Oral evidence

Taken before the Treasury Committee, Treasury Sub-Committee

on Wednesday 18 June 2003

Members present:

Mr Michael Fallon, in the Chair
Mr Nigel Beard
Norman Lamb
Mr John McFall
Mr James Plaskitt
Mr David Ruffley

__________

Witnesses: SIR NICHOLAS MONTAGU, KCB, Chairman, MR DAVE HARTNETT, CB, Deputy Chairman, MR STEPHEN BANYARD, Director Service Delivery Support, and MR NICK LODGE, Director Tax Credits, The Inland Revenue, examined.

Q1  Chairman: Sir Nicholas, welcome back to the Committee. Could you identify yourself and your colleagues?

Sir Nicholas Montagu: On my left is Dave Hartnett, who is Deputy Chairman, Director General for policy and technical matters, and the project sponsor for new tax credits; on my right, Stephen Banyard, who is the Director of Local Services; and at the end, on my left, Nick Lodge, who is the Programme Director for new Tax Credits.

Q2  Chairman: One reason we have asked to see you again is the evidence that you gave us on the STEPS PFI contract, Sir Nicholas. You told us in December that procurement law prevented you from excluding business from using an off-shore tax structure. The Government response is business can and will now be restricted from taking advantage of off-shore tax havens. How and why did you mislead us?

Sir Nicholas Montagu: I do not think, with respect, Chairman, I did mislead you. I think that the Government guidance, which, to be precise, is in the Office of Government Commerce report, annexed to the Government's reply, gives very valuable, high-level guidance about the sort of things that need to be taken into consideration in a procurement exercise. The same is true of the Accounting Officer Letter, recently issued to all Accounting Officers by the Treasury Officer of Accounts. However, all my legal advice-and you will understand that in the light of your concern and of the reply, I have gone over this in some detail-still indicates that it would, under European law, have been unlawful to exclude Mapeley.

Q3  Chairman: The revised guidance, according to the Government, will ensure that departments do have discretion to consider restrictions.

Sir Nicholas Montagu: That is true, Chairman.

Q4  Chairman: How is that possible now, when you are telling it was not possible in December?

Sir Nicholas Montagu: I think that what the revised guidance says is this. First of all, it says that under the relevant UK regulations a contract must be awarded on the basis of the lowest price or the tender that is the most economically advantageous to the contracting authority. Tax policy considerations unrelated to the procurement in question are not acceptable as selection or award criteria. Then it goes on to say, "excluding companies using or incorporated in tax havens from the possibility of bidding would fall outside the limited permissible grounds referred to under 7 above to the extent that companies from EC Member States or other relevant states were affected."

Q5  Chairman: The Treasury have now told us that they will restrict off-shore bidders in future.

Sir Nicholas Montagu: I think, Chairman, that the Treasury have said in essence that the structure and tax arrangements of bidders should be considered in the future. We have agreed with that, and paragraph 10 of the Office of Government Commerce memorandum is very tentative. It speaks in terms of a restriction, but then says that is provided such a restriction was not in fact be directly or indirectly discriminatory between bidders. I think the one thing that has emerged from all this, Chairman, is that all lawyers, which include two Counsel, (because since our last meeting Customs, as Richard Broadbent might have mentioned, have gone back to junior Counsel, Stephen Kovats), the one thing on which they are agreed is that it would have been unlawful to prevent Mapeley from using the off-shore structure that they adopted.

Q6  Chairman: You are saying that once Mapeley had been selected, it would then have been impossible for you to revise the guidance. Is that right?

Sir Nicholas Montagu: No. If I may Chairman, I think there are three separate points here. The first is the factual point that the two departments, Customs and ourselves, conducted the procurement in accordance with the instructions then in force, the so-called Green Book, which specifically prohibited taking tax aspects into account. The second is the point that Richard Broadbent made when I last appeared with him in front of your Committee, which was that putting in a new requirement-and he was thinking in terms of asking, we could not have enforced it,-at a late stage, would have resulted possibly in damages claims, certainly in a higher tender. Then there is the point that I am making, which is this. I have read out the conclusions of the Office of Government Commerce, or OGC, report. In further correspondence with Customs, OGC have said it is not possible to have a blanket prohibition of companies taking part in tax avoidance, as this is likely to be too difficult to define. Specific tax arrangements would need to be referred to in the contract; and the advice that Customs have received from Stephen Kovats of Counsel makes it clear that it would be unlawful to discriminate between bidders by excluding just one form of tax avoidance --- in other words, an off-shore structure. I have referred this whole matter again to my own most senior lawyer. He concludes: "So far as I can see, no lawyer who has studied the subject, considers it as even remotely arguable that the preliminaries for a PFI deal could include a provision to exclude a would-be supplier by reason of tax avoidance activities." It seems quite plain to me that the preliminaries for the Mapeley contract accorded with the general understanding of the legal position at the time. Where we have moved on is that obviously, we, like Customs, are extremely anxious to learn the lessons from the Mapeley procurement. That is why I have made sure that the advice from Treasury Officer of Accounts, glossed by advice from my own Principal Finance Officer, has been circulated to the entire senior management of the Department, and anyone concerned with procurement. Where I think the Treasury advice is helpful is that it alerts the project teams in future to the kind of things that, as Richard and I conceded, our project teams were not alert to. In other words, very early on, find out what the structure is and what the tax arrangements are. Find out at a stage when it may be possible to discuss with bidders. I regard that as one of the most constructive and helpful lessons for the whole of government procurement, from this exercise.

Q7  Chairman: I understand the guidance, but are you now disputing the new Government advice as to whether or not it could be a contract condition that off-shore tax arrangements are prohibited? Are you still disputing that?

Sir Nicholas Montagu: What I am saying, Chairman, is that where the Government advice says --- and it is Office of Government Commerce advice --- the award of contracts could in principle be restricted to companies, it also says, "provided such a restriction would not in fact be directly or indirectly discriminatory." I am therefore saying that I think that as high-level advice, this is valuable. In the case of Mapeley, all the legal advice that Customs or we have had, whether from Counsel or from our own lawyers, has been that to discriminate against Mapeley on the basis of their off-shore structure would have been illegal.

Q8  Norman Lamb: To pursue that a little further, it seems to me that there are two issues here. One is whether it would have been possibly to simply say to Mapeley, "you cannot have this contract"; or, secondly, a different issue, whether it would have been possible at the start of the process to have set conditions which would have made them placing a company which owned the properties in a tax haven impossible under the contract. In other words, it is the difference between excluding Mapeley on the one hand and setting conditions at the start of the process, which is what Richard Broadbent referred to in his evidence. He expanded upon that when he came to see us three weeks ago. You set conditions at the start, which would have prevented this debacle from taking place at all. Would you agree that there is a distinction there?

Sir Nicholas Montagu: I would actually, Mr Lamb. In a way, there are three points. First, at the time of the procurement, we were working within Government guidance which specifically said that tax issues must be ignored. The second point is that it is beyond doubt that to have excluded Mapeley when we discovered the structure would both have been illegal and would have exposed us to massive damages claims. The third point is that of course it would be possible now in a procurement to follow the Treasury guidelines. That is why I was saying to the Chairman that I think these are genuinely helpful guidelines.

Q9  Norman Lamb: Do you remember when Richard Broadbent said in evidence, "I am not sure I can agree with that", following on from the comment that you had made about excluding a company in a tax haven?

Sir Nicholas Montagu: I do, I am afraid, Mr Lamb --- and this is a very important point --- have to correct you on this one. What Richard actually said, and the transcript will show, is: "I am not sure about that" Then he went on --- and Richard himself has made quite explicit in letters to you and I think to some of your colleagues who are not members of the Committee that he was not contradicting me. Indeed, he fully agreed with me and was introducing a different and complementary point.

Q10  Norman Lamb: Exactly, and in his evidence at the subsequent hearing, just three weeks ago, he said that there are great dangers. The point he had been making was that there are great dangers and great difficulties in changing goalposts late in the process.

Sir Nicholas Montagu: Yes, indeed.

Q11  Norman Lamb: That is the point he was making in the original hearing at the beginning of December. What I just do not understand is why you were not able to make that same point. Were you aware that it might have been possible at the start of the process to have introduced conditions to prevent this from happening, because you did not say anything about that?

Sir Nicholas Montagu: No, but what I am saying, Mr Lamb, is that I think the lessons from this affair -----

Q12  Norman Lamb: No, I am asking you about your state of knowledge at the time of the hearing in December. He clearly knew at that stage that it would have been possible to set conditions in the original procurement agreement which could have prevented them being based in Bermuda. Were you aware of that same possibility at the time?

Sir Nicholas Montagu: With the greatest respect, Mr Lamb, I talk obviously a great deal to Richard. I do not think he was saying that.

Q13  Norman Lamb: He said it in his further evidence three weeks ago.

Sir Nicholas Montagu: That, if I may say so, I would find surprising. I do not of course deny it, but what Richard and I were doing were making two different points.

Q14  Norman Lamb: Yes, but were you aware of the point he was making, because you steadfastly failed to make it yourself?

Sir Nicholas Montagu: I do not believe it. I do not think that that was the point he was making. I think that --- the point he has told me he was making was: if you change things late in the day, regardless of the law --- and Richard comes from a commercial background --- you expose yourself to damages.

Q15  Norman Lamb: Yes, which implies that it would have been possible at the start to set the conditions correctly, and you did not do that.

Sir Nicholas Montagu: I do not think it would, Mr Lamb. As I said, we were operating within -----

Q16  Norman Lamb: That is what the new Government guidance provides.

Sir Nicholas Montagu: Exactly. With the reservation that I mentioned to the Chairman --- provided that it is legal. But my point is that we were not operating within new Government guidance; we were operating within the terms of the Green Book, issued by the Treasury, which was the bible for all Government procurement. Clearly, the new guidance modifies the old, but we were operating within -----

Q17  Norman Lamb: And Richard Broadbent makes the point that the Treasury was included in the discussions when the terms of the procurement were set.

Sir Nicholas Montagu: Yes.

Q18  Norman Lamb: Yes, so you never got any advice from Treasury at that stage, when you could have set the conditions correctly, to try and set them in a way which would prevent this from happening?

