New Clause 1 — Report on Establishment of Commissioners

Orders of the Day — Commissioners for Revenue and Customs Bill – in the House of Commons at 5:45 pm on 26th January 2005.

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'(1) On the second anniversary of the coming into force of this Act in accordance with section 51(1) the Chancellor of the Exchequer shall establish a working group under an independent chairman which shall report on the operation of Her Majesty's Revenue and Customs.

(2) The Chairman of the working group established under subsection (1) shall not be a Commissioner for Her Majesty's Revenue and Customs or an officer of Revenue and Customs or of Her Majesty's Treasury.

(3) A report under subsection (1) shall include assessments of—

(a) the performance of Her Majesty's Revenue and Customs since its establishment,

(b) the direct costs of effecting the merger,

(c) the direct cost savings achieved by the merger,

(d) whether efficiency gains have been achieved as a result of the establishment of the single revenue authority including, but not restricted to, the effects of the merger on the tax yield,

(e) the overall compliance burden, including the impact on day-to-day customer service and the experience of taxpayers in dealing with the single revenue authority,

(f) the performance of Her Majesty's Revenue and Customs in the area of information technology and data systems,

(g) the working relationship between Her Majesty's Revenue and Customs and Her Majesty's Treasury including, but not restricted to, the adequacy of arrangements for accountability,

(h) the performance of the Revenue and Customs Prosecutions Office including, but not limited to, a cost-benefit analysis,

(i) the work undertaken preparatory to the merger, and

(j) any other area that the chairman of the working group deems appropriate.

(4) But a report under subsection (1) shall not be expected to include any assessment of—

(a) the annual performance of the Commissioners for Revenue and Customs in discharging their responsibilities as tax administrators and collectors, except in so far as these have been affected by the merger, or

(b) any matter (whether relating to value for money or otherwise) that would fall to be considered by the Comptroller and Auditor General in the course of annual audit.

(5) A report under subsection (1) shall be completed within twelve months and shall be laid before the House of Commons and published.

(6) In this section "the merger" means the merger between the Commissioners of Inland Revenue and the Commissioners of Customs and Excise.'.

Brought up, and read the First time.

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General

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

Photo of Alan Haselhurst Alan Haselhurst Deputy Speaker and Chairman of Ways and Means

With this, it will be convenient to take the following: Amendment (a), in line 26, after 'merger,', insert—

'(ia) the effectiveness of the overall staffing levels in relation to the provision of service.'

Amendment (b), in line 26, at end insert—

'(ib) the extent to which improvements in customer service, quality and consistency have been made; the extent to which increased revenue from tax, customs duties and VAT income has been realised; and what measures have been taken to improve the deterrence and detection of crime arising from illegal imports and tax fraud.'.

New clause 2—Transfer of property: management of assets

"(l)The Treasury shall make a scheme identifying any rights and liabilities in property and information technology systems owned and operated by the old commissioners which shall by virtue of sections 46 and 47 rest in the new Commission.

(2) The scheme shall include provision that any such assets identified therein shall be managed in accordance with best value and in the interests of both the customers and the staff of Revenue and Customs.

(3) The scheme may not be made unless a draft of it has been laid before and approved by a resolution of each House of Parliament.'.

Amendment No. 4, in page 2, line 30 [Clause 4], leave out subsection (1).

Amendment No. 5, in page 2, line 40 [Clause 4], leave out

'also have all the other' and insert 'have all the'.

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General

I shall be as brief as possible. The new clause could allow us to have another canter around the territory that we covered in Committee, but I do not intend to do that today.

The new clause goes to the heart of the Bill. It ensures that after two years the Government would be required to undertake a comprehensive review of the merger. We need to know whether the department is working as it should, and whether the planning needed to make the merger a success was undertaken.

I said on Second Reading that we did not oppose the merger in principle. On the contrary—the Opposition believe that with careful management and planning it might be possible to secure some modest savings and extract more value for taxpayers' money. However, have the Government done what is needed to secure those savings? If not, we may discover that the merger was not worth the candle.

We are talking about the merger of two huge departments—two leviathans that have been around a long time. Their cultures differ markedly, they have been governed by different statutes and the revenues that they try to collect are very different. This is a big undertaking. There is a world of difference between trying to secure an up-to-date income tax return from a self-employed physiotherapist in Dulwich and trying to secure revenue on tobacco at the ports to try and stop smuggling, but we are trying to bring the two cultures together.

On Second Reading, I expressed regret at the poor quality of the regulatory impact assessment and the paucity of information about the savings that the merger would secure. To clarify the issue, I set out four criteria to judge the performance of the new Revenue department. First, would its creation increase the yield or, to put that another way, would it reduce the tax gap? Secondly, what will happen to the compliance burden—that is, the hassle that millions of people could face if the merger goes wrong? Thirdly, how big are the transitional costs of the merger? Fourthly, what will happen to the quality of the department in the long run—to its morale and the standards that it sets itself?

We pressed those points in different ways not only on Second Reading but throughout our deliberations in Committee, and to be frank, we have had very little but general assurances from the Government on any of them. That will not do, and we need to be clear what is at stake.

The worst-case scenario is very bad. If the Government have not done enough of the necessary preparatory work, the merger could be a disaster—for the Exchequer and the taxpayer. Even if there is an adverse effect on the tax yield of, for example, only 0.1 per cent.—Mr. Laws made this point on Second Reading—hundreds of millions of pounds would be at risk, thereby adding to the black hole in the Chancellor's accounts. And even if the compliance burden increases by only a tiny amount, billions of pounds in extra costs could be imposed on businesses and the self-employed.

