UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 57-iii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

TREASURY COMMITTEE

(TREASURY SUB-COMMITTEE)

 

 

HM REVENUE AND CUSTOMS: ADMINISTRATION AND EXPENDITURE IN 2006-07

 

 

Wednesday 5 December 2007

MR DAVE HARTNETT, MR MIKE ELAND and MS SARAH WALKER

Evidence heard in Public Questions 342 - 512

 

 

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Oral Evidence

Taken before the Treasury Committee

(Treasury Sub-Committee)

on Wednesday 5 December 2007

Members present

Mr Michael Fallon, in the Chair

Nick Ainger

Mr Graham Brady

Jim Cousins

Mr Philip Dunne

Ms Sally Keeble

John McFall

Mr George Mudie

Mr Sin Simon

John Thurso

Mr Mark Todd

Peter Viggers

________________

Witnesses: Mr Dave Hartnett, acting Executive Chairman, Mr Mike Eland CB, Director-General, Law Enforcement and Compliance, and Ms Sarah Walker, Director, Benefits and Credits, HM Revenue and Customs, gave evidence.

Q342 Chairman: Mr Hartnett, welcome to the sub-committee. Could you identify your team formally, please?

Mr Hartnett: Yes, Chairman. Thank you. I am Dave Hartnett, Commissioner of Revenue and Customs and the acting Chairman, to my right is Mike Eland, also a Commissioner of Revenue and Customs and the Director-General responsible for enforcement and compliance, and to my left is Sarah Walker, our Director for credits and benefits.

Q343 Chairman: Could we start with the issue of data security. Mr Gray in his statement on internal controls of 3 July says there has been an increased level of issues involving data security. HMRC is taking action to improve the security of data which it holds. Were there breaches before the breaches that have been reported?

Mr Hartnett: Yes, Chairman, there were. There was an issue in 2006 when our information technology partner mislaid a disc of banking information. We notified this information to the Commissioner and we introduced at that stage more stringent rules. I am pleased to say the disc was found but that does not excuse the loss in a way.

Q344 Chairman: Since you were merged together, Customs and Revenue, how many cases of security breaches have there been?

Mr Hartnett: There have been quite a number.

Q345 Chairman: How many?

Mr Hartnett: Seven of some significance, but we record everything that is a security breach, so leaving a cupboard open over night we record because we set out from 2006 to learn lessons in relation to security and to tighten things up.

Q346 Chairman: Seven serious breaches?

Mr Hartnett: Seven breaches which we reported to the Information Commissioner.

Q347 Chairman: Will the Pointer Review now be looking at all losses of data in this period?

Mr Hartnett: The Pointer Review will initially focus on the loss of the child benefit data and our data security generally. Kieran Pointer has told me he aims to make us a world-class performer in the maintenance of data, so I am sure he is going to look across how we manage all our data and the issues we have had.

Q348 Chairman: Turning to the loss of the child benefit discs, what would have been the cost of desensitising the material approximately?

Mr Hartnett: I do not know the answer to that. Mr Pointer will be looking at that. I have seen speculation in the media about what would have been involved. At the moment I do not know.

Q349 Chairman: But you must know. You must be able to hazard an estimate as to what it would have cost, because that was the key point, was it not? It was too expensive to desensitise?

Mr Hartnett: No, I do not think that is right. The emails that have been released by the NAO do refer to costs, but that is not a complete story. They also refer to size considerations and the like, and the key issue around that data is it should not have left our premises anyway. There are a number of breaches of our procedures in that happening.

Q350 Chairman: I understand that, and I am not suggesting cost was the only issue involved here, but if cost had been an issue, of what order would the figure have been for you to say, "That is just too expensive for us to do"? Are we talking of 50,000, 10,000, 100,000?

Mr Hartnett: I would have thought, Chairman, it would be less than 50,000, but I do not have the precise figure.

Q351 Chairman: Can you clarify who in the HMRC finally authorised the undesensitised material to be sent on the disc? There has been this confusion as to whether it was a business manager and so on.

Mr Hartnett: I can clarify that.

Q352 Chairman: Could you clarify the grading system and who it was?

Mr Hartnett: Yes, of course. To the best of my knowledge, there was no authorisation here. The team that managed that data and were established to manage the data securely in a secure environment within our offices released the data. We have two crucial rules here that if we are letting any asset, data, software, hardware, equipment, out of our offices, it has to be managed in a proper way and there has to be proper authority. If it is software, it has to be released outside the organisation with all appropriate protections. What happened here is that that did not happen. This is a dreadful mistake.

Q353 Chairman: I understand that, but what is the proper authority for releasing this? In what grade in your organisation is the proper authority vested?

Mr Hartnett: Here we had set up a procedure with the National Audit Office for passing data to them. The National Audit Office did not use the procedure and we did not release the data through the procedure, and that procedure worked in a team led by our child benefit process owner, a member of the senior Civil Service, who in October knew nothing of this because the process was not followed.

Q354 Chairman: But it was not, equally, copied to anybody else more senior. Is that right?

Mr Hartnett: No.

Q355 Chairman: These emails were not copied to anybody more senior.

Mr Hartnett: I have seen absolutely no evidence, other than the one email that has been commented on in the media, that anyone in the senior Civil Service at any level was copied into this.

Q356 Mr Todd: I suppose one of the puzzles to anyone who knows anything about the systems is that it was actually technically possible to do this. Not that some senior manager did not know about it; it should not have been possible for one individual member of staff to produce a file of this kind and despatch it; there should have been a built in bar in your system which required some sort of intervention to achieve that outcome. That has been a puzzle to me from the start. Can you throw any light on that?

Mr Hartnett: Mr Todd, it is a puzzle to me as well, I have to say, but let me explain what was going on here because I think it may help. I think Kieran Pointer's work really has got to help us with this. The data that was in Waterview Park in the North East was drawn off from the child benefit computer system. That is in a different building and it was needed for what we call claimant compliance, to check that we were paying child benefit in circumstances where it was due. It was brought to Waterview Park and loaded up on to a secure, stand-alone desk-top computer in a secure environment, and from that the people with access to it draw off samples for our claimant compliance people with our people saying, "This is the sort of sample I need." The emails are interesting in this context, because they show no expectation at all that the data would ever have left our offices, but I think you are onto a crucial question, and that is how on earth was it possible ever to draw down a full copy? At the moment I know it clearly was possible, but---

Q357 Mr Todd: That is an issue of system design.

Mr Hartnett: Exactly; absolutely.

Q358 Mr Todd: And also management disciplines imposed on that system design at the time someone conceded with the security requirements that should have been in place.

Mr Hartnett: Yes.

Q359 Mr Todd: So it is not just some funny software engineer who did not quite do their job?

Mr Hartnett: No, it is a design issue.

Q360 Mr Todd: It is a disciplinary issue.

Mr Hartnett: Well, it is a discipline issue within the---. Yes.

Q361 Mr Todd: Okay. I do not think it should require the Chair of PWC to tell you that actually either; it would seem obvious to most people. What sort of resources does Kieran Pointer have at his disposal to examine this issue? Is it just him and his good will?