Sir Nicholas Montagu: The guidance from Treasury, Mr Lamb, was the Green Book. It was taken as read for all Government procurement that it should be in accordance with the Green Book. The Treasury were involved. The Treasury Task Force were fully involved.

Norman Lamb: So the Treasury never thought of that and never sought to correct you!

Q19  Mr McFall: At the beginning of this project, when you were sitting down and looking at the issue of procurement, did anyone come up with the point that if a company bid that was wanting to use it as an off-shore tax structure, what you would do about it? In other words, was there any anticipation of that?

Sir Nicholas Montagu: As far as I know, Mr McFall, nobody did, because, again --- I hope the Committee will forgive me -----

Q20  Mr McFall: You see, Sir Nicholas, it seems surprising that the Inland Revenue, dealing with tax and sophisticated tax issues at a national and an international level and off-shore tax structures, that nobody, bar nobody in your department thought, "wait a minute, if this comes up, this problem hits us right between the eyes; what are we going to do?" You are saying nobody thought of that.

Sir Nicholas Montagu: What I am saying, Mr McFall --- and the Committee will forgive me if I repeat ground that I went over with Richard last time --- is that any procurement at that time was undertaken in strict accordance with the Green Book, which was the Treasury's guidance. That specifically spelled out that it was impermissible to take tax into account. Might I also emphasise ---

Q21  Mr McFall: So you are saying that there was a robotic approach from you and your officials; you could not think outwith the Green Book, so it was not on, that question was forbidden?

Sir Nicholas Montagu: I am saying, Mr McFall, that I think you would find that any Government Department undertaking a major procurement regarded itself as bounded by the rules set by the Treasury. I do also have to repeat again the fact that every lawyer who has looked at this case has concluded that to exclude Mapeley on the grounds of -----

Q22  Mr McFall: Sir Nicholas, is the issue not this?

Sir Nicholas Montagu: ---- would have been illegal.

Q23  Mr McFall: You have a very senior civil service team, very sophisticated, the crème de la crème of people in the civil service, and you did not think of this; and you did not think ahead and say: "Wait a minute; see if we end up with an arrangement where there is an off-shore tax structure; how are we going to present that (a) to ministers and (b) to the country?" Nobody thought ahead: that is really what you are saying to us.

Sir Nicholas Montagu: No, what I am saying, Mr McFall, is that we now have new guidelines in the light of the Mapeley case. I -----

Q24  Mr McFall: Sir Nicholas, we do not want to go on too much, but you did not think on this because you had a book and a set of rules and you were not going to think out of the box.

Sir Nicholas Montagu: I need to amplify that, Mr McFall. We had a book and a set of rules which mirrored the provisions of European and international law. We were certainly not going to think about operating outwith the law. I come back to the point that every lawyer who has commented on this, whether outside counsel or Government lawyers, has concluded that it would have been illegal -----

Q25  Mr McFall: Sir Nicholas, the Government response says quite clearly the departments agree that mistakes were made. Exploring options for an alternative structure would have been legally possible.

Sir Nicholas Montagu: It would have been legally possible -----

Mr McFall: Exactly, so it is not a case of going outwith the law; it is using your initiative.

Q26  Norman Lamb: The law is exactly the same.

Sir Nicholas Montagu: Richard and I conceded last time that, yes, it would have been possible to explore different structures. That was the point that Richard was making, which Mr Lamb raised, that if we had done so at the stage where the Bermuda structure became apparent, that would have been moving the goalposts and would undoubtedly have involved -----

Q27  Mr McFall: Sir Nicholas, all I can say really is that it is obfuscation on your part. It is not a matter of moving the goalposts; you did not think about it. You messed up on a grand scale. All we are looking for is an admission that you have made mistakes so that in the future we can have confidence that the Inland Revenue does its job properly and is properly accountable. That is all we are asking for.

Sir Nicholas Montagu: Mr McFall, again, without wanting to go over old ground, Richard and I were very open last time in admitting the mistakes that we had made in handling it. There are certain things that I cannot accept. I cannot accept that we were wrong to act within the rules laid down by Treasury and within European law. I cannot accept that being obliged by Government procurement rules to get the best value-for-money deal --- we secured a deal which saves the Government 1 billion over twenty years and was, by a very long way, ahead of the next best bid.

Q28  Mr McFall: What you have shown to us, I think, already today is that you had no imagination whatsoever in doing this. You were not thinking ahead. Really, for a Government department to act like that is totally unacceptable, particularly when we get a response back from the Government that says mistakes were made. So we are looking for a little bit of humility here, rather than obfuscation.

Sir Nicholas Montagu: I am happy to admit that mistakes were made, Mr McFall. With the greatest of respect, I do not think that operating within what we understood to be the law and what we still understand to be the law, and within the central procurement rules, was among them.

Q29  Mr McFall: Nobody would think for a minute of asking you to work outside the law. We realise it is working inside the law, but you could have done it a lot better. You told us that the procurement was conducted in an exemplary way, in accordance with the rules, and that apart from being alerted to the presentational difficulties of the deal, you implied that in the same situation you would do the same again. Do you accept now that that was rather complacent?

Sir Nicholas Montagu: I was talking strictly there, Mr McFall, in terms of value for money, in terms of the value of the deal; and it was undoubtedly the best one on offer. With all the benefit of hindsight, and in the light of the new Treasury guidance, I think that if we were conducting the procurement now we would do it rather differently.

Q30  Chairman: It is not the law that has changed, Sir Nicholas. The guidance states very clearly that it would be possible for departments to make it a contract condition. The law has not changed.

Sir Nicholas Montagu: I think, Chairman, again, what it is saying is --- it is hedged about. If you read the Office of Government Commerce memorandum, the -----

Q31  Chairman: I have just read from it.

Sir Nicholas Montagu: The paragraphs that I mention are extremely tentative. What the Office of Government Commerce has said to us in terms is that their advice is a general framework, and that the introduction of a specific contract provision to exclude particular tax arrangements would need to be considered on a case-by-case basis by the lawyers dealing with the case. As I have indicated, counsel retained by Customs has indicated that in the Mapeley case it would have been unlawful. Leading counsel in the field retained by us came to the same conclusion, as has my own senior solicitor.

Q32  Mr Beard: Sir Nicholas, the Government's response to our report in this paper notes: "Experience with the Mapeley project has clearly illustrated failings in the Departments' internal procedures."

Sir Nicholas Montagu: Yes, indeed.

Q33  Mr Beard: What do you recognise as being those failures?

Sir Nicholas Montagu: I think, Mr Beard, that it was the ones that the Committee identified that there were particularly failure of internal communications, failure of the project team to be alert to the issues, and again the lack of clarity of accountability. What we have done since then is this. I mentioned that the head of our procurement section has issued guidance to all budget-holders on the need to establish the group structure and tax-planning arrangements of all bidders at an early stage - a Board member now invariably oversees all major procurement in other projects and will normally chair the steering group. We have made sure that the new Treasury guidance for Accounting Officers has been widely circulated to all senior directors. In addition, we have issued internal guidance, drawing explicitly on Government Accounting, covering all the relevant considerations that need to be taken into account before issuing a letter of comfort, and we are conducting a landscape review, which will complete by 2003, on governance and accountability arrangements. Governance and accountability seem to me to be at the heart of this. We have a major review of accountabilities on, and it is something that we revisit at Board level constantly. The day after tomorrow, I have an all-day meeting with my key senior directors, which will centre on accountabilities. The other thing that is important, and in a way responds to Mr McFall's point, is that whenever there is a major deal in prospect, we have arranged for our policy tax specialists to be involved.

Q34  Mr Beard: The Government's response also noted that you will "improve procedures to ensure that ministers are kept in touch with significant developments in procurement projects".

Sir Nicholas Montagu: Yes.

Q35  Mr Beard: Are you satisfied that these changes now are adequate to ensure that ministers are kept informed?

Sir Nicholas Montagu: Yes, I am, Mr Beard. Again, we have made very clear that everyone involved in major procurement projects keeps Ministers regularly in touch. To give you a very obvious example, our major project at the moment to re-let our big IT partnership. This is something I talk to the Paymaster General about every time I see her. She receives regular reports. Last week, for example, my senior director who is handling it at working level went to see her to take her through exactly where we are.

Q36  Mr Beard: What about other issues besides procurement issues? Do these guidelines cover ministerial communications on those too?

Sir Nicholas Montagu: Absolutely. Again, we have alerted people to the need to be sensitive to any wider local issues, or issues likely to be of interest to Ministers.

Q37  Mr Beard: You say you have alerted people. What have you done to alert them? It is one thing to produce a document that says these things, but it is another thing to make sure that these things have permeated the organisation.

Sir Nicholas Montagu: I agree with that. As I indicated, we are doing it by Board members' direct involvement in all steering groups --- and they normally chair it. These would clearly involve people on the project team. They would include a review of where we are at, including any issues likely to engage the interests of Ministers, and the Board member would double-check that these have been brought to Ministers' notice, and that where asked they were receiving regular reports.

Q38  Mr Beard: When you last appeared before this Committee in December, you said you were hopeful of reaching a settlement with Mapeley reasonably early in the new year --- this year.

Sir Nicholas Montagu: Yes.

Q39  Mr Beard: Why have you not been able to achieve that? Why is it taking so long?

Sir Nicholas Montagu: I have to tread a little carefully here, Mr Beard, simply because they are still going on. Ministers agreed --- and again this is something we are obviously involving Ministers in --- that we could restart our negotiations with Mapeley at the end of January. Essentially, we are talking about quite tricky issues. They are fairly complex, factual and legal issues that reflect the complex and changing nature of our businesses and estate. Obviously, I cannot go into the detail. Part of the discussions relate to the further payments that are due to Mapeley for additional services that they are providing in new and existing buildings, and part are the kind of continuing discussions that you would expect with a major contract about what is already due under the contract.

Q40  Mr Beard: What are these additional services?

Sir Nicholas Montagu: The kind of thing that we are talking about is that in existing buildings, upgrading security from unmanned to manned, providing additional specialist cleaning, taking additional floors in a building --- day-to-day, but nevertheless extremely important changes that you would expect within a changing contract. The team reports to Treasury Ministers and are supervised by a Board-level steering group, with representation from Customs, Treasury and ourselves.

