxpayers and the Government. It endorsed what the Government saw as the pragmatic approach adopted in this initial Bill to create HMRC, which will be followed by further work. Finally, although this is not related to the Bill, the Committee endorsed steps to strengthen the Treasury's capability in the area of strategic tax policy making.

In that respect, the Committee was reporting afresh on an issue that was first examined by one of its predecessor Committees in 1863, although that Committee published two reports that year which came to exactly opposite conclusions on amalgamation. The Committee chaired by the hon. Member for Sevenoaks has had no such second thoughts. Indeed, it made recommendations to the Government about proceeding on integration. It made further recommendations on quantifying the expected costs and benefits; on ensuring that business as usual is a top priority during the merger period; on proper parliamentary scrutiny, including a second stage of legislation for any substantive changes; and on safeguarding the confidentiality of taxpayer information. My right hon. Friend the Paymaster General explained that we have taken those recommendations into account in framing the Bill, and she set out the Government's point-by-point response to them.

I shall try to do justice to the very detailed contributions that hon. Members made to the debate, starting, if I may, with Mr. Tyrie. He said that as a country we are very lucky in our Revenue departments; we would share that sentiment. He said that he worked with both departments in the 1980s; I fear that he may have to wait for a little longer than a few months until he gets the chance to do so again. He mapped out the rationale for integration and quoted a section of the O'Donnell review, which summarised the principal benefits on page 7 of its report.

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General

I also pointed out that the Government have not provided the quantification of those benefits that is necessary in taking this decision, and that the project has real downside risks whereby if it goes wrong it could be very costly for the country in terms of lost yield. I would not want the Minister to paint a picture suggesting that we are giving unalloyed and unqualified support to the merger.

Photo of John Healey John Healey The Economic Secretary to the Treasury

The hon. Gentleman did indeed make a substantial contribution to the debate. If he will be patient, I propose to move on immediately to his point about costs and benefits, then to deal with the concerns that he expressed about IT, as one of at least six of his points that I intend to respond to directly.

The hon. Gentleman mentioned cost-benefit analysis of integration, as did the hon. Members for Yeovil (Mr. Laws), for Sevenoaks and for Hexham (Mr. Atkinson). All did so in the context of being generally favourable to the plan to integrate the two departments. Essentially, their questions concerned detailed cost-benefit analysis of full integration. Let me try to explain the situation. A change management centre has been set up for the departments with the specific role of identifying and tracing the benefits that may flow from integration. As part of that, it will ensure that all proposals for bringing work together are tested to identify the benefits that they deliver and to establish proper priorities for the integration work. Of course, the National Audit Office will subject the new department to scrutiny and monitoring on efficiency and effectiveness, just as in the case of its predecessors; and any legislation on reforms that are required will be accompanied by a regulatory impact assessment that will spell out the anticipated costs and benefits.

I remind the hon. Member for Chichester that, as my right hon. Friend the Paymaster General said, until this House gives the Bill its Second Reading, the departments do not have the legal authority to spend money to analyse and model the options in sufficient detail to quantify the costs and benefits that can flow from integration in the way that he seeks. Clause 38 provides for expenditure by HMRC in carrying out all its functions.

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General

Does the Economic Secretary seriously suggest that we do not have figures from the Government on costs and benefits because of some legal bar to their beginning the preliminary work?

Photo of John Healey John Healey The Economic Secretary to the Treasury

There is no ducking the fact that there is a legal bar until the HMRC is closer to being formally constituted. There is a bar on deploying resources. It is obvious that, until more detailed plans are worked out about how integration can be effected to secure the general purposes and gains that the O'Donnell review sets out, it is not possible to quantify the costs and the benefits precisely. I shall shortly spell out the costs and benefits analysis that we were able to set out in the regulatory impact assessment that accompanies the Bill.

Photo of Mark Francois Mark Francois Shadow Economic Secretary (Treasury)

I thank the Economic Secretary for his courtesy. The NAO report on IT procurement that I mentioned in my speech contains a list of recommendations to the Government from Sir Peter Gershon from the time that he spent at the Office of Government Commerce. One recommendation, on page 3 of the executive summary of the report, states:

"No government initiative (including legislation) dependent on new IT to be announced before analysis of risks and implementation options has been undertaken."

How does he square that with his comments?

Photo of John Healey John Healey The Economic Secretary to the Treasury

I shall deal with IT, if the hon. Gentleman, like the hon. Member for Chichester, will be patient. Let us be clear: the Bill and the changes for which it provides do not directly depend on changes and integration in IT.