Mr Hartnett: No, I think Kieran Pointer, I know that Kieran Pointer has various resources he can draw on. He is drawing on some of his colleagues in PWC who have expertise that will be relevant, and we will make available to him in HMRC, and I am sure the Treasury would do the same, any resources that we have that he would find useful.

Q362 Mr Todd: Presumably there is the possibility of a prosecution in this matter. Are you having to make available resources to advise some of the staff who may be interviewed by Kieran Pointer in the process of this investigation?

Mr Hartnett: Staff who need advice about their own position will, I think, obtain that advice from their trade union. Can I just explain that there is more than one inquiry under way here? We have got the Kieran Pointer inquiry looking at our systems, finding out what has happened, enabling us to make our system better for the future reporting to the Chancellor, we have a police inquiry, which is crucially focused on finding the discs, if I can put it this way, in the national interest, we then have the Information Commissioner, who will be conducting an inquiry, which could lead to a criminal sanction, and we then have the Independent Police Complaints Commission, who are our regulator established in the Commissioners of Revenue and Customs Act 2005. I know they are all talking to each other, but those are the principal inquiries underway at the minute, two of which could lead to criminal sanction.

Q363 John Thurso: HMRC is using an expensive 0845 number for its helpline. Why is that?

Mr Hartnett: Mr Thurso, we have always done that with our help lines. We aim to make the charge as---

Q364 John Thurso: Do you not think this is a slightly exceptional case, a helpline where you have lost 25 million of this people's data? There is a slight difference.

Mr Hartnett: I have two things to say. First, we wanted to use an existing helpline to make it available as fast as we could, and that we have done. The second is that the amount of traffic on the helpline has been relatively small. We have 150, 160,000 calls a day. Since the Chancellor made his statement, we have had around 35,000. If I am wrong I will give you more. I am being corrected; it is now up to 60,000 calls.

Q365 John Thurso: It sounds quite a lot to me actually. Can I move on? You have written to all those whose personal data has been lost. How many instances have you had of calls or letters subsequently suggesting that the data in those letters was incorrect?

Mr Hartnett: The last number I heard was something just short of 200 approaches to us in two or three different circumstances, in a couple of cases more than one letter in the same envelope, letters being addressed to old addresses for people, but they were the only address we had, and then a small number of odd cases where letters have gone to the wrong address. I think what is really important here is that less than 200 out of 7.25 million letters. That is completely regrettable, and I apologise to all the people who have been troubled by that, but the banks and others have told us that that is a pretty good result.

Q366 John Thurso: There is a difference. If I get cheesed off with my bank I can change to another one. Unfortunately, I cannot change to whom I wish to pay tax or receive benefit, so I would suggest there is a stronger duty on you. The last question on this. Have you ascertained whether you might be in breach of the law in respect of any of the information sent in those letters of apology if they contained information relating two a third person?

Mr Hartnett: We did ask our own lawyers to look very carefully at the letter in that respect and in other respects before they were sent out and were told there were no legal issues.

Q367 Mr Brady: First of all, can I pick up on one of your earlier answers. Sixty thousand calls to the helpline. Do you have a figure for what the cost of those calls has been to the users, either as a total or---

Mr Hartnett: I do not, Mr Brady. We will see whether we can get one for you and I will write to the clerk.

Q368 Mr Brady: Thank you very much. Secondly, you have made it clear that you are not in a position to say what the cost was or would have been of disaggregating the information concerned on these discs. Could you say, though, what the policy at HMRC is on the question of what cost is acceptable, what can be borne in certain circumstances?

Mr Hartnett: If I can put it initially in terms of the National Audit Office, we are obliged to provide data for the National Audit Office - they are our auditors, they have statutory authority and we would provide data whatever the cost - but if the cost was going to be very significant, I would expect senior managers to get involved and have a discussion with the National Audit Office about that.

Q369 Mr Brady: Do you have a guideline figure of what "very significant" would be in that context?

Mr Hartnett: No, but I would have thought here that to provide the data that the National Audit Office needed, if the cost had been, say, 50,000, I would have expected the process owner to become involved and also at that stage to have said, "Golly, we do not need to provide them with some of this information."

Q370 Mr Brady: Presumably there is some correlation between the level of costs that would be acceptable and the number of records concerned and the amount of information being requested?

Mr Hartnett: Yes, I think that is an important issue here, because the National Audit Office had changed their approach to auditing child benefit and, to the best of my recollection, the sort of discussion I have just described I would expect to take place had not taken place in as much detail as I would have thought necessary.

Q371 Mr Brady: In terms of the expenditure of HMRC on the provision of information for audit purposes, has the amount of expenditure or the policy changed since 2004?

Mr Hartnett: Not to my knowledge.

Q372 Mr Brady: But, again, would you be able to give us figures on that? That would be helpful.

Mr Hartnett: Of course. If we have got them you can have them.

Q373 Mr Brady: Thank you. One final thing. It has been put to me by somebody who works in the field of running and designing these big databases that it would be normally possible to execute the operation that was needed in separating information in the files very simply, that it would normally take very little input. He goes on to say that normally you could give this to an outsourcing company to do at very little cost and says it very much depends whether there has been a well drawn up contract with the outsourcing company. Is that something that you are yet in a position to give a view on and, if not, is it something that is going to be part of the Pointer Review?

Mr Hartnett: I think I can give you at least a preliminary view, if I may, and that is that when we needed to pass data to APAX - the clearing system - in order to enable them to get their members' number to protect accounts, we were able to segregate the data in the way you have described without our IT supplier and quickly. It is, therefore, a matter of huge regret that we did not do that before, but I think the important issue is that those who asked for and those who provided that data had stepped outside the process that we had established.

Q374 Mr Brady: Thank you for that, but it does suggest that the contract may be perfectly sound and the system may be perfectly sound and, therefore, it would not have been particularly expensive to do the work that was necessary.

Mr Hartnett: I do not know, as I said to the Chairman earlier on, what it would have cost, but we have demonstrated that this can be done and it can be done quickly and no-one alerted me, when I asked for it to be done, that I was doing something that was going to involve significant cost.

Mr Brady: Thank you.

Q375 Mr Dunne: Mr Hartnett, in answer to Mr Brady just now you suggested it was the NAO who was changing the audit procedure in relation to their audit of child benefit. When did the responsibility for administering child benefit pass over to the HMRC from DWP?

Mr Hartnett: It passed over in 2003, but, Mr Dunne, may I correct one thing if I made a mistake earlier on, or maybe you have interpreted me in a particular way. It was the audit approach rather than the procedure. I have really no knowledge of the procedures, but it was how they were going to approach the need to check child benefit that was changing.

Q376 Mr Dunne: Was that to do with the approach that the NAO were taking to the sampling methodology to check the veracity of the payments that had been made?

Mr Hartnett: Yes. My understanding of this, and I have not spoken to the auditor, is that they wanted to be sure that we were paying child benefit in the right circumstances and wanted to think through, from a full scan of the database, how best to draw off the data to do that.