Q41  Mr Beard: You are saying that the security arrangements now are different from those that you set out negotiating in the beginning.

Sir Nicholas Montagu: I am saying that in some buildings they can be. It is in the nature of the work of complex departments like Customs and Revenue, that over the life of a contract, requirements will change.

Q42  Mr Beard: What I do not see is that these are complex matters, so why is it still taking so long? It is now six months -----

Sir Nicholas Montagu: Taken in aggregate, and given the size of the Revenue estate, they are quite complex. I mentioned that it is not entirely this; we are talking over legal issues, about what is due under the existing contract.

Q43  Chairman: Can I be clear on the timetable? The contract was signed in April 2001.

Sir Nicholas Montagu: Yes.

Q44  Chairman: Negotiations about it and the difficulties with it started in November 2001, just six months after the contract began. So the contract operated for six months, and the re-negotiations have now gone on for 18 months. Is that right?

Sir Nicholas Montagu: Chairman, there are two separate issues. There is the issue that I discussed with the Committee last time, when Richard and I appeared. What we are talking about now is not a re-negotiation of the contract; we are talking about the sort of things that you would get under any major contract, for example what is technically called "equitable claims". There is the point that I made to Mr Beard on further amounts due for additional services. Contractual claims involve quite complex issues again, with lawyers required on both sides. We are very concerned to get through them as quickly as we can, but, as I say, Ministers authorised us to resume negotiations in January. In the negotiation of this, I do not think that four to five months is that long.

Q45  Mr Beard: What are the other topics, apart from the security one that you have mentioned?

Sir Nicholas Montagu: I mentioned security, cleaning, taking additional floors in buildings --- and that again can be quite big --- and then there is a raft of contractual issues which the Committee can understand I would rather not go into.

Q46  Mr Beard: What is not clear, Sir Nicholas, is what is the incentive for Mapeley to conclude these negotiations, given that you are already paying them?

Sir Nicholas Montagu: I think the incentive, Mr Beard, is that it is the further amounts that are due to them. So if we can add for additional services, until we can conclude negotiations, they cannot be assured of what amounts will be due to them for these additional services. These are services over and above those provided for in the original contract.

Q47  Mr Beard: Have they now got a definite tally of what extra services are needed; and, therefore, is there a point at which you could envisage these negotiations ending, and the total sum that you are paying into Mapeley being defined?

Sir Nicholas Montagu: Yes, so far as these are concerned, Mr Beard. If you are asking me for the foreseeable future, the answer is "no". Again, compare it, if you will, with our big IT contract with EDS. Over the life of that contract, we have had to ask for all manner of new services, each one of which is the subject of a separate negotiation. Departments' needs change, as staff needs change and as security needs change. I would expect throughout the life of the contract for commercial negotiations to continue. As I say, it is in the nature of it.

Q48  Mr Beard: This is an open-ended contract in other words.

Sir Nicholas Montagu: No, it is a flexible contract. The terms of the contract are clear and settled. What we are now mainly talking about is how much should we pay for additional services. I think that this Committee and the Public Accounts Committee would expect us to negotiate, rather than to pay at first blush whatever might be asked. The same applies with IT contracts, and this is true of big procurement contracts right across government.

Q49  Mr Beard: Mapeley have got you over a barrel in these discussions because you cannot afford now to abrogate this agreement for the very reasons you discussed at the last session we had with you, so they can constantly demand for various services, and you have no means of saying "no" because if they do not deliver them you have no alternative to Mapeley.

Sir Nicholas Montagu: I do not think, with respect, Mr Beard, that that is quite true. Obviously, as in the IT contract we would benchmark a demand, so one would expect to do so with Mapeley. If I might give you a very obvious example, in the last year with the new tax credits we have set up a large number of contact centres. These are additional to the original Mapeley contract. You would expect there to be a negotiation over the payments for that. If you look across the whole of government to any major procurement partnership, you will find that partners' needs have changed, and that there needs to be a whole series of further negotiations. Basically, the contract specifically provides for change. It is one of the great attractions for us in this because it gives us flexibility in, for example, not retaining buildings; and so they are expected.

Q50  Norman Lamb: The Observer last Sunday reported on the sale of one of your offices, 11 Belgrave Square. It reported that there had been a 23 million tax windfall because it was sold by some shareholders of Mapeley. I understand that it is not part of this whole contract. It was sold to another company based in a tax haven, so no capital gains tax or stamp duty was paid. Is that report basically accurate?

Sir Nicholas Montagu: I do not honestly know, Mr Lamb. This is a transaction between Mapeley shareholders and third parties. They are perfectly legal commercial deals.

Q51  Norman Lamb: But it rather demonstrates the problem that we have been discussing. There is 23 million of lost revenue to the Government.

Sir Nicholas Montagu: I have to go very carefully here, Mr Lamb. Depending on the nature of the deal, there might or might not be tax liabilities. I do not know if the Observer knows. Even if I knew, I could not comment on it. I do not think we do know.

Q52  Norman Lamb: Are you aware of any other properties, perhaps within this whole deal, being on the "for sale" list? What about Canterbury, for example?

Sir Nicholas Montagu: I would not know, Mr Lamb. Our contract with -----

Q53  Norman Lamb: Would you not know if Mapeley are about to sell a building where your officers are working?

Sir Nicholas Montagu: Our contract with Mapeley is for the management of our buildings, and provided that the management -----

Q54  Norman Lamb: But have they mentioned to me this rumour that Canterbury might be up for sale?

Sir Nicholas Montagu: I have not heard the rumour. I think I need to make quite an important point here. Government does business - not just talking about the Revenue departments --- with a huge range of outfits. If you started outlawing or trying to prevent all manner of deals which might or might not involve tax avoidance, I think that the Public Finance Initiative would not get very far. I have to emphasise that this deal was between third parties; it is not one which concerns our contract with Mapeley.

Q55  Norman Lamb: Private Eye reported that they had seen the contract that was actually signed between Mapeley and the Revenue, and that it referred specifically to the Bermuda-based company, and said that it had been signed by John Prescott. Is that correct?

Sir Nicholas Montagu: I think the position is that the contract was signed on behalf of John Prescott as Secretary of State.

Q56  Norman Lamb: Was he aware of the details?

Sir Nicholas Montagu: Because formally he owned all buildings on -----

Q57  Norman Lamb: And the contract refers to the Bermuda-based company, does it not?

Sir Nicholas Montagu: It would do because it was -----

Q58  Norman Lamb: Presumably, if his name was on the contract, he would have been briefed about the fact that the company was based in Bermuda.

Mr Hartnett: Mr Lamb, I do not think we know the answer to that question. The Secretary of State would have been advised by his own officials, not by us.

Q59  Chairman: But senior officials knew before it was signed that it was a Bermuda-based company.

Mr Hartnett: I cannot say, Chairman, whether Mr Prescott's officials knew anything.

Q60  Norman Lamb: But one would assume they would. If a Minister is asked to sign a contract, one assumes that he got advice on it.

Mr Hartnett: The contract would have been signed on behalf of the Minister.

Q61  Norman Lamb: With his name on it.

Mr Hartnett: I am sorry, I do not know that, without looking at the contract. This contract, in terms of sheer bulk, was massive, so I think -----

Q62  Norman Lamb: Well, for goodness' sake! Can I just ask one final question? You were asked if you could supply to the Committee a document that was described by some as a sort of smoking gun at the time, the e-mail from Dave Shaw, who gave advice on the issue, Sir Nicholas. You reported back that you could not because "it refers directly to policy advice given to Ministers"; and yet in the period prior to the signing of the contract by John Prescott, we have already been told that Ministers had not been informed. So what was this policy advice to Ministers which prevents you from letting us see -----

Sir Nicholas Montagu: I am sorry, Mr Lamb, but I cannot discuss policy advice to Ministers.

Q63  Norman Lamb: So Ministers had been advised of that!

Mr Hartnett: Mr Lamb, maybe I can clear this up. I became involved in the detail of Mapeley five days before the contract was signed.

Q64  Norman Lamb: Because it was you who spotted the disaster, was it not?

Mr Hartnett: I asked a question about what the Inland Revenue was selling into.

Q65  Norman Lamb: You were a bit concerned.

Mr Hartnett: Well, it was my first involvement in detail, and I asked. I asked Mr Shaw and a number of other specialists in the Inland Revenue for advice about whether the Inland Revenue could challenge what was the beginnings of the explanation of the structure. In Mr Shaw's note to me, there was an explanation of some detailed policy issues around the generality of what the structure might be. There was no specific advice to Ministers in that e-mail, or anything -----

Q66  Norman Lamb: In other words, it can be disclosed to us! That was the justification for not disclosing it.

Mr Hartnett: No, no, it was about policy advice, and policy advice for Ministers summarised by Mr Shaw.

Q67  Norman Lamb: Could you delete those items that are specifically policy advice to Ministers -----

Sir Nicholas Montagu: I do not think we could, Mr Lamb. I am anxious to help the Committee, but these were intrinsic in the e-mail.

Q68  Norman Lamb: And yet Ministers have not been advised about this situation.

Sir Nicholas Montagu: This was about general policy advice to Ministers; it was not about Mapeley.

Q69  Norman Lamb: David Hartnett, he did not say "do not touch it with a barge pole", as he was reported to have said.

Mr Hartnett: No. I am sorry, I have not looked at the e-mail since before the last hearing that Nick appeared at, but I have no recollection of those words appearing.

Q70  Chairman: Let us leave Mapeley now and move on to tax credits. The senior Treasury official in charge of welfare reform told the main Treasury committee in April 02 that the new tax credits had been developed in a series of stages that they would enter into in April 03 and had been planned and designed "for a very long time". How was it, just a month later, that we had such a mess that the Paymaster had to apologise to the House?