I should point out in passing that I think that I can support the amendments to my new clause standing in the name of John McDonnell, who draws particular attention to the likely effect on the yield of changes in staffing levels. As I have said, with careful planning it should be possible to find substantial staff savings. To put it another way, as a result of the merger it should be possible to increase the productivity of both Revenue officers and customs officers. We succeeded in increasing productivity in the 1980s, but it was not an easy job, and it required a lot of care and thought; what worries me is that there is little evidence of that from the Government.

A lot is being spent on new IT systems, but I am afraid that that does not inspire me with much confidence. I shall not go through, as I did on Second Reading, the Government's sorry track record in that regard, but it is not a happy story. Nor does the Government's confusion on Second Reading as to the savings that they hope to make from, and the costs associated with, the merger fill me with confidence. At the beginning of that debate, the Paymaster General said that the merger would result in efficiency savings of £500 million, but in his winding-up speech, the Economic Secretary said that such savings would amount to only £100 million. I would have expected the Government to have a clearer view of the merger's costs and benefits, and this is why the Bill should contain a commitment to a review. We need to ensure that we have got this process right. We need the pressure of an impending review to bear down on those implementing these changes, to ensure that they do their utmost to deliver what we need.

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North 6:00 pm, 26th January 2005

The hon. Gentleman is making an interesting speech and I, too, am among those who have some doubts about the merger. Is he suggesting that if the review concludes that the merger has proved very bad, a de-merger should take place, or is he merely arguing for an ongoing inspection of the new service?

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General

By the time, after two years, that we have been through the merger and the review, we will need a de-merger like a hole in the head—but I note what the hon. Gentleman says. We will need to ensure that this thing works, and I would not be surprised to find that, despite the opinion polls, it is we Conservatives who will have to do so. We will try to find a way to ensure that the tax yield is not being imperilled and that the compliance burden is not rising inexorably as a consequence. But it is not an easy job.

The Government have had years in which to plan for this merger. We must bear it in mind that not long ago, the Paymaster General was saying that a merger was not worth the candle. She told the House in 2000 that the Government had looked carefully at and thought about a merger, but had decided that they could get all the benefits of the synergy of the two departments without a full merger. Now, we are told that those benefits can be achieved only through such a merger. That does not fill me with confidence, either—but I am repeating a point that I made on Second Reading, which I do not want to do this evening.

If the Government have done the careful planning about which I have been talking, I do not understand how a review such as that proposed in new clause 1 could worry them. On the contrary, it could provide a written testimonial to justify an award to the Paymaster General for getting things right. However, if she does not agree to new clause 1, thousands of professionals who deal daily with the Revenue and Customs and millions of taxpayers will have the right to ask why she will not permit a review of her own handiwork. If the Government do not like new clause 1, what are they afraid of? The measure is central to finding out whether the merger works. If the Government's response does not show that they will be flexible, we shall press the new clause to a Division.

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

I speak as the chair of the Public and Commercial Services Union parliamentary group, which has members from both sides of the House. We meet representatives of the PCS regularly, which enables us to draw on the experiences of staff who operate such services. It has been invaluable and enlightening for us to draw on that depth of professionalism. I associate myself with the Paymaster General's comments about the excellence of the service and the professional commitment of the staff.

The running theme of new clause 1, amendments (a) and (b) to it, which I tabled, and new clauses 2, 4 and 5 is an attempt to ensure that there is openness and transparency in the process and that there is adequate scrutiny and accountability, especially to the House. Let me be clear. The PCS and a large majority of hon. Members from all parties now support the merger of the departments and want it to work effectively. We take our lead from the Treasury Committee report that was published in 2000, and many of us are pleased that the Government took that on board, were flexible and returned with a commitment that the merger would go ahead. That demonstrates that the Government were listening to Parliament on that occasion and subsequently, as a result of various reviews.

We would all welcome assurances from the Minister that the process of the merger will be subject to close monitoring and that regular reports will be made to Parliament to identify, using clear criteria, whether the merger is proceeding successfully. If there were problems, corrective action could thus be taken following the scrutiny of Parliament. Additionally, hon. Members could be engaged in discussions about not only how the performance should be monitored, but how solutions could be found and implemented.

New clause 1 is a straightforward measure that details the review process and the elements that we would like the Government to include in such a review. I am not fixated on a two-year period or a formal review, but I want assurances that the Government will look at the agenda, that the process will go forward and that there will be adequate reporting to Parliament.

Photo of David Taylor David Taylor Labour/Co-operative, North West Leicestershire

Does my hon. Friend agree that a key performance indicator of the newly merged department will be the extent to which it is able to bridge the tax gap, which is currently estimated to be about £30 billion a year? We should examine the shadow economy, law enforcement and the various forms of evasion that are too common in our economy at present.

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

That is exactly one of the points that the amendments try to address. Amendment (b) sets explicitly and straightforwardly as part of the review process an examination of the extent to which customer service improves and the quality and consistency of practices. It also provides that it should be determined whether targets for increased revenue are being met so that we can tackle that tax gap.

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

On Second Reading, mention was made of the possibility of exposing the tax gap by increasing the number of VAT inspectors and Inland Revenue inspectors because they can generate many times their own salary. This would be beneficial. Is my hon. Friend implying that that will be taken into account?

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

That links amendment (b) to amendment (a). In amendment (b), the purpose is to try to identify the specific targeted role that the merger can undertake in increasing revenue and tackling the tax gap. In addition to that, there are the issues of fraud detection and, as a result of that, deterrence. That can be achieved only if there is adequate staffing. That is why I tabled amendment (a). We need to have a continuous review of overall staffing levels in relation to the level of service that we are demanding from professional staff.

I reiterate my continuing anxiety, which I expressed on Second Reading, as did other Members on both sides of the House, that in the midst of the Gershon review proposals, which will hit the Department with a reduction of posts that has increased to 16,500, specific to the merger will be the reduction of 3,200 posts. We now have clarity about savings. Overall savings on staffing will be £500 million and the rationalisation process will result in savings of £100 million. My anxiety is that for a saving of £100 million we may be losing the professional staff that are required to recoup so much more tax, to detect crime and to deter tax avoidance. That loss of staff could undermine the savings figures.