The regulatory impact assessment confirms the figure of 3,200 for staff savings as a direct benefit and gain of the integration of the two departments. Her Majesty's Revenue and Customs is committed to delivering those figures from integration as part of its efficiency plan up to 2007–08. Let me be clear and direct: the savings from those 3,200 posts, including the associated overheads, could be £100 million of a total of £507 million that the department will save by 2007–08. Those are Gershon savings.

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General

Are they to do with the merger?

Photo of John Healey John Healey The Economic Secretary to the Treasury

They are indeed, but they are not entirely dependent on it.

Photo of John Healey John Healey The Economic Secretary to the Treasury

I am sorry but I need to explain the point to the hon. Gentleman again. The staff savings that flow directly from integration are set at 3,200—HMRC has signed up to deliver that target by the end of 2007–08. The costs of those posts plus the associated overheads could be approximately £100 million. That is part of a total saving, set at £507 million, that the department will achieve by the end of 2007–08. They are Gershon savings and include additional savings on posts through integration. Those efficiency savings will save at least £507 million by the end of 2007–08. Hon. Members should not regard that as new information, because in September a 16-page note, entitled "HMRC Efficiency Technical Note" was produced on the department's efficiency plan. Hon. Members will find plenty of information in that publication that they do not seem to have.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

The Economic Secretary says that the information is available. It did not appear to be available to the Paymaster General earlier. I am grateful that he has corrected her comment that the £500 million savings were down to the merger. Will he clearly answer two other questions? He said that the figure of 3,200 was a target for job cuts that had been signed up to. However, the Paymaster General admitted earlier that the figure was a guesstimate of savings. Is it appropriate to sign up to a target of 3,200 job reductions on the basis of a guesstimate? Will there be any net savings from the Bill in the period of the existing spending review?

Photo of John Healey John Healey The Economic Secretary to the Treasury

The existing spending review is entirely consistent with the period that I have just outlined, to 2007–08. The savings involved will flow from the posts. The hon. Gentleman has failed to see what has been going on in other Departments as part of the general efficiency drive in Government. This is precisely the nature of the targets that have been set and signed up to. Department by Department, senior managers and Ministers are examining how they can be realised. There is nothing different about this stage of the process for HMRC.

Photo of John Healey John Healey The Economic Secretary to the Treasury

I am going to make some progress, if I may. I want to move on to a point that the hon. Gentleman raised earlier, and which was also mentioned by the hon. Members for Sevenoaks and for Yeovil. The provisions in the Bill are not a downgrading of the Inland Revenue oath, as the hon. Member for Sevenoaks tried to argue. The statutory duty set out in clause 17 places the staff of HMRC under the same strict obligations as the Inland Revenue oath does, but in a modern guise. Protecting customer confidentiality will remain an essential characteristic of the new department, as my right hon. Friend the Paymaster General spelled out earlier, and all staff will continue to take their obligations on confidentiality extremely seriously.

Photo of John McFall John McFall Chair, Treasury Committee, Chair, Treasury Committee

I would like to pay tribute to my colleague, the Chairman of the Sub-Committee, the hon. Member for Sevenoaks, for his work on this inquiry. It was a very productive inquiry: the fact that Customs and Excise and the Committee worked together was very good, and the fact that the Treasury has taken up our suggestion is very welcome. Confidentiality was a concern for us, however. Will the Minister assure us that he will ensure the confidentiality of each department, and that that will be in the Bill?

Photo of John Healey John Healey The Economic Secretary to the Treasury

I can give my right hon. Friend that assurance; it is indeed in the Bill.

Photo of Michael Fallon Michael Fallon Chair, Treasury Sub-Committee

The Minister has not quite reassured me on the specific point as to whether the statutory declaration will continue to be practised. Is it to be wrapped up inside the employment contract, or will members of the service still make the statutory declaration in front of a witness when they join?

Photo of John Healey John Healey The Economic Secretary to the Treasury

The staff will have a statutory duty, which will be binding on them, regardless of what they have already signed. As my right hon. Friend the Paymaster General said, the statutory duty set out in the Bill replaces the Inland Revenue oath and for the first time extends it across former Customs and Excise matters, giving statutory backing to existing duties of confidentiality under employment contracts across a wider range of functions.

The hon. Member for Chichester raised the question of information technology, as did the hon. Members for Rayleigh (Mr. Francois) and for Bury St. Edmunds (Mr. Ruffley). The Paymaster General and I know only too well how central information and communications technology is to the delivery of the essential functions of both revenue departments. As we look forward to their integration and to the formation of HMRC, we are creating a single chief information office which will bring together the planning for both organisations. I want to make it clear that HMRC will not have a single operating environment. Both departments have many systems at present, a number of which are stand-alone systems that are likely to remain so under HMRC. As Members would expect, detailed contingency plans and disaster recovery arrangements are already in place, together with strategic sites for back-up. However, I do not accept the argument of the hon. Member for Chichester that it would be appropriate to publish that information.