Sir Nicholas Montagu: I think I can tell you, Chairman. Certainly, the senior Treasury official concerned was entitled at the time to make those comments, in exactly the same way as the Office of Government Commerce reports on preparations for the new tax credits found that the programme was well on its way to successful delivery, and commented that it was an exemplar of good programme management. What happened was this. Obviously, we did extensive trials of systems and contingency planning and training of our people in the run-up to new tax credits. This included extensive testing of computer systems on what is called a "clone", which was 50 per cent of the capacity of the actual system. When the system started running, we experienced difficulties with it, including slow running. In addition, this was compounded in some cases by people claiming late and getting their claims wrong. If I may say, I should like to add my apologies to those that the Paymaster has given. People should have been getting the money they need, and getting it quickly, and not all of them are doing so. For my part, it is absolutely my top priority to put this right, and I am personally driving the discussions with EDS, our IT partner, at the very highest level. I talk every week with Michael Jordan, their Chairman and Chief Executive Officer. I got him over here two weeks ago to talk over the issues and see them for himself in person. I have made it clear to him that the performance of the IT is unsatisfactory and must be improved urgently. It is undoubtedly the most difficult case that the partnership with EDS has faced. It is standing up to the challenge in this sense; that we are working in close partnership day and night to identify and resolve the problems with the system; and keeping everything, not just fingers, crossed, it does look as if this is beginning to pay off. The performance of the system has improved in the last few days, and with nearly 4 million claims in payment, we have now got 250,000 claims to clear, of those received before June, and are deciding 100,000 claims a week on average. I should say that in the context of the 4 million claims nearly in payment, this is against a total of 4.4 million claims received.

Q71  Chairman: Do you think it is acceptable to fail a quarter of a million people?

Sir Nicholas Montagu: No, Chairman, I do not. I have said I do not think it is acceptable, and I have made it clear to Michael Jordan, that people are not getting quickly the money to which they are entitled. What I am saying is that we have had serious problems with the computer system, and that I am personally driving the effort to get these sorted; and that we have seen a real improvement, so that we are now deciding 100,000 claims on average a week.

Q72  Chairman: You said to us that some who had claimed tax credits before 31 January still did not receive their award notice or payment on time. How many were there of those people who did claim on the proper date, who were not given their money when they expected it in April? How many are we talking about?

Mr Lodge: Chairman, we had received about 2.5 million claims by the end of January. The vast majority of those were paid in time from April and from the beginning of May, in the case of people who opted for four-weekly payments in arrears. There were some who did not receive their payment on time because in the first week some payments were made late, and because for some of those claimants we had not yet received all the information we needed or we still needed to carry out further checks.

Q73  Chairman: How many were there?

Mr Lodge: In the first week in April, when we started to make payments --- and this would include people who had applied after the end of January as well --- there were perhaps a couple of hundred thousand payments made a day or two days late. Of those claimants who had applied by the end of January, the number would have been much smaller than that.

Q74  Chairman: Roughly how many?

Mr Lodge: Approximately the number who had applied, whose claims had been processed and who were due for payment, would have been a small proportion of that 200,000, but I cannot say how many.

Q75  Mr Plaskitt: That is rather surprising because you are talking about going over this extensively now to try and fix it, and to find out what went wrong. Sir Nicholas, you have talked about extensive testing. Surely you have to know exactly how many cases you are trying to deal with if you are trying to sort them out, so can you not tell us exactly how many of the people who had successfully lodged their claim before 31 January, were not paid on time? Are you talking about a smaller proportion of 200,000? Can you be more precise than that? I am, frankly, surprised that you do not know. Let me come to it another way: have you now sorted all of those people?

Mr Lodge: Of the people that claimed by the end of January, there is only a very small number who are not now in payment, and that is around 20-25,000 people. We have contacted those people and are awaiting further information from them before we can process their claim.

Q76  Mr Plaskitt: So you still have not sorted the cases of those who claimed before 31 January; there are still some unresolved --- is that what you are saying?

Mr Hartnett: Mr Plaskitt, can I come in because I might be able to help? I hesitate to disagree with Nick, and will let you have a note if I am wrong, but I think about 18,000 who claimed before 31 January, are still not in payment. The overwhelming majority of those are not yet in payment because we have not yet had all the information we have asked for to put them into payment. We have asked on a number of occasions for that information. We are phoning people and writing to people, and have not got it all yet.

Q77  Mr Plaskitt: Were there any people who put their claim in before 31 January, and who made a full and complete claim, who did not get their payment on time?

Mr Hartnett: Yes.

Q78  Mr Plaskitt: How many of those were there?

Mr Hartnett: The number I can give now is that there were around 200,000 people who had made a pre 31 January claim, who received their money 24 hours late; and there were another 200,000 who received it 48 hours late. There are others, and I am afraid I do not have the number, but we will get it to you.

Q79  Mr Plaskitt: That information would be useful. Mr Lodge, you said that some people are still not sorted out amongst those who made a pre January 31 claim. Did anybody inside your department brief the Paymaster General to the extent that she could say to the House of Commons on 28 April "anyone who has made a complete application and has yet to receive money will do so by the end of this week (1 May)" ---and here we are on 18 June and still saying some are not paid.

Sir Nicholas Montagu: Mr Plaskitt, as you know we are actually discussing the advice that we give to Ministers, but obviously Nick will give you as helpful an answer as he can within those parameters.

Q80  Mr Plaskitt: But the Paymaster General must have had some information to enable her to tell that to the House of Commons, and yet today we find out that there are still some people in that category not paid. Was she given incorrect information by your Department?

Mr Hartnett: The Paymaster has given two statements. Which one are you quoting from?

Q81  Mr Plaskitt: 28 April.

Mr Hartnett: Am I right in recalling that the Paymaster's statement of 28 April said that people would either be in payment or made ready for payment, or would be the subject of enquiries which would enable them to be put into payment?

Q82  Mr Plaskitt: No, it is a bit more explicit than that. The exact quotation is: "It is our intention that anyone who has made a complete application and has yet to receive money will do so by the end of this week." She said that on 28 April. Was that delivered?

Mr Hartnett: I believe that anyone who made a complete application was put into payment.

Q83  Mr Plaskitt: So you are confident that those that are still outstanding beyond that deadline are only outstanding because their application was incomplete?

Mr Hartnett: I believe that those that are now outstanding are those where we have raised enquiries and either the enquiries are still continuing --- and it may be because they were incomplete or because when the claim went through our processing system there was a verification failure. What is a verification failure? It is where a claim goes through and an alarm bell rings in the system and says "we do not know about Harry Smith and need to find out who this person is"; or it might have a difficulty because in the unfortunate event of a breakdown of family, two different people might be claiming in relation to the same child. ---and we have seen as many as four people claiming in relation to the same child. It is these people for whom we have made arrangements for them to get interim payments through our local offices. We have not been able to get them into the system.

Q84  Mr Plaskitt: How many people have received what I call emergency payments from their local tax office?

Sir Nicholas Montagu: There have been about 200,000 payments. Nick will be able to tell me how many people that is.

Q85  Mr Plaskitt: There have been 200,000 interim payments.

Sir Nicholas Montagu: About, yes.

Q86  Chairman: Sir Nicholas, forgive me, but we did send a memo to you on 22 May, asking you for precise figures in each of these cases, and you have not supplied them. We asked for the figures on 6 June, and you are still saying "about 200,000". We asked for details of the numbers.

Sir Nicholas Montagu: I am not sure that we have the numbers of claimants figures. As I said, by the end of May we had made about 200,000, and obviously that is a round figure. They were individual interim payments made through our enquiry centres on the day of request. By contrast, over the same period, 17.5 million payments were made centrally through the normal channels. I am not sure that we are able to correlate that 200,000 to individuals at this stage. It represents about 1.1 per cent of payments that have been made automatically.

Q87  Mr Plaskitt: Do we take it that no-one has actually counted precisely how many emergency payments have been made?

Sir Nicholas Montagu: No, that is not what I am saying, Mr Plaskitt. I am saying that we know the number of payments. Some of them will have been made and some people will have received more than one payment and some will have had a payment to tide them over until their regular payment came in; but I am not sure that we have the number of people to whom these payments have been made.

Q88  Mr Plaskitt: Do you know how many payments have been made?

Sir Nicholas Montagu: Yes, 200,000

Q89  Mr Plaskitt: That is a rounded figure, though, is it not?

Sir Nicholas Montagu: Yes.

Mr Hartnett: Maybe I can help. We process on to our IT system the interim payments that are made out of our local offices. We are processing all the time and we will, later this year, do a full reconciliation of the Giros, cheques, given out against the system. But at any moment in time we know the number of payments we have made. We do not know how many people they represent because at the moment we are a couple of weeks --- maybe more, maybe less --- behind in processing, so we do not know as I sit here, whether Harry Smith has received two interim payments through our local offices or one over the last week --- or three. It is possible for us to produce that figure, bur not just yet.

Q90  Mr Plaskitt: We would like to see it. How many people who applied for tax credit received their payment before they received their award notice?

Mr Lodge: We do not have a precise figure for that. We do know that a number of people received their payment, as you suggested, before they received their award notice, because award notices were a little later than planned in going out. So there would have been quite a large number, but I cannot be precise.

Q91  Mr Plaskitt: Can you get any closer to a number than that?

Mr Lodge: It would only be a very approximate estimate. I think it would have been well into six figures.

Chairman: Six figures? It is between 100,000 and a million!

Q92  Mr Plaskitt: To be clear, we have somewhere over 100,000, but we do not know how far over, of people who received the payment but did not know whether it was the right payment or not.

Mr Lodge: Until they received their award.

Mr McFall: Can I ask how that happened?

Q93  Mr Plaskitt: You appreciate from the questions we asked you earlier on, that we are trying to extract numbers.

Mr Hartnett: Can I add something? Lots of hundreds of thousands. It happened because there were some systems issues around award notices, but we also needed to check that the award notices going out were accurate, and we did lots of checks on that. Once we saw that we had systems issues, it seemed really important to us to get the payments out to people. I think Nick would want to say this, but let me say it as I am talking, that we are very sorry that people got their payment before they got their award notices. That is not what we planned for.

Q94  Mr Plaskitt: I know some of my colleagues want to ask specific questions on the figures and information but, before I let them do that, I just want to come back to where you started. You said that before this whole system was set up and went into operation, you did extensive trialing and testing.

Sir Nicholas Montagu: Yes.