We need to ensure that my right hon. Friend the Minister has a process that will enable staffing levels to be reviewed from the very start of the merger programme and throughout the settling down of the new department. There are real anxieties among the professionals on the front line. They fear that going for such a level of staff cuts will have a dire impact on service delivery. In that event, not only will customers complain but the Treasury will miss out on tackling the budget gap, which in past debates we have identified as between £30 million and £40 million.

The second element of my amendments goes to the discussion that took place in Committee about the transfer of rights and liabilities. There was an extensive debate and I do not wish again to go through the history of the Mapeley STEPS contract. That matter was adequately exhibited in Committee. However, there is still a lack of confidence in the ability to ensure the proper management of these schemes and contracts, both in terms of property and of new technology. That is why there is an explicit reference in new clause 2, which was similarly debated in Committee, to best value.

The debate is taking place on a day when yet again we have had another report on the failure of a computer contract in government. The Child Support Agency report is a dire warning, again, of what can go wrong in information technology contracts that are not properly specified and monitored, and are not produced in a way that allows for parliamentary scrutiny.

The reason for introducing new clause 2 is explicitly to say that we need a scheme that embodies best value in the transfer of rights and liabilities. In Committee, my right hon. Friend the Minister said that that is integral to the overall processes of Government, and I accept that. However, given the concerns that we have had as a result of the Mapeley STEPS arrangement, the EDS performance within the Department and the revelations today regarding the CSA contracts, I think that there is a need to restore confidence by having a specific statement about the importance of best value within the development of these transfers.

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

Does my hon. Friend recall a point that I made on Second Reading, when I suggested that more extensive in-house IT capacity could overcome some of the problems inherent in contracting out?

Photo of John Martin McDonnell John Martin McDonnell Labour, Hayes and Harlington 6:15 pm, 26th January 2005

The new clause demonstrates that if we had a thorough commitment to best value we would enable in-house bids to be made, as is the case with best value in local government and other services. There would not be prejudice against the public sector, as has sometimes been the case in the past in the awarding of central Governments contracts. There is a need to reassure the general public and the House with an explicit statement in legislation that best value will apply to the merger of the departments, and that there will be adequate scrutiny of the best value scheme that is introduced. Only when the House is confident that there is thorough parliamentary scrutiny will we restore confidence in the ability of the new department and other Government Departments to manage their own affairs with regard to new technology and property schemes.

Amendments Nos. 4 and 5 deal with the process of parliamentary scrutiny. There was some debate in Committee about the definition of the commissioners' functions. To put it bluntly, the amendments would require them to retain existing functions. If new functions are transferred to them, or if there is a transfer of functions away from the department, there should be parliamentary scrutiny and an explicit parliamentary decision by the affirmative procedure, rather than by the negative procedure envisaged in the Bill. That would restore confidence in the process of the merger and the future operation of the new department.

In Committee, the Paymaster General said that the transfer of functions in the Bill would take place using the process that pertains to other Departments, and would be achieved either by Order in Council or negative resolution. That was a revelation to me, and I would prefer all transfers of departmental functions to be brought before the House so that it can make a decision using the affirmative procedure. That would facilitate proper scrutiny of such transfers and delegations of powers between departments. It is even more important, when establishing a new department, that we are clear about its functions, so the House should engage with the process of the construction, allocation and, at times, the transfer of those functions. We should participate in the bedding down of the new department and increase the confidence of the general public and the House in its operation.

I would welcome assurances from the Minister about the process of continuous monitoring. Will the agenda set out in new clause 1 and the amendments be followed in that process, and will there be adequate opportunities to report to the House? There should be opportunities for debate and participation by all hon. Members in the critical path taken by the merger, which we all support and believe is overdue.

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

We, too, support new clause 1 and amendments (a) and (b), which go to the heart of what the Bill is designed to achieve. Like Mr. Tyrie, I do not wish to revisit all the discussions that took place on Second Reading on 8 December, but some of us were left with the feeling that there was a lack of ministerial clarity about the cost benefits of the merger and the wider objectives that it is designed to achieve. New clause 1 and the associated amendments focus on setting up a monitoring regime to demonstrate whether those objectives have been achieved, and also establish precisely what they are. To that extent, they are very helpful.

The context in which the Government initially announced the planned merger of Customs and Excise and the Inland Revenue was the political battle among all the main parties to demonstrate that they could achieve better value for money from existing public expenditure. It was in those terms that the Chancellor announced the merger in the 2004 Budget statement, when he said that it was designed to secure value for money. When the measure was announced in the Gracious Speech on 23 November last year, it was also put in the context of reducing bureaucracy and the costs to Government. There was nothing in either statement that implied that the major objective of the policy was to close the tax gap. There was nothing about the compliance burden on business or about improving customer service in the ways suggested in the amendments tabled by John McDonnell, yet all those are important objectives in merging two such organisations.

As a member of the Treasury Committee, Mr. Beard, said on 8 December, that some of the individuals who were consulted after the O'Donnell report made it clear that the cost savings and benefits from the Bill may be quite small in the context of the other objectives, particularly that of reducing the tax gap, which Gus O'Donnell had estimated at £30 billion or £40 billion per year.

As the hon. Member for Chichester mentioned, new clause 1 deals with two big issues—first, the lack of clarity about the costs and benefits of the Bill in purely economic terms and how much it will save the Exchequer in the short term, and secondly, the Government's lack of clarity about whether there are bigger objectives for the merger of the two organisations.