Q377 Mr Dunne: So the issue of the data loss in October in terms of putting the CDs in an envelope in a particular manner is one set of errors, but the decision as to what data should be made available to the NAO was not taken in October, it was taken in March when the NAO had discussions with the HMRC on the approach that would be taken to looking at child benefit then, and that is where this exchange of emails becomes relevant. You said to us just now that the proper authority should have been used in looking at the data, and I think you also said that you would have expected the process owner to have become involved should a significant cost have been incurred. Could you confirm whether, as we have been led to believe, the process owner for child benefit was copied into the email exchange on 13 March, in particular the email at 15:23?

Mr Hartnett: My understanding is, yes, the process owner was copied into that email and only that email.

Q378 Mr Dunne: That email refers to a meeting to be held, one presumes from reading this email, between NAO audit staff and staff within HMRC, including compliance and KAI colleagues, to discuss the data extract.

Mr Hartnett: Yes.

Q379 Mr Dunne: It also refers to the fact that an additional data scan would incur a cost to the department?

Mr Hartnett: Yes.

Q380 Mr Dunne: So the process owner, having received this email, was aware that there may be a cost to the department, was aware that other colleagues within the department were discussing the data exchange, including compliance colleagues, and presumably, even if he was not aware of the proper authorities, your compliance colleagues would have been.

Mr Hartnett: I think the crucial issue here, Mr Dunne, is what we know from the email is that it was sent. We do not know that the process owner read it or when he read it. That is one of the things we must find out. One of the very significant questions here to be answered is was the process owner in a position, having received the email, to put up his hand, if I can put it that way, and say: "Do not do this very silly thing", and that is an important question for us to know the answer to.

Q381 Mr Dunne: I agree, that is absolutely vital, but it cannot be held entirely at his door. Can you, first of all, explain who KAI Analysis are?

Mr Hartnett: Yes, Knowledge Analysis Intelligence, it is a bit of a grandiloquent phrase, they are the 600 or so people in HMRC who are our analysts - economists, statisticians, social researchers.

Q382 Mr Dunne: So in this context would you anticipate that those are the data collection people who would be actually responsible for gathering the data.

Mr Hartnett: I think they are going to be the people who provide expert advice on samples.

Q383 Mr Dunne: So they are technical people, effectively, rather than making decisions about what information should be included within a sample?

Mr Hartnett: Technical but not IT technical.

Q384 Mr Dunne: Is there some HMRC definition of compliance. What would you expect the compliance colleagues to have been looking at in this context?

Mr Hartnett: Mike may want to add something because they are broadly in this area. These are the people who are checking two things. They want to make sure we are paying child benefit to the right people and, if there were attempts to improperly obtain child benefit, they are the people who would investigate.

Q385 Mr Dunne: So would they have no responsibility for checking compliance with the department's data protection regime, for example?

Mr Hartnett: Yes.

Q386 Mr Dunne: You know who these people are who received the emails?

Mr Hartnett: I do.

Q387 Mr Dunne: Would any of those individuals have had any compliance responsibility in the context that I am describing it in terms of data protection?

Mr Hartnett: No expert, or some way on the way to being expert, responsibility for DPA.

Q388 Mr Dunne: Can we turn to the actual data itself? Are you able to tell us, without giving away public information - either tell us now or privately - the version of software on which the data was sent on to the CD?

Mr Hartnett: I am not able to tell you that. Sarah?

Ms Walker: No.

Mr Hartnett: The only thing I can tell you - and we will write to you, Mr Dunne - is how the CD was protected, which was with Winzip 8.

Q389 Mr Dunne: Winzip 8?

Mr Hartnett: Eight not nine.

Q390 Mr Dunne: Does Winzip 8 allow for automatic encryption?

Mr Hartnett: No, I think that is nine. Winzip 8 allows for compression. I am sorry, I am not a technician, but it allows for compression and password protection is my understanding.

Q391 Mr Dunne: Are you able to tell us, again without making this easy for someone who may have these CDs, whether a dictionary password was used for password protection?

Mr Hartnett: I do not know the answer to that.

Q392 Mr Dunne: Would you be able to write to us privately - I do not know if we can keep that confidential - and, secondly, the number of symbols in the password? Would that be possible to provide confidentially or will that come out in the Kieran Review?

Mr Hartnett: It will come out in the Kieran Pointer Review.

Q393 Mr Dunne: I think it is important, Chairman, because if the password used in the unencrypted data was sufficiently complex, then it may have meant that the information, although not encrypted, was actually sufficiently secure to have avoided the need for HMRC to have written to 25 million people.

Mr Hartnett: But we have not written to 25 million people. We have written to 7.25 million. Can I just add one thing quickly for Mr Dunne in case it does help here? We have increased the complexity of passwords on the back of this experience so that there are normally now at least 20 symbols and sometimes will be 30.

Q394 Mr Dunne: Good. I am pleased to hear that. I have a couple more quick questions if I may. In relation to the police investigation, could you confirm whether the HMRC advised the police of the data loss and, if so, when?

Mr Hartnett: Yes, the Chancellor of the Exchequer, as I recall this, asked Mr Gray to bring in the police. The first contact with the police was the Friday, which I believe was the sixteenth, and HMRC was asked to prepare a full handover brief to carry on its own searches and there was a formal handover to the police around two o'clock on Sunday the eighteenth, from memory. If I have got any of this wrong I will come back.

Q395 Mr Dunne: That is very helpful. My final question, Chairman: the Daily Telegraph today reported that there may be as many as 350 children who are under special protected measures whose information may be included in this data loss. Can you confirm whether or not that is correct and where they would have received that information, which itself would appear to be a breach of data security?

Mr Hartnett: Can I come to that in just a moment. I have had a note from behind, and I am grateful, to say the first contact with the police was actually on the Thursday and not on the Friday. I apologise for getting that wrong. I read the article in The Telegraph this morning and I read it slightly differently, if I may say so. I thought it was about witnesses in protection, and I hope you will not mind if I say very little about witnesses in protection but there are a couple of important things I can say. The first is we often will not know who they are - people, rightly, do not tell us. Sometimes we have knowledge and we have particular arrangements for dealing with it, where we have knowledge, which are very secure indeed and, if the Committee will allow, I am not going to lay out. Then the important issue is, where people are in protection and we do not know who they are, we cannot mark the file in any way, we do not know the true name and the alias, so I wondered whether that article this morning was actually raising a significant fear. It seemed as though it might be misplaced.

Q396 John McFall: Mr Hartnett, you are aware that the main committee may come back to this in the New Year.

Mr Hartnett: Yes.

Q397 John McFall: But it strikes me that this could be a wider problem of data exchange between government departments and agencies. Correct me if I am wrong, but was there not a letter sent on 9 November from a senior person in the NAO to HMRC apologising for the lack of arrangements in this as a result of the increased strictures of international accounting standards?

Mr Hartnett: I do not know whether it is the letter you have in mind, Mr McFall.

Q398 John McFall: Is it dated 9 November?