Q95  Mr Plaskitt: In fact, you put quite an emphasis on that.

Sir Nicholas Montagu: Yes.

Q96  Mr Plaskitt: What went wrong with all that trialing and testing when you have got so many problems despite that? Was the trialing and testing just inadequate?

Sir Nicholas Montagu: I do not think it was, Mr Plaskitt. As I say, the Office of Government Commerce were pretty rigorous on this and commented: "Comprehensive contingency plans well advanced. Within the programme team, real 'can do' attitude. Comprehensive tightly controlled reporting" and, in particular, "Controlled go live approach to implementation and roll-out, which is proving very successful". I will get Dave to comment in more detail in a moment as the project sponsor. I mentioned that we trialed it on a so-called "clone" that was 50 per cent of the size of the real system. The real system, as you would expect, is of exceptional complexity. To give you an idea of the scale, it is probably about six or seven times more complex than the system required to bring in self-assessment. When it came to live running on the 100 per cent system with the pressures on it, which clearly cannot be completely replicated in a clone, we had the difficulties that I have mentioned. Particularly we had the difficulties with going slow, which meant that our people in enquiry centres on the end of helplines could not deal with cases as quickly as they would normally be able to do and then, of course, you got numbers building up. There were up to 1.7 million attempts in a single day to get through to our helplines when we had planned for half a million calls a week, which is a huge contingency by the standards of any organisation.

Q97  Mr Plaskitt: I think we will be coming to that.

Sir Nicholas Montagu: All the previous releases had gone like clockwork. To be honest, it has come as a surprise to both us and EDS, after the success of the trial running, that we have the difficulties that we do. If I might just add before bringing Dave in, the obvious point, but one which I would want to get on the record, is quite apart from driving EDS in the way that I have described, which has to be the top priority to get to where we need to be, I want to be very sure indeed that we have learned all the lessons and feed them in before next year's releases come along.

Mr Hartnett: Can I add a word or two about the systems. I am not an IT technician but if I could add something, it might help. This is a component based system and that means that it is a number of different computer systems which are joined together. The joining together has gone pretty well, it is the data flow that is the issue. I am not a medical man either but maybe I can try and do this by reference to medicine. There is a sort of arterial sclerosis somewhere which constricts the flow of data and there is something like a clot that appears.

Q98  Mr Plaskitt: We want his name, I think!

Mr Hartnett: Maybe I can volunteer for the moment. There is something which triggers this and it is that that cannot be replicated in testing and was not picked up in testing. It triggers in live running and what our IT partners have been able to do, crudely, is work around it for the minute so that we can get everyone into payment. It is working out what is constricting the flow and has caused queues in the past and what causes the clot to appear and really build queues, that is the key issue in relation to this IT. Nick and I speak daily, seven days a week, to the EDS senior technicians and the main board in the States driving out the work on how this is going to be solved.

Q99  Mr Plaskitt: I have got just one final question. In the autumn we start with the Pension Tax Credit which is being run by the Department for Work and Pensions ----

Mr Hartnett: May I just say it is a Pension Credit rather than a Pension Tax Credit. Forgive me for saying that.

Q100  Mr Plaskitt: It is being run by the Department for Work and Pensions. Are you talking to that department about the problems that you have been experiencing and the lessons that you are learning from it, and is their IT contractor the same one as yours?

Mr Hartnett: Can I do the questions in reverse order?

Q101  Mr Plaskitt: Yes, of course.

Mr Hartnett: Yes, it is the same contractor.

Q102  Mr Plaskitt: Oh, God.

Mr Hartnett: I think it is. Yes, it is the same contractor. Yes, the lessons are being learned. One of the things that Nick and I will be doing in relation to NTC is when we really understand this issue, and I hope that will be very soon, we are going to make sure that anyone who might bump into anything like that again in developing government IT systems understands the difficulties. We have got to share the lessons, as Nick said earlier.

Q103  Mr Plaskitt: As far as you can see, you can be confident that we will not have a similar scale of problems with Pension Credit?

Mr Hartnett: I cannot possibly give you that assurance on behalf of another department.

Q104  Mr Plaskitt: Not even knowing the contractor?

Mr Hartnett: I have no knowledge of what they are designing for the Pension Credit. I am sorry not to be helpful.

Q105  Mr McFall: My colleague has covered most of the questions I was going to ask, but on the issue of alarm bells ringing, I well remember being in my constituency office on 7 April and I had an avalanche of telephone calls, like every other Member. Alarm bells starting ringing for us on that morning, when did alarm bells start ringing for you?

Mr Hartnett: About four days earlier when it became clear that the first payments to be made - Nick will help me if I go wrong here - on 7 and 8 April were going to be 24 hours and 48 hours late. When the first payments that were being made through the system did not arrive, alarm bells started ringing even louder. Mr McFall, may I just add to my answer to Mr Plaskitt. Mr Plaskitt, I want to check, if I may, when I get back whether it is just the same contractor or it is another and we will send you a note if I have got it wrong.

Q106  Mr McFall: Four days earlier, what did you do? Did you contact the Chancellor of the Exchequer? Did you contact the relevant minister? Did you contact MPs' offices to say "There is a disaster going to come and you had better be ready for it"?

Mr Hartnett: I am racking my memory because I want to ----

Q107  Mr McFall: Can I help you?

Mr Hartnett: Yes, please.

Q108  Mr McFall: Because I phoned the Inland Revenue myself that day and they did not know what was going on hardly. I got to Sir Nicholas's office and you were off that day, Sir Nicholas, and you promised me a letter.

Sir Nicholas Montagu: I think I was probably in hospital that day.

Q109  Mr McFall: That is legitimate, there is no problem with that.

Sir Nicholas Montagu: That is very kind of you, Mr McFall. I am glad you do not think I should have my gallbladder out in the office.

Q110  Mr McFall: Maybe if you waited until a week later you would have been in hospital as a result of it. However, the fact of the matter is there was no meaningful response from the Inland Revenue to Members of Parliament, so you let this get out of hand completely, and that is the charge I am laying in front of you.

Sir Nicholas Montagu: I think, Mr McFall, that in the early days of course we alerted Ministers to it. We concentrated on trying to get it sorted. Obviously I received daily reports, actually including when I was in hospital, but that is by the by. Yes, with hindsight I think we hoped that this was something that we would be able to get sorted out quickly. Had we done so in the early days your postbag, and mine, would have been a great deal smaller. It was when we realised that actually there was a build-up of cases and that although the vast majority of claims were in payment there were the difficulties, that we then did start. Again, if we let MPs down I am happy to apologise for that. We have tried to remedy it since with the flow of information, with the dedicated helpline and so on.

Q111  Mr McFall: The fact is there was a lack of imagination there, just as there was before. If you had let MPs know and if you had given them briefings, as I asked for from your department and that they readily gave me, we could have tried to explain that situation but, instead, there was an image of utter chaos.

Mr Hartnett: Mr McFall, I am really sorry that there was an image of utter chaos. As both Nicks said earlier on, the system was extensively tested and the slow running, the queues that we have experienced, did not emerge. They did not emerge in the first few days either because we were late by 24 hours and 48 hours. It was only as we were then processing more and more claims that the difficulties that we have had over the last weeks began to emerge. It was only by pressing our IT partners really hard that we got more and more information out of them, because I do not think that initially they fully understood everything about the difficulties. We got more and more information. It was not that we understood the problem from the very first moment, our learning grew here.

Q112  Mr McFall: Following Mr Plaskitt's point, please consult your colleagues in DWP so that we do not have this in October.

Mr Hartnett: Of course.

Q113  Mr McFall: Can I ask about the IT problems on that because there was a written answer on 13 June from the Paymaster General and it referred to "unscheduled downtime" and the fact that the Revenue were working urgently with their IT partners to improve the system's availability, speed and stability. What problems were being experienced there? What are the practical consequences of these difficulties?

Mr Lodge: The way that these problems manifest themselves mainly is that staff trying to process claims might have fatal errors that appear on the screen in front of them. What that means in practice is that they are thrown out of that particular transaction and have to start again with that particular transaction or that particular part of the processing work that they are undertaking. That is one manifestation. Another is slow running, by which I mean slow response times, which in practical terms means that a member of staff processing the claim or a member of staff operating on the helpline dealing with a claimant on the telephone has to wait much longer than they should do to move from one screen of the system to the next screen, in other words to get the information that they need. That is the second main manifestation. The third is that when the system runs slowly, as it did quite often, there comes a point when the system has to be taken out and flushed out to try to get rid of the clot that Dave Hartnett mentioned earlier. It is that downtime that the Paymaster was referring to, I believe.

Q114  Mr McFall: How much downtime?

Mr Lodge: The system was being taken down several times a day regularly for periods of, it could have been 30 minutes, it could have been an hour, it could have been longer, in order to clear these internal queues.

Q115  Mr McFall: You could have been losing two hours every working day on this?

Mr Lodge: Sometimes more than that.

Q116  Mr McFall: Four hours?

Mr Lodge: It could have been four hours quite often.

Q117  Mr McFall: So it was a two and a half day week?

Mr Lodge: I would not quite describe it as a two and a half day week and I do not think staff on the end of the processing or the helpline would describe it that way either. There was a significant amount of lost processing time from the system working much more slowly than expected and from it having to be taken out of commission for periods of time to clear it out effectively so it could be restarted.

Q118  Mr McFall: There were some serious problems there with IT, I think. Who was responsible for designing, testing and implementing the tax credit IT system? Who is responsible for paying any additional costs incurred?

Sir Nicholas Montagu: EDS were responsible for the design.

Q119  Mr McFall: And they are responsible for any additional costs?

Sir Nicholas Montagu: I think, Mr McFall, that on that issue I have already made very clear to EDS and, indeed, publicly that once we have got these problems sorted out, which has to be absolutely our top priority, certainly we will want to discuss with them issues arising from the contract and arising from the non-performance of the contract. Obviously that will include issues of what the extra costs are and whether redress is possible. Again, the Committee will understand that at the moment I am not in a position to say more than that. Our top priority needs to be working together, as we are, to get it sorted out.