The hon. Member for Chichester noted that when we debated the issue on 8 December there was some uncertainty on the Government Benches about how much the merger would save. It was initially suggested that savings would be £500 million per year. Later in the debate, it was made clear that that related to the total savings coming out of the Gershon review, of which the merger savings and staff reductions were just a small part—3,200 job reductions from the merger, set against about 16,000 job reductions gross from the entire process, including the Gershon review.

Photo of David Taylor David Taylor Labour/Co-operative, North West Leicestershire

Does the hon. Gentleman accept that it is extraordinarily difficult to calculate savings in such a Department? If initiatives such as spend to save and spend to raise are put on hold, it is impossible to define the loss of revenue associated with ill-judged cuts or changes that are not justified. A calculation of savings is impossible to achieve, is it not?

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

The hon. Gentleman is right that taking into account factors such as the tax gap, it is particularly difficult to do a sensible cost-benefit analysis. However, the Government could make some reasonable assessment of the likely savings in terms of staff numbers or the additional costs in the short term arising from investment in capital equipment. That would provide at least a simplistic analysis of the costs and benefits over the short term, yet we are uncertain what that calculation is.

On Second Reading, we were unable to get the Paymaster General or the Economic Secretary to say whether there would be any net savings, however limited, in the first five years of the merger. The Conservative party and others are making claims about cutting waste and bureaucracy in Government. We can see in relation to the Bill how difficult it is in practice to turn grand aspirations to save money through reducing waste into specific figures. One potential achievement of new clause 1 is that it would allow us to see, even in the narrowest economic terms, whether there was any economic benefit from the merger.

Many of us doubted whether clear economic benefits would result and those doubts were reinforced by the statements of the Paymaster General and the Economic Secretary in the debate on 8 December on cost savings from reduced staffing. We assumed that the reduction of 3,200 staff consequent on the merger was the result of a rational calculation, but the Paymaster General stated that it was only a working assumption based on savings in other departments where similar major changes have occurred.

The Economic Secretary admitted that the reduction was not based on a rational calculation and that it is a target—he also said that it is a realistic target, but we have only his word for that. One benefit of new clause 1 is that it would allow a much clearer assessment of the short-term benefits or costs of the merger, which is something that the Government have been unable to provide.

Photo of Jim Cousins Jim Cousins Labour, Newcastle upon Tyne Central

From his study of the possibilities offered by the merger, does the hon. Gentleman believe that the target could be greater than 3,200 net job losses?

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

It is impossible to say, because the Government have not given us any information about the assessment of 3,200 job cuts. The only conclusion that we can draw is that the figure was picked out of the air and based on the percentage reduction in jobs when other bodies have merged. It is impossible to tell whether the figure is too high or too low without knowing whether it is based on a serious assessment and I hope that the Paymaster General will clarify that matter when she responds on new clause 1.

New clause 1 and its associated amendments (a) and (b) would also deal with the point that the merger concerns not only the economic issue of saving on the costs of Government bureaucracy, but much bigger prizes, not least the closing of the tax gap, which the hon. Member for Hayes and Harlington has already mentioned. A year or so ago, Martin Taylor made this submission to Gus O'Donnell's report, saying:

"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."

David Varney also made that point in his contribution to the O'Donnell report. People outside the Treasury are clear that bigger prizes are at stake than the reduction of job numbers in the new merged department, but we have no way in which to assess what the Government hope to achieve on reducing the tax gap, which should be the priority.

Finally, no clear assessment has been made of the reduction in the compliance burden or, as the amendments tabled by the hon. Member for Hayes and Harlington indicate, what effect the merger will have on the service and performance that the merged department will provide for our many constituents who rely on those services. Earlier today, he referred to the problems in the Child Support Agency, which the media have discussed today. As he and many other Labour Members know, however, many hon. Members receive even more complaints about the operation of the tax credit system than the operation of the CSA.

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

The hon. Gentleman knows that one of today's report's recommendations, which arose out of the monitoring process, urges the Government not to go ahead with staff cuts in the CSA until those matters are resolved.

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

The hon. Gentleman is right. Even the Government appear to acknowledge that, because of the customer service problems at the CSA—if I can put it like that—the planned staff cuts may have to be deferred to make sure that the service can be improved. One wonders whether the same is true of the tax credits department of the Inland Revenue, which is struggling to process tax credits and so causing a great deal of difficulty for many of our lowest-income constituents.

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

The Paymaster General shakes her head, but I think that she is out of touch with what is going on throughout the country in relation to tax credits. As a constituency MP, I can tell her, as I have many times before, that I am inundated with constituents on very low incomes, who are exactly the people whom the Government set out to help by introducing tax credits, and whose income position is being even more disturbed by the way in which the tax credits system is operating.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 6:30 pm, 26th January 2005

I want to put this on the record: thousands and thousands of families in the hon. Gentleman's constituency are benefiting from tax credits. I have repeatedly told him that I know that there are problems going back to the introduction of the system when the computer system did not work. If he sends me details of the cases, I will ensure that they are looked at, but I cannot believe that he has thousands and thousands of them.

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

The Paymaster General knows that I am taking this matter seriously because she has in her diary an appointment for me to come and discuss it, which I welcome. If the Treasury was being a little more open in the parliamentary answers that it is giving to hon. Members on both sides of the House, we would have a better understanding of the chaos in the tax credits department and the problems that that is causing to many constituents.

New clause 1 and the associated amendments would allow us to return to the merger in the future and consider it in terms not of the smaller issues that we have rightly debated over the past few weeks, but of the big picture of the problems that it is supposed to address. We would be able to establish the net situation in relation to costs and benefits, the effect on the tax gap and the effects on customer service standards and the compliance burden.

To echo the hon. Member for Chichester, I hope that the Paymaster General, who has already been generous in some of the amendments that she has accepted, will surprise us by indicating that she is willing to follow this route or some variant of it.