Mr Hartnett: The one I have got here is dated 9 November, second director at the NAO to our child benefit processor owner, and it does raise issues like that. If I may, Chairman, very quickly bring out a couple of important points in it. The NAO rightly say they take their data protection responsibilities very seriously, but they also say the security incident we have had here has occurred solely as a result of the data request that was initiated, and they refer to redefining the direction of the audit approach and that they should have told us that; but if I can come to your question about the wider thing, the Head of the Home Civil Service, Sir Gus O'Donnell, has raised with all government departments this issue. He has brought a group of people in very senior positions together, certainly involving the chief information officers, the leaders of IT in the departments. We are contributing to that, based on the dreadful experience that we have had and that we have caused our customers, and out of that will come lessons and new procedures for everybody.

Q399 Chairman: If you have had seven serious security breaches in the two and a half years since you were set up, does that not indicate systemic failure?

Mr Hartnett: I think, Chairman, it may well do, and I put it in that way because I want to hear what Mr Pointer has got to say here, but can I explain how I and my brand new Director of Data Security are seeking to work with Kieran Pointer. We have asked him, and he has agreed, if, as soon as he has identified an issue for us, he will share that with us, and that is really important because he will not wait for his interim report, he will not wait for his final report and we will make changes as things are brought to our attention based on what he says and we will discuss these with him. It may help you for me to say something about the sort of things that I think are going to come out of this process of engagement with Mr Pointer. There is an issue for HMRC about whether the products that we design are sufficiently designed with data security in mind and there is a big issue, which I think the Committee has brought out this afternoon already, about how we supervise junior staff. I do not in any way mean junior in the pejorative sense, but how we do that. The fact that HMRC has what I will call islands of information: in the North East, for example, we have the national insurance computer, the child benefit computer, it is a very data rich area for us and probably we need to take special care there. There are issues around our people's understanding, which Mr Thurso raised, of the Data Protection Act and there are cultural issues here about how we approach data protection.

Q400 Chairman: Is this systemic failure, do you think, linked in any way to the quite considerable reduction in head count in your organisation of over 10,100 in the last three years?

Mr Hartnett: I have not seen anything here so far which says that this dreadful mistake has got anything to do with head count reduction. It has everything to do with mistake, failing to follow procedures and of the arrangements between us and the NAO which we set up not being followed.

Q401 Chairman: Bonuses for the Chancellor's departments, including HMRC, have increased from 1.8 million three years ago to 19.8 million last year. What share of that 19 million was paid in bonuses to your staff?

Mr Hartnett: To me?

Q402 Chairman: To your staff?

Mr Hartnett: To my staff. I am afraid I do not know the answer as I sit here. I will find it for you.

Q403 Chairman: Can you estimate it roughly? You are the biggest of the Treasury departments?

Mr Hartnett: It would be a wild estimate, Chairman. It is a wild estimate. Between five and 10 million.

Q404 Chairman: Why is that not shown in your accounts?

Mr Hartnett: Because the bonuses, I think, will be shown in our accounts and, again, these are not accounts that I signed off, so I am not intimately knowledgeable in the details but will be shown in remuneration.

Q405 Chairman: So why are they not shown in these accounts for the last year? Is there a line there showing the bonus figures?

Mr Hartnett: There is no specific line that I am aware of, but I would imagine the bonuses would be shown in overall remuneration and in the remuneration for individuals who are named in the accounts and in the general line in the accounts for remuneration.

Q406 Chairman: This might not matter so much if it is only one million a year for the whole organisation, but now that it has got, as you say, to ten million?

Mr Hartnett: No, it is a wild guess, Chairman.

Q407 Chairman: If it has got to ten million, then I think it ought to be shown separately, should it not?

Mr Hartnett: I will take advice on that.

Q408 Mr Simon: Following up on the Chairman's two points there but backwards, just to finish off on the bonuses, the cost of your staff has gone up by 29 million, while the number of staff has gone down by 4,000?

Mr Hartnett: Right.

Q409 Mr Simon: We are not sure if that is related to bonuses or not.

Mr Hartnett: I am not sure.

Q410 Mr Simon: Nick McPherson says that the majority of the 21.5 million bonus payments to Treasury will not be to Treasury officials, so presumably, by inclination, the majority of them will be to people like you?

Mr Hartnett: I think, Mr Simon, I have got to take this away. There are different bonus arrangements in HM Revenue and Customs for the senior civil service and for others of my colleagues, but to help you with this line of questioning I really should take it away and give you some precise figures.

Q411 Mr Simon: On the question of principle, on reflection do you think it might have been more helpful, if bonuses, as the Chairman said, seem to be growing whilst staff numbers shrink to quite big numbers, tens of millions of pounds, to publish them separately?

Mr Hartnett: I have said to the Chairman I can see that it would certainly be helpful to the Committee.

Q412 Mr Simon: What you said to the Chairman is you would take advice.

Mr Hartnett: I am going to explain why I said I would take advice; it may be helpful. Most of the presentation of our accounts follows standard accounting standards. We have moved substantially into international accounting standards as well. The reason I am going to take advice is to see whether we can publish a line like that, and, if we can, we will.

Mr Simon: Excellent. Many thanks.

Chairman: We are asking this because we asked the Permanent Secretary of the Treasury how much of the bonus total, the total 21 million, I think it is, went to the Treasury?

Mr Simon: And he said, "Not me guv."

Q413 Chairman: He said the majority of it did not go to Treasury officials. You are the largest department, so we are assuming the majority of these bonus payments went to you, your staff.

Mr Hartnett: Chairman, with great apology, I say I do not know but I will find out for you.

Chairman: Thank you. Sin, on you go.

Q414 Mr Simon: On this side we have all been admiring your performance, which is exemplary, in how to do this, but one of the things that you have disarmingly done consistently is said: "Clean hands, straight up, honest guv, I do not know", which is fair enough and which does work admirably well, but there is an element to it which is that the more you do it the less credible and convincing it becomes, and the Committee ideally, I think, would prefer answers to not answers.

Mr Hartnett: Mr Simon, I will give you an answer to every question that I can answer. Can I put in a tiny plea here? I am here to answer everything I can. I am nine and a half days into this. I appreciate it is a bit of a cop out, but, if I cannot answer today, I will give you an answer.

Q415 Mr Simon: Finally, back to the Chairman's point about the head count. Although your overall head count has been going down, at the same time your other staff, presumably short-term, fixed term contracts and consultants, have increased by 9% in number and 25% by value and cost. You said that the head count reduction has got nothing to do with mistakes, be they systemic or not, but is what is actually happening here that you are just slashing head count and costs are going up and mistakes are being made?

Mr Hartnett: I do not think that is right. Our people take pride in the job they do. They try to do a really good job. Interestingly, I came here from a meeting with our largest group of stakeholders, which are tax advisers, who probably represent 18 million of our customers, and they have been very supportive to us, they want us to do better, but they tell me that our people do a very good job. Over the last number of months, we have actually reduced the number of fixed term appointments. I think you will see a substantially smaller number of others when you see our accounts for the year to 2008.

Q416 Mr Simon: In which case, do you think that that was becoming a problem which you identified and addressed?

Mr Hartnett: I do not think it was a problem. I think it was how we have created flexibility in our organisation. Let me give you a quick example. We have a programme we call Pace Setter, which is about developing the effectiveness of our business, helping our front-line people, supporting our front-line people to do business better, developing their managers, and what we have seen in our processing areas with the Pace Setter Programme is that we can improve performance by, in the best areas, between 40 and 50%. We are getting better at what we do. We have got a way to go yet, but we are getting better.