Q120  Mr McFall: Maybe I can just ask the question again. What recompense is going to be made for this inconvenience? Will the taxpayer have to bear that or will EDS?

Sir Nicholas Montagu: Again, Mr McFall, I have to give you the answer that this is something that we will need to talk to EDS about when we are clear about what the scale of extra costs have been when we look at the scope of the contract and so on. What the Committee has is my undertaking that those discussions will take place.

Q121  Mr McFall: Were you and your officials, Sir Nicholas, confident that on day one everything would have worked well with the IT?

Sir Nicholas Montagu: Were we confident? Yes, because again, as I have indicated, all the previous releases had gone like clockwork, all the clone running had been completely satisfactory.

Q122  Mr McFall: So this was a bolt out of the blue for you, was it?

Sir Nicholas Montagu: Yes, totally.

Mr Hartnett: Absolutely.

Sir Nicholas Montagu: I remember Dave Hartnett coming to me on day one and telling me about what was happening and my reaction was not one which would be printable in a Select Committee.

Mr Hartnett: Nor was mine.

Q123  Mr McFall: This was a learning experience for you, just like the rest of us?

Sir Nicholas Montagu: Exactly so. If I may say so, Mr McFall, remains so.

Q124  Mr McFall: It does not give us a lot of confidence, Sir Nicholas. It does not give us any confidence, the Chairman says.

Sir Nicholas Montagu: I think it needs quite genuinely to be put into context, that we have had a ten year contract with EDS, it has been an extremely successful partnership and, indeed, has been recognised as such. We have never had a failure on this scale and that is why, as I said in my earlier remarks, it is undoubtedly the most difficult test for the partnership.

Q125  Mr McFall: So the dress rehearsal went well but the first night was disastrous?

Sir Nicholas Montagu: Exactly so, and we had not had anything on that scale before.

Q126  Mr McFall: What we will be looking for in the future is to ensure that the taxpayer does not pay for this burden. We will be seeking transparency and disclosure from you on this issue.

Sir Nicholas Montagu: I understand your concern entirely, Mr McFall.

Q127  Mr McFall: And you will write to us on that with clarity at some stage in the future?

Sir Nicholas Montagu: I will write to you when I can. Again, the Committee will forgive me but I have to make the proviso that after taking legal advice on whether there is any restriction on what I can and cannot say in terms of commercial confidentiality.

Q128  Norman Lamb: Just on the compensation issue, how many claims for redress have you received from people who have suffered loss as a result?

Sir Nicholas Montagu: Very few.

Q129  Norman Lamb: You expect a lot more, I take it.

Sir Nicholas Montagu: I think so, yes.

Q130  Norman Lamb: Can I just come on to the issue of the helpline. You say in a rather under-stated way in your memorandum to the Committee that the helpline has been "under pressure". Are you aware of how excruciatingly frustrating it has been for people up and down the land to find it absolutely impossible to get through, to wait for ages? As I understand it, this is not a freephone number, so people who are sometimes most in need are having to ratchet up phone bills waiting to get through, and when they get through they are told that they cannot be provided with the information because the computer is down. Are you aware of the scale of the problem with this helpline?

Sir Nicholas Montagu: Yes, I am indeed, Mr Lamb. As I indicated, in one day we had up to 1.7 million attempts to get through, and if anything ----

Q131  Norman Lamb: Given the number of potential applicants, why was this not predicted in any way?

Mr Lodge: We did recognise that there would be a lot of phone calls. We planned to have in place capacity to deal with those calls, many millions of calls in fact. Up until, I think it is fair to say, mid-March or towards the end of March the helpline coped extremely well with that traffic and had handled, by that stage, many millions of calls. We saw an extraordinary peak in activity as we got into April for reasons that we have already discussed during this Committee: late issue of award notices, some people getting their award notices after their payments, understandably phoning to ask what was going on, to understand what these payments related to precisely. We saw as well increased volumes following some of the media coverage with people who had opted for four weekly payments in arrears and, therefore, were not due any money until the beginning of May, worried that they should have had some money, why had they not heard from us.

Q132  Norman Lamb: But are you aware that we are all receiving complaints about the helpline not working, despite the fact that the pressure point has now reduced somewhat?

Sir Nicholas Montagu: Yes, I am indeed, Mr Lamb. I get a lot of letters from you and other MPs about it. I am also aware from our offices. As Nick says, the pressure is lower, our performance is improving, but the pressures are still intense.

Q133  Norman Lamb: The Committee asked for details of the anticipated and actual call volumes, the helpline capacity, the level of service planned and achieved, but you did not provide that information and you did not even say why you could not. Why not?

Sir Nicholas Montagu: As Nick indicated, we planned on the basis of up to ten million in the period January to March.

Q134  Norman Lamb: I am asking why the information was not provided to the Committee.

Sir Nicholas Montagu: Are these data that we have in that form, Nick, or not?

Mr Hartnett: We do have some data about the planned capacity. Would you like me to run through that for you?

Q135  Chairman: What we are asking is why, when we asked you on 22 May for information like this, as on the previous point, the exact numbers who applied tax credit not received, why this information was not provided to this Committee.

Sir Nicholas Montagu: It may have been, Chairman, that we did not have that information at that time. I can look back on that.

Q136  Norman Lamb: You just did not comment on it. There was no explanation as to why you were not able to respond to our request.

Sir Nicholas Montagu: I apologise if that is so.

Q137  Norman Lamb: Perhaps you can provide it in a written memorandum to the Committee. In other words, giving the information that we have already requested. Just a quick couple of further points. I understand that there is a mass of protective claims going in, lots of self-employed people who have accountants employed by them who are making protective claims in order to avoid negligence on their part. Is this a symptom that you are witnessing, loads of claims that may not actually have substance and may not meet the criteria but are clogging up the system?

Mr Lodge: It is not something that we have particularly noticed so far. It may be something that is to come but so far we have not had an enormous volume of claims that we have identified as being of that nature, no.

Q138  Norman Lamb: Another concern that has been raised with me is that the number of inquiries to the Inland Revenue inquiry centres on this whole subject has led to considerable delays in dealing with all sorts of other inquiries that the Revenue has to deal with. Is that the case? Is there a knock-on effect?

Sir Nicholas Montagu: What we have tried to do, Mr Lamb, and Stephen may want to come in as director of local services, is actually minimise the impact that new tax credits have had. We always planned to redeploy people to new tax credits if necessary and, therefore, have had to do so because of the system not performing. We are using process claims to deal with telephone inquiries and make interim payments.

Q139  Norman Lamb: I am talking about the knock-on effects on other inquiries.

Sir Nicholas Montagu: I realise that. We have carefully managed the impact so that, for example, the flow of funds to the Treasury is unaffected and the impact on non-new tax credit customers is pretty low. Some may be experiencing slightly longer times for replies to inquiries. What we are doing is we are keeping the position constantly under review, as Stephen can tell you, and deploying our resources flexibly so that we meet our key business and customer priorities. To the extent that work has been put on one side, we will have a constant plan to get back to normal.

Mr Banyard: There is not much I can add to that. What we have tried to do is preserve the essential services, for example the flow of funds to the Treasury and those processes which are critical to the business.

Q140  Norman Lamb: Customers are having to wait a long time.

Mr Banyard: We have also tried to preserve the services to the customers as well. We have prioritised customer contact. We have trained up a lot more people to serve in our inquiry centres. We have supported our helplines and we have put additional people on to post. We have tried to preserve customer services and we are trying to preserve the key business processes and we have put on one side those pieces of programme work which are less time dependent.

Q141  Norman Lamb: We are getting a lot of people still coming into our advice surgeries saying that they are still unaware of the rights to emergency payments. I appreciate there has been some publicity about this but would it not be possible, perhaps by way of a recorded message on the answerphone when people first get an answer, or something, to ensure that everybody knows that they can make an emergency interim payment claim at their local office?

Mr Lodge: The vast majority of people do not need to do that, of course, but that service is available. In terms of making sure that people are aware of it, we have tried to do that when people have contacted us. I think it would be all right for the Committee to have a note, we would like to consider that proposal a little bit further.

Q142  Norman Lamb: Certainly I would like you to look into it.

Sir Nicholas Montagu: We will certainly undertake to look into that, Mr Lamb.

Q143  Chairman: Given the difficulties you have had this year on tax credits, are you confident you are going to cope next year with the first end-of-year reconciliations that are due then and the resultant under or overpayments of tax credits you have got to process?

Mr Hartnett: Chairman, I think we said earlier on in response to Mr McFall that we were pretty shocked that after all the testing and after the early releases going so well that we ran into this problem with the data moving around the system and the queues that arose and was not fully understood by the IT specialists. That very fact has caused us to look incredibly carefully at everything that is planned going forward because we do not want that to happen again. We are looking at the further releases of software. We are looking at the renewals process, which I think you were referring to, in great detail. We thought that those plans were very significantly de-risked on the back of the experience of the ----

Q144  Chairman: Were what?

Mr Hartnett: De-risked, without risk. With the risk taken away. We are now looking again in minute detail at all of that.

Chairman: Let us turn to the next disaster area, the failure to issue deficiency notices for five years without telling anybody or a minister.

Q145  Mr Ruffley: Sir Nicholas, can I draw your attention to the written ministerial statement by the Paymaster issued today on the review of the suspension of National Insurance deficiency notices. This is particularly important because it affects the basic State Pension. As you know, deficiency notices are the mechanism by which those with gaps in their contribution record are notified of those gaps and given the opportunity to make payments to fill those gaps so that they can get their full whack of basic State Pension. I am looking at the conclusions of the review. It is acknowledged that ministers were not informed for six years of the decision not only to suspend this system but also not to resume it. Why did it take six years?

Sir Nicholas Montagu: I think there were various reasons. The initial decision to suspend in 1998 was taken by the Contributions Agency, which of course was still part of the Department of Social Security.

Q146  Mr Ruffley: It transferred to you in April 1999.

Sir Nicholas Montagu: It did indeed.

Q147  Mr Ruffley: Okay, we are allowing you one year when it was not on your watch. What about post-April 1999?