Photo of John Gummer John Gummer Conservative, Suffolk Coastal

First, I wonder whether any large company contemplating the amalgamation of two very large departments and making significant redundancies as a result would think it right to look back in two years' time to ensure that it had done it properly. If the Government decide not to do that, or something like it, I suspect that they will find themselves out of line with what any other large organisation would do.

Secondly, the Government have everything to gain by doing that because, although there are many examples of the hopeless introduction of new technology, the best successful examples come from the Inland Revenue. Perhaps it would have been a good thing had there been such an arrangement after the introduction of the new technology for self-assessment, because had lessons been learned from that, the Government would perhaps find themselves with less egg on their face. It is important to do this because it may point not only to failures but to successes, and the Government are very much in need of administrative successes. Indeed, any Government who would inherit the effects of the new clause should think the same.

Thirdly, I want to echo a point that was made by John McDonnell. There is a genuine feeling among those who work for Customs and Excise and for the Inland Revenue that there is some incomprehension in the Government about the way in which the system works, what will happen and whether there is an opportunity for the sort of cuts that have been recommended. On balance, I believe that there is probably much opportunity for saving. However, it is essential to maintain and improve the morale of those who work for us in those departments. It is necessary for them to believe that what happens now has been considered in detail.

I fear that I can guess what advice civil servants have given the Paymaster General. I am sure that they have advised her to express general agreement with the new clause, to give significant encouragement to people who want the investigation by saying that they will get what they want but not quite in the way that the new clause proposes and to suggest that there is no need for the detail of the new clause because the Government will ensure that, in principle and in general, its demands are fulfilled, but that they would prefer not to have the new clause.

I hope that the Paymaster General will have the courage of her convictions and refuse go along with what the civil servants suggest. Of course they do not want a detailed arrangement. Of course it is easier to have a general acceptance that we will reconsider the matter carefully in two years. They do not want to be asked to be precise about what has happened so that we can use the example for better governance in other spheres. I hope that she will accept the new clause in its entirety, perhaps with the amendments that the hon. Member for Hayes and Harlington tabled, so that we know now what will be done then, and so that it is done properly and not in a way that is convenient to cover up things that have gone wrong. That has happened not only under this Government but Governments for a long time.

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

Mr. Speaker's selection means that we have a wide range of amendments to consider and I want to speak briefly about only those to which I have put my name and those that I support.

Amendments Nos. 4 and 5, which John McDonnell tabled, are important. I fully understand that, as was explained in Committee, the power to transfer functions under the Ministers of the Crown Act 1964 has existed for a long time and been exercised. However, it is important to maximise parliamentary scrutiny, as he argues, over any transfer of functions in the instance that we are considering because the powers of the Revenue and of Customs and Excise, together with the prosecuting powers, are formidable. It is important that there should be maximum parliamentary scrutiny of any further change. I therefore support amendments Nos. 4 and 5.

I also support the hon. Gentleman on new clause 2. Indeed, I hope that he is encouraged by the fact that it has a great deal of all-party support. It is important that we include a specific duty on the commissioners to secure best value for property and IT systems. Pace the remarks of my right hon. Friend Mr. Gummer, the record of the Revenue with IT is not wholly unblemished. There have been instances of technology being introduced too quickly or ministerial demands being made on it too late or revised too late in the day. Our constituents have consequently suffered.

Such criticism certainly applies to property. I do not want to rehearse the Mapeley STEPS—strategic transfer of the estate to the private sector—fiasco, when the Revenue's entire property estate was transferred overseas, apparently without any Minister knowing that that had occurred. We do not want to debate all that tonight but the new clause would at least secure a duty to seek best value. Before the Paymaster General rises to point out that the Mapeley contract still represents best value, it is important to remember that the property estates of the two combined departments is a formidable Government property estate. It constitutes hundreds of tax and customs offices throughout the country. It is therefore all the more important that the duty of best value is attached to the new commissioners who will run the combined department. After all, if the two departments are to be merged successfully, we would expect some rationalisation of the estate. However, we ought to consider the fact that, sadly, it is the experience of business that we never quite get the full savings that we envisaged when we planned these things on the back of the envelope in the first place. It is therefore all the more important, not only because of the Mapeley STEPS fiasco but because the estate will presumably be rationalised, that a specific duty to provide best value should be placed on the commissioners in respect of both property and information technology systems. New clause 2 would achieve that. It would also usefully bolt on a piece of additional parliamentary scrutiny.

It is all very well for the Public Accounts Committee or my own Treasury Sub-Committee to pick up these scandals and ask all the questions afterwards. How much better it would be if, when a major change such is this is proposed, it were subject to proper parliamentary scrutiny at the time, before it could go wrong. Had the Mapeley STEPS arrangement been put to the House, and had we been told—even Ministers do not appear to have been told—that all our tax offices were to be transferred overseas, which hardly encourages the rest of us to pay our taxes here, I am sure that the proposal would not have gained parliamentary approval, either on this side of the House or the other. New clause 2 is therefore to be commended.

Let me return to new clause 1, which was moved by my hon. Friend Mr. Tyrie and which I have also signed. It is an important and comprehensive new clause. When the Sub-Committee reported on the proposed merger, having studied the O'Donnell review and taken evidence on it—including evidence from the permanent secretary himself—the biggest single risk that we identified in the process was that the collection of revenue might be put at risk by the disruption caused by the merger. We urged Ministers to focus on that and, to their credit, I think that they have recognised the danger.

This is a truism, but when mergers in business are contemplated and followed through, the management often end up being distracted from the core task of running the business by running around making sure that the merger is being carried through successfully. Mergers can distract senior management from the running of the business, and if such distraction were to put the collection of revenue at risk in this case, it would be very serious indeed.