Q417 Mr Simon: How is morale in your office in Washington?

Mr Hartnett: Morale today, I think throughout my organisation, is very low indeed on the back of this experience. The average age now in our organisation is pretty high. People have grown up in the organisation. They learnt how to manage data the day they arrived, whatever background they came from, and they feel this terribly. What is most interesting about Washington - I was there to talk to them last week with Kieran Pointer - they are absolutely determined to learn from this and, more importantly, to re-establish their reputation as a high-performing partner in business doing the public service they want to do. They are very determined.

Q418 Jim Cousins: Mr Hartnett, are you or some of the members of your team yet clear about how many people you will lose by transfer to the proposed borders agency?

Mr Hartnett: Mike.

Mr Eland: The estimate is around 4,000. The detail of the transfers is still being worked through, but it is that order of magnitude.

Q419 Jim Cousins: Mr Hartnett, that is 4,000 people transferred to the borders agency on top of the 1,200 plus who were transferred to the Serious Organised Crime Agency, and you have had to move a large number of people in Customs who were engaged in the detection of tobacco smuggling into dealing with---

Mr Hartnett: Missing trader fraud.

Q420 Jim Cousins: Yes, missing trader fraud. Are you satisfied that you have actually had the right human resources to investigate the kinds of activities that you should be investigating?

Mr Hartnett: Let me start, and I will ask Mike to come in. When we moved people to the Serious Organised Crime Agency (I am going to call it SOCA, if that is all right, because that is how I have got to know it) we moved function as well, and I am not going to claim, because I do not know, whether there was a perfect match between the resource needed for function and the number of people that went, but it was a pretty good match. The same will happen with borders, and with missing trader fraud - I think this Committee has heard advice on the numbers - the financial cost of missing trader fraud. We have to be an organisation that is very responsive, with expert people to deal with pressures like this, and the big strategic issue for us, Mr Cousins, is that we are moving to an approach in relation to compliance, which is the area you are raising, where we match resource to risk and we want more flexibility in our resource. Mike.

Mr Eland: Particularly on the tobacco point that you mentioned, we did move resource across to deal with the MTIC fraud problems we had, but we did that as a temporary measure. We are strengthening our criminal investigators. We have put additional resource into those, particularly to deal with the tobacco problem as well; so we are looking, as Dave said, to adopt a flexible approach where we move resource around to deal with particular problems as they arise, hopefully overcome them and then we can redeploy them back to where they came from. On the VAT MTIC side, we put in a lot of additional resource there to deal with the immediate problem which we are now beginning to move back into other VAT fraud and deal with that; so we are moving resource around.

Mr Hartnett: Can I quickly come in with a couple of examples which may help illustrate the approach. The first is we have developed a programme in relation to our top-end tax avoidance where large corporates or other large entities create a risk for the Exchequer. We have been very successful there in resolving issues, sometimes through litigation, sometimes engaging with corporates. We have taken a very tough approach that where we believe we are right on the law we want a 100% tax, and interest where appropriate, penalty. It has been a new approach, along the lines of the flexibility I described, which has worked well and we have had our off-shore disclosure regime where so far people have come forward and paid us a sum over 400 million - there will be a lot more money to come out of that project - using our skilled resource to do more productive work, again, on the basis of a flexible deployment.

Q421 Jim Cousins: I think a lot of us are concerned about whether the degree of organisational change that is going on with these large-scale transfers of staff, accompanied by internal transfers of staff from one activity to another, actually leave you with the capacity to do the job that you should be doing. There are, for example, we are on record now as knowing, no fixed uniformed Customs posts anywhere in Devon and Cornwall; around the coastline of Wales, which is very large, there are only two places: Cardiff and Hollyhead. Lord Carlile in his own work on securing our borders against terrorism has expressed concern about this. Do not you have some worries about whether our borders are properly protected?

Mr Hartnett: The crucial issue here is we are matching risk to resource. I think the last time I was in front of the Committee we said that in some areas now we were much more successful. I visited our Felixstowe operation three or four weeks ago and saw that they were very successful indeed by using IT supported approaches to risk. Mike, do you want to come in again?

Mr Eland: I think we have got to tackle the threat through a combination of fixed resource and mobile resource. I do not think that purely going back to fixed resource around the coast would give us the best protection. It has got to be a balance of both. It is important that when we go down that route we are constantly testing the risk to make sure that we are not, by reducing staff in a particular area, opening up new risks, so we sent mobile teams in to test that, and we have also, I think, got to maximise the deterrent impact. I think it is in that area that we feel we can make more improvements. We can make more of a visible impact when we do send the mobile teams in. It is not just about detecting the smugglers, it is also giving some degree of public reassurance as well and, therefore, some visibility is important in that.

Q422 Mr Cousins: Is it the case that your sea and air intelligence team has been given guidance to concentrate only on channelised ports and airports, and ignore the rest?

Mr Hartnett: I am not aware of that.

Q423 Mr Cousins: Can you check that?

Mr Hartnett: Of course.

Q424 Mr Cousins: What about the employment of part-time and casual staff to reinforce customs staff? Does that go on?

Mr Eland: I am not aware of that.

Mr Hartnett: I am not aware of that either.

Mr Eland: Not in a front-line capacity. There might be some case of using part-time back-up in sort of back office, but I am not aware anywhere of any front line.

Mr Hartnett: We do, Mr Cousins, and this is an important point here, offer part-time opportunities for people who have worked with us who may want to work part-time. We want to keep the experience. So I think what I would add is that I believe there will be people who work part-time, but they will be very experienced people who have grown up in our organisation.

Q425 Mr Cousins: Are any people on guarding duties working at Customs, in a Customs capacity, casual employees?

Mr Eland: Do you mean security guards at buildings?

Q426 Mr Cousins: Yes.

Mr Hartnett: I do not have the answer to that. We will find the answer for you.

Q427 Nick Ainger: Mr Eland, how do you actually test that the changes in policy that you have implemented, certainly since 2003 where there was a significant withdrawal from the ports - and in my experience, I have Pembroke Dock a mile and a half from my home, so I know quite clearly what has happened, and Fishguard as well, two major ports with high volumes of passenger and vehicular traffic - have not had a detrimental impact on reducing the security of our borders?

Mr Eland: We do it in two ways, first through monitoring data, seizures and the like, to see if there is any change in performance - we do it through intelligence - about criminal gangs activity, so if we saw shifts in their activity, and we also have started to do a series of risk-testing exercises where we do put mobile teams into areas where we have no coverage without any warning or opportunity to anticipate that, and test whether we find anything in terms of seizures and things in that area.

Q428 Nick Ainger: How often would that take place in a year, in a particular port? Say Fishguard or Pembroke Dock?

Mr Eland: We have done four big exercises in the last six months.

Q429 Nick Ainger: In one port in, or in a number?

Mr Eland: No. We have deliberately gone for remote areas to test precisely the worry you are articulating, and we want to build that in - or the new Border Agency I imagine will build that in as part of their programme. I think you have to do that if you are going for that mix of fixed and mobile resource.