I am grateful to the hon. Member for Yeovil for his general support for the change that we are proposing. He says that he can see the potential benefits of integrating the departments, as we can, and he came to the same conclusion as the Treasury Committee that gains were more likely to come from integration than from the further closer working of the two independent departments. He outlined the three principal objectives involved: the further closing of the tax gaps; the provision of a better service to business and individual customers; and the efficiencies that can be gained. I say to him that the focus is certainly not only on the efficiency savings that could come from integration, although it is true to say that, on Budget day, when the integration was confirmed, the focus of the media was very much on those savings. The lengthy O'Donnell report, the policy and plans in place in both departments to improve services to taxpayers, and the public service targets that are set for HMRC to continue to reduce tax gaps, will all, I hope, reassure him that this is not a merger that will be driven by efficiency savings alone.

Photo of John Healey John Healey The Economic Secretary to the Treasury

I will give way one last time. I am sure that other Members who have contributed to the debate would like me to be able to answer their points as well.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

I am grateful to the Economic Secretary for giving way. I remind him that he has almost two hours in which to respond, so there is no particular hurry. I have accepted that we will not get an answer from him on the issue of net cost, but does he really think that setting an arbitrary target for job reductions of 3,200 for this merger, which we now understand is based only on a guesstimate from other mergers, is the right way to get the support of the staff for the significant changes that he has discussed today?

Photo of John Healey John Healey The Economic Secretary to the Treasury

It is not an arbitrary target—it is a realistic target. What has been done for HMRC is exactly what has been done and is being pursued in other departments.

My hon. Friend Mr. Beard, who has served for some time with distinction on the Treasury Committee, urged us not to lose sight of the wood for the trees. Like the hon. Member for Yeovil, he stressed the main concern, which should be to close the tax gap, as he put it, and reduce it almost to the point of elimination of evasion. I want to underline that HMRC has public service targets set throughout the current spending review period and throughout the period of the initial stages of integration, which cover reducing the amounts of unpaid VAT to the Exchequer and reducing the underpayment of direct taxes.

My hon. Friend the Member for Bexleyheath and Crayford also gave some indication of the potential gains for business: a single inspector; single inspection visits; and a single point of contact. I am sure that he looks forward to the publication, which my right hon. Friend the Paymaster General mentioned, of the consultation paper on further steps and changes in powers in January. We look forward to his views and those of the Treasury Committee as part of that consultation. He was also concerned that integration should not distract the departments from their continuing duties. The Treasury Committee was right to stress that, and Ministers have made that clear to the new chairman, David Varney, who has certainly made it clear to his staff that that cannot be the case.

The hon. Member for Sevenoaks asked why the Government have changed their mind since 2000, which was a point echoed by the hon. Member for Bury St. Edmunds. It is less that we have changed our mind than that we have undertaken a serious study, led by the permanent secretary to the Treasury, which gives us a better basis as Ministers to take such a decision to move to integration. It is also based on a couple more years of experience in government of such large-scale mergers than when the Committee first took evidence and produced its report. I welcome the second report from his Committee, as I have made clear, and its conclusions.

The Committee urged us to treat this as a staged process, and to evolve the new department rather than to do it in one go, although, curiously, the hon. Members for Sevenoaks and for Hexham then started raising concerns about the second stage of the process. I hope that the former will be reassured by confirmation that the consultation on this second stage will begin in January, and that it is clear to him that we do not expect that to be completed in time for the setting up of the new department under this Bill. My right hon. Friend the Paymaster General has made it clear that we regard the Finance Bill in 2006, or appropriate legislation, as the likely timing for introduction of the succeeding stage. Of course, we will delay no longer than necessary, as to do so would be to delay gaining the benefits that we set out to achieve from integration.

On the concern raised about geographic location and the move of Customs and Revenue staff to Parliament street—I will come on to the similar point made by Mr. Burnett in a moment—location is not an issue. The existing convention whereby Ministers and their officials do not intervene in individual cases will be strictly maintained. As now, Ministers and their officials will not have access to individual taxpayer and customer information in the Treasury.

The hon. Member for Torridge and West Devon asked where the new RCPO staff would be housed. They will have two offices, one at New King's Beam house in London and one at Ralli Quays in Manchester. They will share those larger Government buildings with some HMRC staff and some staff from other Departments. However, the respective operational areas will be quite distinct. RCPO staff will report directly to their new director, who will be accountable to the Attorney-General and not to Treasury Ministers.