Sir Nicholas Montagu: Post-April 1999, I think the original intention was to restore the class 1 deficiency notices. I also think there is a cultural issue here that up to April 1999 the Contributions Agency had been a freestanding executive agency used to taking what it saw as operational decisions on non-statutory issues, like class 1 deficiency notices. The functionality to reissue deficiency notices was available in the middle of 2000 but restarting them was not seen by the National Insurance Contributions Office as an option because they were facing substantial arrears of work caused by an earlier systems problem. I think that carrying on from the earlier Contributions Agency position, this was not seen as an issue. With hindsight it was and some of the things that we will be doing ----

Q148  Mr Ruffley: Forgive me, Sir Nicholas. Those who are here can actually read this in detail but look at the conclusions of the review on this point. "There was a failure by the National Insurance Contributions Office", this was when it was under the Inland Revenue roof, "to involve colleagues in Revenue policy responsible for policy on NI contributions in the consideration of whether to resume the issue of deficiency notices during 2001". You are presiding over an organisation where the left hand does not know what the right hand is doing.

Sir Nicholas Montagu: I think so far as ----

Q149  Mr Ruffley: Is that not a proper characterisation?

Sir Nicholas Montagu: No.

Q150  Mr Ruffley: Why not?

Sir Nicholas Montagu: I do not think it is a fair generalisation, Mr Ruffley, what ----

Q151  Mr Ruffley: Characterisation, not generalisation.

Sir Nicholas Montagu: To characterise an organisation is to say that it is generally like that. What is certainly true ----

Q152  Mr Ruffley: Sorry. I am characterising left hand does not know what the right hand is doing in relation to what I have just read out.

Sir Nicholas Montagu: In relation to what you have just read absolutely, I accept that.

Q153  Mr Ruffley: So the left hand did not know what the right hand was doing?

Sir Nicholas Montagu: The left hand did not know what the right hand was doing. Again, I think that the reason for this was the still relatively recent transfer of a highly operational office. What we are doing is we are now taking strong action to ensure that the National Insurance Contributions Office is not just made more aware of the issues, I am not talking about political awareness, we are adding people from Revenue policy and strategy and planning to their modernisation group. We have got them producing a comprehensive list of current issues for regular discussion of Revenue policy and business services. We are also going to ensure there is more regular contact at director level.

Mr Ruffley: Can I move on to exhibit B ----

Q154  Chairman: Before you do that, can we just be clear, how long have you been in charge of the Revenue?

Sir Nicholas Montagu: How long have I been in charge of the Revenue?

Q155  Chairman: Yes.

Sir Nicholas Montagu: Six years nearly.

Q156  Chairman: When did you realise that these notices were not being sent out?

Sir Nicholas Montagu: In late 2002 because that was when Revenue Policy brought it to the attention of the Board.

Q157  Chairman: Why did you not tell anybody then?

Sir Nicholas Montagu: At that point Revenue Policy, and Dave may want to elaborate on this, was busy working out with the National Insurance Contributions Office exactly what the issues were and what options should be put to ministers which they did as soon as they elaborated the options and clarified funding.

Q158  Mr Ruffley: If I can just move on to the next indent, the Conclusions of the Review, the second indent, paragraph 2, where we talk about accountability, there was a transition from the assumption somewhere in the ether that deficiency notices would be resumed at some time in the future over to a new assumption that they would be replaced in the medium term by statements of account. Now, you say here that that happened without an explicit decision, without any clear accountability, and then, "It is not clear who should have been responsible for identifying the issue and drawing it to the attention of ministers who would need to consider whether and how to inform Parliament". What kind of organisation is it when you say that no one knows who is meant to be responsible?

Sir Nicholas Montagu: Well, it is quite clear to me, Mr Ruffley, that what should have happened was that instead of seeing this as a purely operational decision, and of course the National Insurance Contributions Office takes loads of genuinely low-level operational decisions, but this was one which should have involved Revenue Policy and that is why we are not only having the landscape review which I mentioned, but I want a specific review of accountabilities within the National Insurance Contributions Office, more exchange of personnel. This, after all, is our report that we have identified and I sign up totally to the recommendations in it. A lot of them I have already put into practice.

Q159  Mr Ruffley: Could I just make the final point here under your conclusions where perhaps you can enlighten us. You are talking about the need to consult more widely not having been recognised, and you have conceded that.

Sir Nicholas Montagu: Yes.

Q160  Mr Ruffley: Then you say, "When the proposal to restore deficiency notices was considered by the departmental budgeting committees in autumn 2002, the urgency of the matter and the potential impact of not funding work on restoring deficiency notices were not sufficiently recognised by those committees." Now, you have said very clearly, and I think helpfully, to me just now that it was operational, some of it low level and it was missed, and I understand that. What are these departmental budgeting committees? Who are they? Who sits on them and why as late as autumn 2002 was the urgency of this matter "not sufficiently recognised by those committees"? Who sits on those committees? Who are they?

Mr Hartnett: Mr Ruffley, can I try and help here. When the Tax Policy Manager responsible for National Insurance contributions saw that the reintroduction of deficiency notices was not happening and that 5 April 2003, the six-year time limit, was approaching fast, she was pressing for these to be reintroduced. That had to be funded. We have tight controls over funding and these committees control that funding.

Q161  Mr Ruffley: My question was who are they?

Mr Hartnett: I am just coming to that. They are our finance managers and our planners in the Department who work out what they are going to do. As soon as that Tax Policy Manager saw that the funding issue was not being met, she brought it to me and we moved within days of that.

Q162  Mr Ruffley: When did you tell Dawn Primarolo about this because I think we have got as far in the narrative as autumn 2002 and we have just done it logically. Can you just remind me of the date that Ms Primarolo was apprised of all this information?

Mr Hartnett: I am working from memory, but March 2003 from the Paymaster's first statement.

Q163  Mr Ruffley: Yes, I had read that. It was almost by way of a rhetorical question. All this is going on and it is not at the level of low-level operational cock-up now, is it? It has actually got further up the food chain to the departmental budgeting committees in autumn 2002 and the urgency was missed, but no one seems to be concerned that ministers, and thus Parliament, are advised on all of this. Why was that? The departmental budgeting committees are not operational, are they? I just wonder why bells were not ringing from these senior people further up the food chain. That is my question, Mr Hartnett.

Mr Hartnett: They are middle to high middle-ranking management, Mr Ruffley, but what I want to repeat, I am sorry, is that within 24 hours of the Tax Policy Manager realising that these committees had not understood the impact of not funding this, we addressed it.

Q164  Mr Ruffley: But why the delay in telling Ms Primarolo?

Mr Hartnett: Because what the team were doing after they had seen this is working out what we could do to put this right against the background of plans for the pension statements that are referred to. I think we do need to go back a little way in this, and the operational managers in all of this had been focusing for some years on addressing the issues which came out of NIRS2 to make sure that people got ongoing contributory benefits, so what our people were actually doing was putting together what it was, and now we were reacting as to what we could do.

Q165  Chairman: Can I be clear about the Chairman's position here. You knew in the autumn?

Sir Nicholas Montagu: In the very late autumn.

Q166  Chairman: You knew in the late autumn. You see the Minister and report to the Minister every so often, so why did you not tell the Minister until March?

Sir Nicholas Montagu: I have to say, Chairman, that I do not think that I did in fact see the Minister between knowing of it and March, but the correct answer is the one that Dave has given. What we needed to do was to work out what options there were for dealing with this issue, for funding it and to present it to the Minister and that is what we did.

Q167  Chairman: You could have told her. While you were working up the options, you could have told her that the problem existed, could you not? Why did you not tell her for four months?

Sir Nicholas Montagu: I am unclear about what the process was between ----

Q168  Chairman: So are we.

Sir Nicholas Montagu: ---- between those two points, but in general we aim to go to ministers with solutions to issues and this is what we did in this case.

Q169  Mr Ruffley: Could I just ask two questions, and I am on paragraph 10 of your Review, the conclusions. We are told that you are, as part of the solution, appointing a customer champion to be "the voice of the customer". Then you go on to say, "This would complement the existing role of the head of the National Insurance Contributions Office Customer Relations Group who have responsibility for customer relationship management". You seem to be duplicating effort. What is the point of having a Customer Relations Group if you are now going to appoint a separate customer champion? I am not a guru on management theory, I freely confess, but what is all this about? Why did you not just get the existing person, the Customer Relationship Management Head, to do the job they should have been doing in the first place instead of telling us that you are now appointing a customer champion? What is the logic there?

Mr Hartnett: Well, the logic goes like this: we use customer champions to stand in the shoes of customers and ----

Q170  Mr Ruffley: But why are the Customer Relationship Management people doing it? I am making an argument about the duplication of things which should be done originally in the first place properly. Why are you getting more people to do what the first person should have been doing properly in the first place?

Mr Hartnett: If I may, there are two reasons. They can stand in the shoes of customers and be much more senior in relation to the management of customer relations than anyone has been before and will be challenging, from the customer perspective, what is happening in management meetings in NICO. The Customer Relationship Management team in NICO are looking out on the customers from inside the business; they are not standing in the shoes of customers.

Q171  Mr Ruffley: Okay. Looking forward, you say that later this year you will start writing to people with gaps in their contributions records during the years that the deficiency notices were not operative, if my understanding is right there, to give them sufficient information to make informed decisions about whether they could benefit from paying voluntary contributions. How many people are in that category? How many people will you have to contact?

Sir Nicholas Montagu: I do not think we have the figure here, Mr Ruffley, but I think ----

Q172  Mr Ruffley: Do you know who they are?

Sir Nicholas Montagu: Well, we will do. We searched the system and that is the basis for the issue of the deficiency notices, but we are probably talking millions.

Q173  Mr Ruffley: More than one or more than three?

Sir Nicholas Montagu: I would think yes, more.

Q174  Mr Ruffley: More than three?

Sir Nicholas Montagu: Yes, I would have thought so.

Q175  Mr Ruffley: Any advance on three?

Sir Nicholas Montagu: Until we scan the system it is quite difficult to know.

Q176  Mr Ruffley: Have you not scanned the system yet because do not get me wrong, but you are taking steps, incredibly constructive steps, and we welcome that, but I just want to pin down when all of this is going to be done. You are saying that later this year you will start writing to people. Is that because of the workload you have got, you cannot get to this work until later in the year?