Q430 Nick Ainger: But in the Department Report you referred to slippage in meeting the targets in relation to the seizure of illegal drugs. Is it slippage, or is it a failure?

Mr Eland: No. There has been a small reduction in the seizures, and there has been a more marked reduction in weight, but we think that those fluctuations are not such as to indicate a downturn in performance. The drugs market is volatile, and the sort of margins that we have there could be no more than just that temporary downturn.

Q431 Nick Ainger: How do you know?

Mr Eland: We do not. We keep this under monthly monitoring but there is no indication, from all those other sources and for the work we do with SOCA and ACPO, the police organisation, that there is any change in threat as a result of that.

Q432 Nick Ainger: There is a report dated 20 June 2006 in The Times where it quotes, "Special Branch officers expressed alarm at ports being left without cover. A senior police officer told The Times: 'The service is unhappy about the approach of Customs. You can have a major port with no coverage because they are mounting operations up the coast. It leaves gaps and gateways completely open'". Does ACPO still share those views?

Mr Eland: ACPO fully understands what we are trying to do in terms of this mixture of fixed and mobile staffing. One of the reasons, though, for setting up the new Border Agency is to be able to use the full range of staff at the border for a full range of activities. At the moment we are compartmentalised into different activities, and we believe by bringing everybody together in one organisation you would be able to get a broader coverage.

Q433 Nick Ainger: So are you saying that, once the Border Agency is in place, ports such as Pembroke Dock and Fishguard may actually start to see a physical presence?

Mr Eland: That is obviously not my decision but the concept is that different agencies working at the frontier at the moment have people in different places according to the risks of that organisation, so there will be different places. Special Branch are deployed differently from Customs because they are looking for different people. By bringing everybody together and sharing a joined-up risk assessment we feel we will be able to achieve a broader coverage. That is the basic concept.

Q434 Nick Ainger: So the answer to my question is?

Mr Eland: I cannot give you a specific answer in relation to Fishguard because obviously that will be for the new Border Agency to determine.

Q435 Nick Ainger: In terms of staffing levels in the Border Agency, those that are currently Customs staff, those that are currently SOCA staff, those that are currently Immigration Service staff, as far as you are aware is there going to be a net increase in the number of staff with the Border Agency, or literally is it putting those three bodies together?

Mr Eland: SOCA is not going into the Agency, but there is no net increase planned.

Nick Ainger: Thank you.

Q436 Peter Viggers: In last year's Spring Supplementary Estimates you received 30 million for expanding call centres, and I believe there was quite a brisk operation of manning a call centre in Liverpool. In the Winter Supplementary Estimates you have come back for another 30 million. Have you finished your expansion of the call centre programme? What are we getting for our 60 million?

Mr Hartnett: We have finished the expansion based on the operations we have at the moment, where our responsibility is to grow or change. Then we might want to expand further. What you are getting is a very effective call centre service. If I look back two or three years, Mr Viggers, we had backlogs in calls which were quite substantial - it is not like that now. People do not necessarily get through first time every time but our measures of performance show we are doing a lot better, so you are getting a good service which compares well with services in the private sector.

Q437 Peter Viggers: One of the indicators, indicator number 5 in the 2007 Departmental Report said that by 2007/8 there was increase to at least 85 per cent the proportion of individuals who find their statement of account/PAYE coding notices/tax credit notices easy to understand. The target was 85 and there was slippage. In 2004 it was 77.6; November 2006 was 76.7. Do you know whether those figures are improving?

Mr Hartnett: They are improving but not improving fast enough for my expectation or the expectation of HMRC. I will ask Sarah to say something in a minute in relation to tax credit. The statement account for self assessment has been a hard read in the past; it has improved; it has to improve further. It is really important. We have more to do; that is a challenging target; we are determined to get there.

Ms Walker: The tax credit award notice was improved a year or so ago following consultation with voluntary sector and other advisory bodies. It is still a complex document: it is produced from the computer system which is not particularly easy to change; however, it does now include all the information we hope people would want. We are concentrating on providing accompanying information and accompanying fact sheets that will help people to find their way around it better.

Q438 Peter Viggers: I have had a small but, because of the nature of the case, significant number of people whose cases cannot be handled on the tax credit controlling computer, they are told the computer is not capable of handling their case. Do you happen to know if this is a major problem for many people?

Ms Walker: There are still a number of people who we are paying off the computer. We have a programme of fixes being put into the system to try and fix the problems that are preventing them from being dealt with automatically. Meanwhile we have a unit in the tax credits office who deal with manual payments directly and are maintaining those people's payments.

Q439 Mr Mudie: Do you think it is significant on tax credits that the Ombudsman has now done two special reports on you on that specific subject, and she has titled the first one "Putting things right" and she has titled the one that got brought out last month "Getting it wrong". Now, if I were just to ask you how you would respond to this, it is clear that the tax credits office dealing with complaints still have some way to go in providing fit-for-purpose, complaint handling arrangements. As a result of these failings - two pages of failings - some tax credit customers on very low incomes who are living in very difficult circumstances are finding themselves in the distressing position of being unfairly required to pay back often large overpayments which were caused by official error. Now, I looked in your annual report for some admission that things had some way to go, and there was nothing in the spirit of that. In fact, the lovely Adjudicator we have just seen, in her report, says: "We have seen a number of cases where as a result of this treatment disillusioned claimants are seeking to leave the system". So these are the poorest people, the people the system is designed for, and because of the way you are operating the system people are not claiming. Now, tell me things are getting better.

Mr Hartnett: Let me start, Mr Mudie, and then let Sarah come in with some of the detail. They are getting better; they are not good enough --

Q440 Mr Mudie: They are getting better in technical matters, process matters, if you like, but the Adjudicator spends all her report relating to you on COP26 and handling complaints and the Ombudsman does the same. Now, those come down to the nonsensical argument about was it reasonable for people to know they were overpaid and, secondly, in terms of paying back, this business of hardship. Have you settled what you are doing? The Adjudicator said it would be done in January this coming year. Have you settled a new Code 26?

Mr Hartnett: Let me bring Sarah in on Code 26.

Ms Walker: Yes. The Financial Secretary said to Parliament I think at the last Treasury oral questions or the one before, that yes, we are introducing a new test, there will be a new Code of Practice 26 which will no longer refer to reasonable belief and it will be introduced by the end of January.

Q441 Mr Mudie: Has it been cleared with the Citizens' Advice Bureau?

Ms Walker: We are currently consulting with the Citizens' Advice Bureau and all other interested parties.

Q442 Mr Mudie: So it takes out reasonable doubt?

Ms Walker: Yes.

Q443 Mr Mudie: Excellent. So it is just going to be on the basis of --

Ms Walker: If I can explain what the new test is, we issued a new version of the Code of Practice back in April 2006 which sought to make it clearer what we meant by reasonable belief, which said: We do not expect you to be able to check the whole of the calculation of your payment but we do expect you to check that we have properly recorded things that you have told us about your circumstances - that is how many children you have, what your income is, that kind of thing - and that you would check that what goes into the bank account matches we have told you is going to go into the bank account. What we are doing now is repeating that; we are saying these are the things we are expecting you to check and we are making it very clear if you have checked those then that is all you need to do. If you have checked those and they are correct and we have still made a mistake, we will not refuse to write it off.