The second argument for new clause 1 is that it asks for the review to include a proper cost-benefit analysis of the merger. I would prefer such an analysis to have been carried out right at the beginning. It is an extraordinary lacuna in the O'Donnell review that he was not able to say—and Ministers have not subsequently been able to confirm—exactly what the savings would be. No business would proceed on that basis. Business A would not merge with business B without being able to tell its board of directors exactly what the cost savings were likely to be. It might not achieve its target, but there would certainly be one. To merge these two very large organisations without even an idea of the likely cost savings, and without carrying out even the most perfunctory cost-benefit analysis, still strikes me as extraordinary.

I would have preferred such a review to take place before the merger proceeded. However, it is now going to proceed, so it is a good idea for us to be able to come back in two years' time to find out what the costs and benefits are. I certainly support new clause 1 and I think that my hon. Friend the Member for Chichester has attracted more and more support for it as the debate has unfolded. I hope that he will feel encouraged to push it even further.

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

This merger is fine in principle, and I support it. That is not enough, however. What concerns me is that we have to make a success of it in practice. I very much agree with the remarks made by my hon. Friend Mr. Fallon on the lack of a detailed plan for, or even an assessment of, the savings envisaged. Hope is travelling faster than experience here. I have been involved in mergers in the private sector that have been uncomfortable experiences for staff and for customers. I hope that this will not be another.

The problem of bringing these departments together is immense. They employ about 100,000 people between them and have different structures, assets, histories and traditions. I have detailed experience of only one of the existing Revenue departments, Customs and Excise. I have always been impressed by that department and the quality of the people whom it attracts. Indeed, it has a proud historical tradition in attracting able people.

It might be appropriate, on the day after Burns night, to recall that Robert Burns himself worked for the Excise. Some years ago, I visited a small museum at Greenock and saw opposite his name a copperplate entry, "The poet does well." That was an early staff assessment of one of its employees, who obviously managed to make a living as a poet as well as serving in the Excise.

I do not know what Burns would have made of the proposed merger. I hope he would have been enthusiastic, because in many ways he was a modernist. I certainly believe that a modern state needs a modern tax-gathering department and the overseas experience is that bringing such departments together in a single entity is probably wise.

However, government as an activity, as well as being the largest service industry in the world, is usually among the least efficient. Therefore, it is very important that Parliament lay down requirements and disciplines to make these things work. That is why I support new clause 1, which was moved by my hon. Friend Mr. Tyrie, as a discipline on the Government to ensure that they turn the hope of greater efficiencies and well-being for staff employed into a practical reality.

I also want to comment on new clause 2, to which I have put my name, because there is, I am afraid, a poorer record in recent history in managing some existing assets of the two departments. My hon. Friend the Member for Sevenoaks mentioned the Mapeley STEPS contract, which is still relevant because it will run for some 20 years. It therefore straddles the transition between Inland Revenue and Customs and Excise and the new merged department.

We know now that that contract was something of a fiasco. It was signed without any clear understanding of what the deal entailed. It was undertaken partly for tax avoidance purposes, in contradiction of the Government's other expressed intentions. That is history, but because the contract is so long, it will affect the new department. Again, I therefore think it right that we should lay down a discipline on the Government in respect of reporting on these matters, drawing up a scheme for managing the property assets and achieving the best-value obligation, which is written into the new clause.

The new clause also covers IT systems. Here again, I have some quite severe misgivings. We know that there are more than 250 major IT systems in the two existing departments, together with two very large IT contracts that have been signed by each department. I am afraid that the chairman designate of the department, in evidence to the Treasury Committee, was not very clear about how they will be managed. So, we need a plan and a best-value obligation, which is provided for in the new clause.

Finally, I want to mention amendments Nos. 4 and 5, which are related to the functions of the new department. I agree with many of the remarks of John McDonnell, who also spoke about that. It is not right that functions of such departments should be able to be transferred without primary legislation, unless the functions are wholly trivial. Such matters are very sensitive: taxation goes to the heart of what a Parliament is about, and we delegate the task of tax raising and enforcement to agencies and commissioners on our behalf. We need to be sure that those functions are not then passed on or back to day-to-day politicians in charge of Government Departments. The whole point of having Revenue Commissioners is that it removes such tasks some way from day-to-day politics and from Secretaries of State. That structure has evolved over many years, and it goes to the heart of the relationship between such Revenue departments and the Treasury. That would be undermined if important tax-associated functions were to be transferred to Secretaries of State in Government Departments.

My alarm has been somewhat increased by the Treasury's provision, which is helpful, of the functions that could be transferred by secondary legislation. It is true that those are not mainstream, core tax-raising functions, but they are: the regulation of charities; child benefit; child trust funds; oil and gas royalties, in so far as they are still collected; the regulation of certain pension schemes; rating lists; valuation of property; and valuation lists in relation to council tax. Those are not trivial functions, and under this legislation, such matters could be transferred out of this Revenue department to other Departments. That undermines the certainty that we seek in primary legislation. It is also unfair on existing staff who are planning careers in those departments, and who hope to do so in the new department, because they will not have the certainty of knowing that their department will be administering such functions, at least for the foreseeable future.

I know that the Government have no present intention of transferring those matters, but they retain the ability to do so by secondary legislation, which we will have no opportunity to amend or perhaps even debate. For those reasons, I commend to the House this collection of amendments and new clauses.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 6:45 pm, 26th January 2005

Let me respond to this wide-ranging and important debate.

First, perhaps Mr. Heathcoat-Amory, who was rightly concerned about the security of staff and their future, should take a closer look at his party's proposal to cut 28,000 from the Revenue and Customs without any details on how to achieve it. He will understand if I put aside for now his conversion on that point.