Sir Nicholas Montagu: We are going to do a pilot of 1,000 people next month and we will aim to get the other letters out starting later this year. I have to emphasise that this needs to be done jointly with the Department for Work and Pensions because of course some people will want to link this with a request for a retirement pension forecast, and the idea of the joint account originally was precisely that, that there would be a single statement providing the deficiency notice and the pension forecast.

Q177  Mr Ruffley: Could you keep the Sub-Committee advised of how that is progressing?

Sir Nicholas Montagu: I am sure we can do that, yes.

Q178  Mr Ruffley: I think this should be done in a timely fashion because lots of people will be writing to MPs about what their position is with the deficiency notices when they read this document today and they may start getting concerned. When do you expect this work to be completed, the writing to individuals?

Sir Nicholas Montagu: I cannot say that at the moment, Mr Ruffley.

Q179  Mr Ruffley: Any notional date?

Sir Nicholas Montagu: No. I will keep the Committee posted, but we are talking about a very large-scale operation. I should emphasise two things. Normally the response to deficiency notices is four per cent from people wanting to make up their record.

Q180  Mr Ruffley: But four per cent of three million plus ----

Sir Nicholas Montagu: Is quite a lot, but they have until 2008 to do so of course.

Q181  Mr Ruffley: I hope you are not going to wait until then to start sending them.

Sir Nicholas Montagu: I am sure we are not. Dave reminds me, in answer to the Chairman's earlier question, that an additional complicating factor, apart from the funding, was that there was a genuine difficulty in finding space on the system, so again this was something which held up working out what the options were to deal with this particular problem.

Q182  Chairman: I just want to be clear about this failure and keeping the Minister in the dark for so long. In your Review, you say that it is not clear who should have been responsible for identifying the issue and drawing it to the attention of ministers. If it is not clear, presumably if anybody should have informed the Minister, it should have been you as Chairman, should it not?

Sir Nicholas Montagu: I think that that part of the Review, Chairman, refers to the earlier issue of the decision to continue the suspension of the notices, and I have replied to that, that I think that NICO should have realised that this was not a low-level operational decision.

Q183  Chairman: You are wriggling on the technicality of which issue it was. Surely the person who should draw things to the attention of ministers is you as Chairman, is it not?

Sir Nicholas Montagu: It depends on what stage, quite honestly, Chairman. I am not wriggling on this one. On operational issues, I would not normally be the person who drew it to Ministers' attention and I think that that is the part of the report that we were discussing. In other words, when NICO decided to continue with the suspension, should they have realised the need to tell Ministers in the way that people in my operational offices across the country seek Ministers' agreement or put Ministers in the picture on this? The person who was accountable at NICO was the Director of that Office ultimately.

Q184  Chairman: So it is up to individual directors in different bits of your empire to tell the Minister, is it? Who is responsible for keeping the Minister informed of the work of the Revenue?

Sir Nicholas Montagu: Obviously I have an overall accountability, but within that the notes to Ministers go up daily. They do not, as they used to many years ago, all go up over my name. They normally go up over the name of the responsible director or assistant director or, in some cases, director general, and I would have expected the Director of the National Insurance Contributions Office to be the person responsible for recognising the potential sensitivity there.

Q185  Chairman: Given that the Minister has been kept in the dark, what disciplinary action has been taken against any of these people?

Sir Nicholas Montagu: A number of the people involved have retired, Chairman, but ----

Q186  Chairman: Retired?

Sir Nicholas Montagu: A number have retired, but I have to say that we are not a department that immediately starts looking for scapegoats and then saying who should be disciplined. What we try to do when we identify that things have gone wrong is to identify a training need or a need for the kind of measures that I have indicated I am taking in response to what has happened here and some of which are detailed in the report.

Q187  Chairman: But it is the accountability to Ministers that concerns this Committee. It came up over Mapeley and it seems to run like a thread through all of this. Do you regret keeping the Minister in the dark over this?

Sir Nicholas Montagu: Again I think with hindsight it might have been better if we had told her before we were able to come up with a solution, but our normal way is to try and come up with a solution and say, "Look, we have looked at this", because, otherwise, we will simply get the response, understandably, "What are you going to do about it?" We perhaps wrongly delayed telling her until we had an idea of what we could do, how we would fund it and, critically, how we would get it on to the system of a large and complex organisation.

Q188  Norman Lamb: The concept of waiting to provide solutions sounds rather like covering up the problems. Is it not important for ministers who have responsibility for your Department to be aware of the problems when they are happening, when they are causing immense problems for people out in the country rather than you keeping it to yourselves until you come up with a solution?

Sir Nicholas Montagu: When they are causing problems for people out in the country, Mr Lamb, I think that is true. We do have, I think, to get this into proportion in the sense that I indicated. Nobody has actually lost out as a result of this and we are talking about a non-statutory function which gets a four per cent response.

Q189  Norman Lamb: We have heard of a whole series of problems and crises this afternoon. The Department has faced a very critical report from a Select Committee and a critical response from the Minister to that Select Committee, so has anyone in the Department taken responsibility for these failures?

Sir Nicholas Montagu: Yes, of course.

Q190  Norman Lamb: Has anybody considered their position? Have you considered your position?

Sir Nicholas Montagu: Of course I have considered my position, Mr Lamb. My position is, and the Chancellor has made it clear to me that this is a position which is 100 per cent supported, that mistakes were made for which obviously I take ultimate accountability, but my job is to continue leading the Revenue through a period of exceptional change, as I have done throughout the last six years, and that is what the Chancellor of the Exchequer wishes me to continue to do.

Q191  Norman Lamb: Has anyone faced disciplinary action on any of the matters that we have dealt with today?

Sir Nicholas Montagu: No, Mr Lamb, because, as I have indicated to the Chairman, our reaction is not to seek disciplinary action. We seek disciplinary action in cases of misconduct.

Q192  Norman Lamb: For a failure to inform ministers, a failure to keep senior people informed of pretty serious matters?

Sir Nicholas Montagu: That would not be a disciplinary matter.

Q193  Norman Lamb: It would in many organisations.

Sir Nicholas Montagu: It may be, but within the Civil Service what we try to do is to regard things of this sort as indicating a need for training or a need for reinforcement, and I cannot believe that any member of this Committee has never made a mistake. We are talking about mistakes here.

Chairman: We are not running the Revenue.

Q194  Mr Beard: Could I turn to the Enterprise Act and the bankruptcy provisions for small businesses in it which essentially stop the Inland Revenue being a priority creditor and require you to be further down the list. The allegation has been made by people who are reasonably informed that the Inland Revenue, as a result of not being a priority creditor, is now pushing for small businesses to become bankrupt at an earlier stage than they were previously in order to be sure that the money is paid. Is that indeed your policy?

Mr Hartnett: Our policy is to support businesses in difficulty with the Government's rescue culture. Where the Inland Revenue can be helpful, understanding and supportive to a particular end of helping the business survive, we do that. There are some cases where it is actually better for us to press for bankruptcy or liquidation more quickly, but this is not a surrogate for the preference that we used to have.

Q195  Mr Beard: Has your policy on this matter changed since the Enterprise Act came into effect?

Mr Hartnett: I am aware of no change, but I will go and look.

Q196  Mr Beard: I would be grateful if you would and let us know the conclusion of that enquiry

Mr Hartnett: Yes.

Q197  Mr Beard: The departmental report says that by 2005 all unsolicited telephone calls and e-mails will be then dealt with by contact centres. We have heard quite a bit about the systems not performing well, so how do you satisfy yourselves that your contact centres are providing and are going to provide a satisfactory level of service?

Mr Banyard: If your question is are we confident of delivering the next tranche of contact centres, yes, we are.

Q198  Mr Beard: That was not my question. My question was how are you going to be satisfied that there is a reasonable level of performance for your clients?

Mr Banyard: We set ourselves targets for our contact centres. These targets are based in terms of dealing with a customer enquiry completely and giving a comprehensive response and that is the measure we judge ourselves by and we think it is the measure customers would want us to judge ourselves by. We measure our response time to customers and our specific targets are to answer 90 per cent of calls within 20 seconds and our aim is to get our contact centres up to that standard. With the new Tax Credits coming in, we have had more calls than we anticipated, but we have the capacity on our pay-as-you-earn centres to deliver that service and up to the introduction of the new Tax Credits, we were delivering it for pay-as-you-earn services.

Q199  Mr Beard: You have said what the target is, but to what extent are you meeting that target?

Mr Banyard: Last year was the year when we introduced five new contact centres and the original one in East Kilbride was meeting that standard throughout the year. The newly introduced ones did not to start off with, but by the end of the fiscal year, in March, they were all meeting that standard.

Q200  Mr Beard: The standard of 90 per cent within ----

Mr Banyard: Within 20 seconds, yes.

Q201  Mr Beard: You say that your contact centres provide access for customers at times when it is convenient for them and, where possible, enquiries can be resolved and subsequent changes made with a single call. You do not say how often enquiries are satisfied with a single call.

Mr Banyard: Ninety-five per cent, I think.

Sir Nicholas Montagu: We did a customer satisfaction survey a few years ago which said that 95 per cent judged the service good or better and we are going to refresh that survey over the next twelve months.

Mr Banyard: In addition, 95 per cent of the enquiries that contact centres receive are dealt with in the contact centres in one go. Some calls cannot be dealt with in the contact centres. They are designed for unsolicited telephone calls from individuals and most of those can be dealt with there and some of them involve executive action which you can take on the telephone because they are recorded calls. If the call is of a specialist nature, for example, if it is about foreign trusts, or if it requires access to papers, for example, if it is an enquiry about accounts or returns which have been sent in, then the call is handed over to the specialist or to the back office which deals with it, but 95 per cent of the calls can be dealt with in the contact centres.

Q202  Chairman: Sir Nicholas, thank you very much. We will leave it there for today. You promised us, I think, some additional very specific information on Tax Credits.

Sir Nicholas Montagu: We did indeed.

Q203  Chairman: If we are to report by the recess, it would be very helpful to have that within the next few days.

Sir Nicholas Montagu: We will do what we can, Chairman.

Chairman: Thank you very much.