Q444 Mr Mudie: One of the examples the Adjudicator gives is somebody who was forced to repay on the basis they were on job seeker's allowance, and apparently there are two so she filled in the incorrect one and got a notice back with the correct one, or vice versa, but there were two initials at the end of job seeker's allowance. Now, I am an MP and I did not know there were two job seekers' allowances, and certainly by reading it I would just clock the job seekers' allowance and pay no attention to two initials in brackets afterwards, and would not know what the hell that meant. Now, you are forcing them to repay. Will that sort of nonsense finish?

Ms Walker: That is a specific point we have picked up complaints from the Adjudicator on and are seeking to learn from that. We are changing the way we deal with initial claims; where people are likely to be filling in that bit of the form we offer them specific help through the helpline. We do need to know which type of job seekers' allowance they have but we realise it causes them problems, and we are specifically looking out for cases where that is an issue and offering them proactive help.

Q445 Mr Mudie: That is good. The other area is hardship. The Ombudsman, but particularly the Adjudicator, felt inhibited; in fact, I think she felt she could not rule against you or adjudicate against you on the basis of hardship, that was something that she felt the Code did not permit her to do. Now, will hardship specifically be included in the Code so that it is clear that the grounds of hardship will be a consideration? I am glad you nodded. Can I press you further, then? Will it be as sensitive? I do not know if you heard the Adjudicator when she said people were inhibited concerning the depth of questioning, which I do not think really should be necessary in terms of deciding whether people should pay money back or not. Can you tell me about that?

Ms Walker: I think there are two issues here, and I think Dame Barbara set them out quite clearly, if I may say so. There are two different issues we need to decide. One is whether there is an overpayment which needs to be paid back; the second is whether making the person pay that back would cause them hardship, because in order to establish whether it would cause hardship we do need to ask them some quite intrusive questions about their income and circumstances.

Q446 Mr Mudie: You have their income though, surely?

Ms Walker: We have details about their past income; we do not necessarily have details about their current circumstances or their outgoings. We may know their income but not their expenses, and we need to know that. What we will do is, as soon as anybody raises any suggestion that this is going to cause them hardship, we will make those inquiries, but I would also say that the Ombudsman's report does raise some questions about the way we handle hardship cases, particularly about the way we internally deal between different parts of the office. We have taken that on board and we are working now to see if we can set up some better arrangements so that we do handle those cases more sensitively and better.

Q447 Mr Mudie: The Adjudicator says discussions were used centrally at the Adjudicator's office or tax credit offices and revealed considerable confusion and an apparent diversion of understanding as to the proper application of Code of Practice 26. So as well as putting a new code in you are actually training your staff to operate that code in a more humane way?

Ms Walker: Yes. The misunderstanding I think was around this concept of reasonable belief and what "reasonable" means. We have accepted that and we are taking that concept out completely.

Q448 Mr Mudie: When we pressed Dame Barbara, maybe she was leaving the good news to you but she did not indicate, to me anyway, that the specific points you have raised that we have been playing hell about for years were going to be settled. Now, was she just being discreet, and has the Ombudsman cleared the new code?

Ms Walker: As I say, we are still consulting, the Adjudicator, the Ombudsman and the voluntary bodies, so we do not have a final version yet.

Q449 Mr Mudie: Are there any matters of policy disagreement?

Ms Walker: I do not believe there are.

Q450 Mr Mudie: Good. On financial matters, you have 3.3 billion still to pick up from past years. How much do you think you will get and when will you get it?

Ms Walker: Are you talking about overpayment?

Mr Hartnett: Tax credits or compliance?

Q451 Mr Mudie: I am on tax credits. Is there a 3 billion short somewhere else?

Mr Hartnett: No. There is another 3 billion figure in our report, but it is not short.

Ms Walker: The story about overpayments is quite complicated with the amounts of overpayments from previous years, the amounts that are still outstanding, the amounts that are still being collected. We have made provisions in our accounts for possibly uncollectable debts; those are prudent provisions which will hopefully turn out to have been over generous. We are still pursuing all outstanding tax credit overpayments.

Q452 Mr Mudie: The figures pointed to 800 million written off, recovered 2 billion, outstanding 3.3, and when I look at my figures it looks as though there is a fair amount for the first two years. In fact, it is 2 billion. Now Parliament or people in Parliament, some corners of Parliament, wanted that written off. How long will it be before you admit you are not going to be able to collect this money? It has been three years now.

Ms Walker: A large proportion of the overpayments are being collected very slowly --

Q453 Mr Mudie: You could say that!

Ms Walker: -- because of limits that have been introduced. One of the elements of the 2005 PBR package was a restriction on the rate at which we deduct an overpayment from an on-going award during the same year, because we are very careful about how much we seek to make people on low incomes pay back at a time, therefore the time it will take for them to pay back overpayments does stretch out. We are not talking about money we do not know how we are going to get or that we are giving up on: this is money that will take us time, even where we are trying to collect a debt directly from the individual rather than deducting it from overpayment.

Q454 Mr Mudie: So that 0.9, just short of a billion from 2003-4, when you see us next year that will have disappeared largely because it has been collected?

Ms Walker: A lot of it will.

Q455 Mr Mudie: Good. Lastly, because it relates to that year, on section 18 what have you got to tell us then?

Ms Walker: I can tell you as much as you like. Section 18 was a problem that we discovered during the course of this year. Certain technical ways in which we handled new information that we got after an award had been finalised, the way we were dealing with some of those cases, had not been correct. What we have done is, first of all, we have corrected the way we are making new adjustments to awards after finalisation; we have also set up a process to review 250,000 cases from previous years which need to be reviewed. In the vast majority of those cases there will be no change to affect the payments or the amount of money that those people have had: we just need to go through a new legal process to legitimise, if you like, what we have already paid them. That is, if you like, a burden for us and it is very annoying for us to have to do it, as you can imagine, but it will not affect the individual.

Q456 Mr Mudie: Why? First of all, how inaccurate is the public story of 250,000 cases taking three years to clear at a cost of500 million?

Ms Walker: 500 million is not a great figure at all. 250,000 cases is the number of cases that are affected and we have written to all those people. We think it will take three years to work them; we are still establishing the processes; we hope we will be able to do it quicker, but if it takes three years it will take three years. 500 million is a figure that I do not recognise.

Q457 Mr Mudie: Which figure would you suggest?

Ms Walker: We think that the amount we will have to repay to people in the sense that we have wrongly collected money from them is around 20 million.

Q458 Mr Mudie: What are staff costs?

Ms Walker: We think the total administrative costs - again we do not know for sure - is in the region of 10 million.

Q459 Mr Mudie: When you say people will not suffer, the Adjudicator did say you were clear now but that there are cases that are sterilised, if you like, that she cannot get to. Will people not suffer in those circumstances?