I recognise, of course, that Members of the House are interested in the ongoing process and success of the integration of the two departments. That interest will be shared by not only Parliament but other groups, particularly taxpayers, claimants who deal with the Revenue and Customs, and the staff of both organisations. Such interest is right and proper, and I share many of the concerns about monitoring that Members have expressed, as do my right hon. Friend the Chancellor of the Exchequer and my hon. Friend the Economic Secretary. So do David Varney, chairman-designate of the new department, the senior management teams in the two departments, and the Treasury itself.

Members have observed that integrating two departments of this size—they represent a fifth of the civil service—is a massive undertaking. Such an undertaking requires careful planning, assessment of risk, internal monitoring and the appropriate level of external assurance. For example, all major IT and data system programmes undertaken by Her Majesty's Revenue and Customs will be subjected to a formal assurance process by the Office of Government Commerce. It is right that, at key stages, we should assess progress and take any necessary steps to stay on track. We should also realise as many of the potential benefits as possible.

Let us be clear about the case for a merger. The O'Donnell review outlined the kind of benefits that could be expected. It spoke of the potential involved in closer working, the additional moneys that could be expected in the first two years of the large business joint team trials, and potential benefits that are clear from international examples of increased yield from compliance work. It cited the Australian example. It discussed the adoption of merged compliance strategies for small businesses, the administration costs of integration and the savings in the Canadian revenue agencies. All that was in the O'Donnell review, and subsequently in the regulatory impact assessment.

The process of regular and continuing assessment is built into planning for what is a significant programme of change. As Mr. Gummer pointed out, that has to be expected. Project plans are in place. The costs of integration will be monitored, and the arrangements will reassure us that the programme is on track to deliver the anticipated benefits. The new clause, however, attempts to draw a distinction that does not exist between the activity and results of integration and the activity and results of the new Revenue and Customs department.

It is no coincidence that the key areas from which we have said we expect benefits following integration are compliance, service to the taxpayer and efficiency. Those are precisely the areas targeted in the public service agreements that will apply to the new department. They will be monitored and subject to parliamentary scrutiny, according to the usual rigorous process. To measure progress against all those targets is to measure the success of the new department and hence the integration.

Many of the benefits will accrue over time, and stem directly from decisions that will need to be made over the next few years. For example, some changes may be piloted in the first instance, and the pilots will be evaluated before a decision is made on any wider roll-out across the United Kingdom. Of necessity, key pieces of evaluation lie ahead of us. As we make progress, the integration of the two departments will be a gradual and continuing process, and will become increasingly indivisible from the ongoing planning and running of the business of Her Majesty's Revenue and Customs.

However, as I said in earlier debates and as the O'Donnell report makes clear, there is a compelling case for integration now. The report also set out at some length the evidence that had been considered and analysed. There was recognition of the difficulties faced, both in the UK and in other countries that had undertaken such exercises. The likely costs and benefits were also quantified at the outset. That was made clear in that report.

Reporting to Parliament is key, and it is right and proper. As well as Parliament, others will be kept fully informed of the progress that the department is making, of any significant changes or initiatives that are planned and of the results of such changes. Therefore, I anticipate a full programme of reporting to Parliament and the wider public over the next few years and beyond.

Let us look at the mechanisms. The annual reports and accounts, submitted by Her Majesty's Revenue and Customs to Parliament and published, will provide extensive information on the costs that it has incurred and other financial aspects of both the integration and the department's day-to-day business, including, as I have said, progress against the department's public service agreements and efficiency targets.

Under corporate governance arrangements, the commissioners audit committee, chaired by a non-executive, will scrutinise the new department's risk management arrangements, and managing the integration will be a prominent element of that. The department's work and that of others will be reported in the annual accounts in the statement of internal control chapter. Those accounts will be subject to scrutiny in the usual way by both the National Audit Office and the Public Accounts Committee, both in general and in the statement of internal control in particular.

Moreover, the PAC can request the Comptroller and Auditor General to examine and report on progress and on the benefits of delivering an integrated department. It can also call commissioners before it to account for matters reported to it by the NAO. The NAO and the OGC are working with the department to provide external assurance of the arrangements for monitoring costs and for securing improvements from the merger.

The Treasury Committee has already indicated that it will take a keen interest in events. I fully expect that it will question my right hon. Friend the Chancellor, me, should I be the relevant Minister, the Economic Secretary and senior officials regularly over the next few years. Finally, Members of Parliament themselves can seek further information. That is a scrutiny process.

Taken together, all that represents an extensive and thorough programme of reporting to Parliament, including the assessments of independent parties, and provides more than adequate opportunity for hon. Members and the wider public to monitor and scrutinise the process and progress of integration. Therefore, the proposal in the new clause for an additional and parallel system of reporting simply duplicates what is in place and planned, and I do not think that the proposals would add anything. I shall ask my hon. Friends to oppose the new clause.

I turn to the amendments tabled by my hon. Friend John McDonnell. I recognise the specific issues that he has raised. They are issues of genuine concern among Inland Revenue and Customs staff generally, and among the Public and Commercial Services Union and other trade unions that represent many of the staff. Let me say straight away that, as I hope he knows, regular meetings are taking place with the trade unions about the creation of Her Majesty's Revenue and Customs in terms of both the overall picture and the individual changes to employment and human resources policies. That ongoing dialogue is an important part of planning for the integration of the two departments and delivering its benefits.

The amendments cover two areas: amendment (a) adds to the list of items to be reported the issue of staffing levels and the provision of service; and amendment (b) additionally covers a variety of compliance and tax yield issues. Both are concerned with the need to maintain and to improve the levels of service, as my hon. Friend said, and the tax yield, while delivering planned efficiencies.

On staffing levels and service provision, both Customs and the Revenue have been developing modernisation programmes that are already starting to have an impact on their business through increased e-filing. As these programmes and other major initiatives start to deliver a more streamlined service, they will allow scope for efficiencies in line with the announced plans, while maintaining and improving service. These plans include redeploying 3,500 staff into front-line areas of work, in support of compliance activity and services provided to taxpayers.