The hon. Gentleman asked about the extra staff in the Customs and Excise Prosecutions Office since the line of accountability led to the Attorney-General rather than Treasury Ministers. The new arrangement is settling down, as he said, and the numbers have also been settled: there are just over 200 staff. The hon. Gentleman also asked about resources for the extension of the functions of the IPCC to the new HMRC. They are still being agreed, and for reasons that he will understand I cannot yet give him a definite answer. He asked about confidentiality, the principle of new powers, the quality and nature of investigators' training post-Butterfield and the external scrutiny that we deem necessary for investigators post-Butterfield. I look forward to discussing and probing those matters with the hon. Gentleman in Committee.

I will pass on the tributes paid by my hon. Friend Mr. Hopkins to the excellent job done by Customs and Revenue staff. He urged us to be prepared to invest in, among other things, more staff when there is a case for doing so, and my hon. Friend John McDonnell mentioned what he described as our "spend to raise" programmes. What we have done in the past has had an impact on the VAT gap, and helped to close the gap in the collection of tobacco excise duties. I was a little concerned when my hon. Friend was reciting his experiences at the port, until he explained that they had happened 15 years ago. He will recall that one of our first moves when we came to office in 1997 was to cancel the Conservatives' planned cut of 300 Customs posts.

Photo of John Healey John Healey The Economic Secretary to the Treasury

My hon. Friend is a great friend of mine, but he has only just come in, and I want to respond to points made by those who have been present and contributed to the debate.

I pay tribute to the work of my hon. Friend the Member for Hayes and Harlington as chair of the all-party PCS trade union group, which is one of the most active all-party groups in Parliament at present. He spoke of the improvement in the information that we publish with Bills, but felt that details of staffing changes were still not full enough. As I said earlier, the aim is to cut 3,200 posts as a direct result of integration. That has been signed up to as part of the efficiency plan for the new department, to be delivered by the end of 2007–08.

Photo of John Healey John Healey The Economic Secretary to the Treasury

No, I will not. I want to finish my response to my hon. Friend the Member for Hayes and Harlington. He will know of the opportunities we are providing; of the redeployment and reskilling of staff affected by the cut in the number of posts; and of our determination to avoid compulsory redundancies whenever we can; and he will know that plans for the development of the new department, and plans for efficiency savings, are being fully discussed with the trade unions.

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. It is obvious that the Minister is not prepared to give way at this point.

Photo of John Healey John Healey The Economic Secretary to the Treasury

The hon. Member for Rochford and Southend, East waited patiently to make his contribution, and is still in his place. Understandably, he is worried about the employment implications of a number of changes affecting Customs and Excise, and not just its integration with the Inland Revenue. I appreciate the concern that he feels as a diligent constituency MP, and I certainly appreciate the uncertainty felt by the staff. I hope that the reassurances that I gave to my hon. Friend the Member for Hayes and Harlington will also help to reassure the hon. Gentleman and his constituents. Any changes will be fully discussed with the trade unions and with the staff affected. Ministers and senior managers are very conscious of the need to settle the precise plans and the implications for particular posts as soon as possible. As my hon. Friend asked, neither Ministers nor senior managers will forget the people in the departments in making these changes, because they remain at the very heart of everything that we do.

The Paymaster General and I were encouraged by the broad support that we received for the Bill in all parts of the House this afternoon, and we both believe it right that detailed scrutiny should take place in Committee. I should make it clear that, as the Treasury Committee advised and as Members have urged today, we cannot proceed without this legislation. The Bill legally establishes HMRC. It allows it to spend money in carrying out its functions, to deploy resources more flexibly on single visits and returns, and to pool information that Customs and Revenue officials currently cannot share. Although it is currently possible to achieve a good deal of close working and joint activity, a single Revenue department structure and management will indeed bring better strategic focus and benefits to all the department's customers. It will help to tackle the tax gap, to reduce costs for honest taxpayers, and to enable much more coherent and integrated future developments.

Beyond creating a single new department, we have also taken the opportunity provided by the Bill to establish a new and fully independent prosecutions office—the Revenue and Customs Prosecutions Office—and to extend the remits of Her Majesty's inspectorate of constabulary and the Independent Police Complaints Commission. Together, they will provide the extra, external scrutiny of HMRC's criminal investigation work that is a direct consequence of accepting and putting into practice the Butterfield review's recommendations.

In summary, the Bill allows for the legal establishment of HMRC. It confirms the transfer of existing powers for the administration of tax and duty regimes, not their extension. It reinforces the principle of, and protection of, taxpayer confidentiality. It strengthens the independent scrutiny and inspection of criminal investigations work. It sets up a new prosecutions office that is fully independent of HMRC, and will report directly to the Attorney-General. I commend the Bill to the House.

Question put and agreed to.

Bill accordingly read a Second time.