My hon. Friend the Member for Hayes and Harlington raised natural concerns about the security and location of the jobs of existing staff in the two departments. I want to be clear with my hon. Friend—he is keen to pursue his responsibilities in this House —and to convey to others outside the Government's intention. The greater part of the efficiencies will be achieved through natural wastage, but a number of actions are being taken to generate maximum flexibility, such as restricting the current recruitment of staff and managing vacancies across the two departments. We are also looking to offer redeployment with appropriate training where necessary. I am sure that all of us would want to see any form of compulsory redundancies avoided at all costs and considered only as a last resort. We have established a constructive relationship with the trade union side about the creation of the new department. Regular meetings are being held and arrangements have been agreed for discussing the new work force plans, including any reductions and skilling requirements. Talks on the detailed plans themselves are not yet under way because detailed plans have not been prepared. But I can absolutely assure my hon. Friend that there will be full consultation on these plans when they are available and in the preparation process.

Photo of Jim Cousins Jim Cousins Labour, Newcastle upon Tyne Central 7:00 pm, 26th January 2005

I am following my right hon. Friend's remarks on the subject with interest. She has said that she regards all the matters covered by new clause 1 as proper matters for parliamentary and Select Committee scrutiny. Does her assurance on that point also cover the full extent of the issues referred to in amendments (a) and (b) and new clause 2? That would be helpful to the House.

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

I am sure that my hon. Friends will pursue all of those matters through the routes that I have indicated to the House. We are making information available in the discussions with the trade unions and the representatives of those who work in the department.

In terms of compliance activity and tax yields, we expect integration to help the department to reduce the tax gap by enabling it to develop a strategic approach that will focus on the most serious threats across the whole department, which can be seen in the commitments that the department has already made with regard to reducing underpayment of direct tax and national insurance; reducing the scale of VAT losses; reducing the illicit market share for cigarettes and spirits; and holding the illicit market share of oils in England, Scotland and Wales at no more than 2 per cent. Those are all a matter of public record.

As with the items listed in new clause 1, the information covered in the proposed amendments is well catered for in the existing plans and reporting arrangements. I hope that reassures my hon. Friends.

New clause 2 goes over much of the ground that we fully discussed in Committee. The issue of property was examined at length by the Treasury Committee and the Public Accounts Committee. I can assure the House that both departments have always sought to obtain best value in their procurement exercises and in the use of their assets.

Much has been said today about information technology, and I recognise hon. Members' concern at the scale of the IT contracts and the importance of achieving best value. I assure the House that those concerns are recognised and shared, and are already reflected in the overarching contracts that both departments have with their external IT suppliers.

My hon. Friend the Member for Hayes and Harlington also raised concern on behalf of the PCS union that the assets should be managed in the interests of customers and staff, and he spoke more generally about staffing levels. We have discussed that point at length.

I turn to amendments Nos. 4 and 5. The Bill provides for the transfer of functions into and out of HMRC by an Order in Council under the Ministers of the Crown Act 1975. Under the Bill as drafted, there can be no transfer out or in of the commissioners' revenue and tax credit functions. I wish to make that point clear to the right hon. Member for Wells. However, clause 7 provides for the transfer in and out of other functions in the new department. Such transfer is not new. The Bill aligns the new department with all other departments: it does not and should not introduce entirely new procedures for transferring functions. The existing arrangements, as set out in the 1975 Act, are longstanding and have worked effectively. The arrangements for parliamentary scrutiny affect any future transfer of the non-Revenue functions and are exactly the same as those for all other departments. The Government have no current plans to transfer functions in or out of HMRC, but it is sensible to take this opportunity to legislate to provide the flexibility to transfer functions, should it be necessary in the future.

We have had a thorough and worthwhile debate, both today and in earlier sessions, about genuine concerns that hon. Members have raised about the integration of the two departments. I hope that I have reassured them that the detailed planning and other work is under way and that there will be plenty of opportunity for scrutiny of the progress we are making in delivering the benefits of integration in future years. I hope that I have reassured my hon. Friend the Member for Hayes and Harlington that the additional issues that he specifically raised are ones on which we shall keep a very close eye. We can expect detailed discussions between the department and the trade unions. For those reasons, I ask that the new clauses and amendments be withdrawn. If they are not, I recommend to my hon. Friends that the House resist them.

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General

What we have heard is a speech that was clearly written by officials and read out by the Paymaster General, with the traditional list of methods of parliamentary scrutiny, the shortcomings of which she knows well. No arguments were advanced against new clause 1 or the amendments tabled by John McDonnell. No explanation was given for the complete absence of a cost-benefit analysis before this measure was brought before the House. No apology was made for the very thin regulatory impact assessment, which has only 15 lines on the risks attached to the merger, when we know that huge risks are attached to it. The economic costs are scarcely analysed at all. They are confined to two paragraphs—12 lines—in the regulatory impact assessment.

We still have little evidence that Ministers have even asked the right questions of officials, still less that they have obtained the right answers. The Paymaster General is not able to tell us by how much she thinks the tax gap might be closed. She is not able to tell us by how much the compliance burden might be reduced. We need new clause 1. It is essential, not only for us, but for millions of taxpayers who could find themselves on the wrong end of this measure. For that reason, I wish to press the new clause to a Division.

Question put, That the clause be read a Second time:—

The House divided: Ayes 128, Noes 246.

Division number 51 Orders of the Day — Commissioners for Revenue and Customs Bill — New Clause 1 — Report on Establishment of Commissioners

Aye: 128 MPs

No: 246 MPs

Ayes: A-Z by last name


Nos: A-Z by last name


Question accordingly negatived.