Ms Walker: It is true that, at the point when we identified the problem, we put a bit of a freeze on dealing with some complaint cases and dispute cases that we were dealing with at that time, so that we could identify those ones which were going to be affected by this, and as Dame Barbara said we were quite cautious on that so we put a freeze on quite a lot of our cases. We have identified the majority of those not affected by section 18, those that have been released who are now being worked normally, and we are now also going on to the complaint cases, particularly members of Parliament complaint cases that are potentially affected by section 18, and those are being worked now so we will get back to our normal timescale for handling complaints as soon as we possibly can, and we are aiming to get back to that normal timescale before Christmas.

Q460 Mr Mudie: Lastly, a mischievous question, when did you tell the Minister? Because this was put into the parliamentary arena the day of the recess on --

Ms Walker: Section 18?

Q461 Mr Mudie: -- July 25 or 26. It was in a large number of written answers that were lodged, and those you always take care to look at because that is when all the bad news is put. But when did the Minister know?

Ms Walker: I do not have the date in front of me; it was very shortly before. We told Jane Kennedy --

Q462 Mr Mudie: That is such a relief. If I thought a Minister was sitting on bad news ... !

Mr Hartnett: Chairman, may I go back very quickly to Mr Mudie's opening question which I had not finished the answer to, also in the Adjudicator's report she uses the words "recognition that we are going in the right direction". There is a significant reduction in complaints; we are absolutely not complacent; the number of upheld complaints is way too high still, but interestingly the Ombudsman as well says she has had discussions at senior levels with HMRC which convinces her that we are determined to improve but we have a long way to go.

Q463 Mr Mudie: Mr Hart, I do not think you should say that. Dame Barbara is a lovely person and you have a very gentle one - I am not saying this young lass is not a lovely person but she is much fiercer - but if this is the case this is a bad situation for a lot of people who should not be in that position.

Mr Hartnett: It is.

Q464 Mr Mudie: What Ms Walker has told us should alleviate that, and I look forward to next year with no Ombudsman's report and tax credit hardly on the agenda.

Mr Hartnett: We hope to get there.

Q465 Nick Ainger: Three brief questions on the COP26. First, will it be retrospective? Secondly, do you expect an increase, and if so what is the estimate of the increase, in the number of write-offs and overpayments as a result of the new COP26, and what is the estimated cost?

Ms Walker: We will apply the new rules to cases in the pipeline at the point of the change. As I said, the change in the reasonable belief test is not a big change in the sense that we had already tried to clarify the reasonable belief test by putting in that clarification before. I would hope that again, therefore, the effect of that change on our decisions would not be very great. If I could explain, in the figures I have, for the disputes that have been dealt with on overpayments since last April we have had over 100,000 disputes. Of those less than 5 per cent have turned out to involve an error on our part but less than 300 of those 100,000 cases were failed on the basis of the reasonable belief test - 300 out of 100,000 - so although those clearly do cause some trouble and a lot will find their way through to the Adjudicator and the Ombudsman, the number who were being failed on the basis of the reasonable belief test was very small so the cost of changing that I would expect to be pretty small.

Q466 John Thurso: I would like to turn to the Gershon targets, if I may. The latest figures provided in the Government response to our report on the efficiency programmes state that HMRC achieved some 311 million of efficiency savings by March '07. With six months to go what is your latest figure of efficiency savings using the accepted methodology for measurement?

Mr Hartnett: I do not have one for you, Mr Thurso, at the minute. It is clearly going to be more than that: I think our efficiency programme is a good one working effectively. I do not know whether Mike has more up-to-date figures for me but at 31 October 2007, in terms of headcount of targets, we were exceeding our target; we had a gross reduction of nearly 17,500; redeployment of 3,300 and something; and a net position of 14,122. I expect that by 31 March that will have increased but I cannot say precisely by how many yet.

Q467 John Thurso: So, looking at the monetary side first, the March 2008 figure was, from memory, 507 million, so you would be confident of reaching that?

Mr Hartnett: I think we will get there.

Q468 John Thurso: You have talked about headcount reductions. Do you think it is wise to continue with the headcount reductions in the light of what has happened, and, if you felt in the light of what has happened that you would be really prudent to pause and reflect before going any further, do you feel you could do that?

Mr Hartnett: Can I go back to the answer I gave Mr Simon earlier on? The dreadful problem of the lost data impact on our customers and on our organisation I do not believe had anything at all to do with headcount reduction. What we have shown through our Pace Setter programme and working with our people to improve the efficiency of process is that we can get very significant gains out of making our processes more efficient. What we have to do, which we have started and are investing in but we need to invest much more in, is the training and development of our people and I think, if I detect your underlying concern, we reduce headcount and that creates pressures --

Q469 John Thurso: I will give you my underlying concern, and it is very straightforward having spent my life in business: basically, if you wish to make a saving, you set out to re-engineer the process and when you have designed the process to get a better outcome you put it in place and the savings flow from it. This, extraordinarily, is a saving whereby the target, the saving, the number of people, is the start point and then you go out and try and resign the business to achieve what has been pre-ordained as the saving. My concern is that therefore you will, as the savings start to bite, get into areas where, because you have not started from the point of re-engineering the business but you have started from the point of a headcount cut, you get into areas where you do start to affect the quality of the output.

Mr Hartnett: I really do not think that is quite right. We did start with a headcount target but we have re-engineered the processes with our people, and I think what is clear from that is that that re-engineering, with a constant improvement in the quality of our performance - and we agree it is part of the headcount target that there will be quality measures there - has shown that we have been able to go further with the headcount reduction, but I do want to stress, because I agree with you entirely on that, that the re-engineering has been significant across our business and is improving our performance.

Q470 John Thurso: One of the critical points on all of this, and it is a point that I discussed when HMRC have been with us before and brought it up with the previous Financial Secretary, is how you objectively measure the actual quality to the end-user - and as far as I am concerned that is my constituents, the taxpayer, rather than the Treasury or another government department - so whether you have an objective and quantity measure of the quality of service, because in the service industry you do have such things. There are ways of measuring so that you know that by doing things more cheaply or more cost effectively you have not actually diminished the service, and when you listen to the problems Mr Mudie and Mr Ainger were raising, tax credits and others, one has to ask whether there is a proper method of measuring the quality of the service. Are you content that you have that element of the equation?

Mr Hartnett: Let me just say one thing. We can improve significantly - it takes a little while - how we measure that, but we are constantly talking to our customers and their advisers about quality and using what they say to us as one of the measures.

Mr Eland: We use two groups of measures. On the customer service side we have time measures, accuracy measures and things like that that we can use; we also do satisfaction surveys; and increasingly we are trying to use focus groups, where we sit down with representatives and say: What is it that you really want to see in terms of service from us?

Q471 John Thurso: I am sure that works with the professional advisers. My worry is the person who comes to see me when they have been kept on the end of a phone and not got through, or when they have got through they have been promised they will be called back and they are not, or when they have got through they have been told they will be called back by the supervisor and they have not been called back - it is those people who have the most difficulty with the system. My theory is that is what is falling through and not being measured, and it is the most critical thing to measure.

Mr Eland: We are certainly trying to develop good measures around precisely that area, the advice centre area. We have things like time to answer calls and things like that. The more difficult ones are whether the advice meets the expectations and the needs of the customer, and the quality.

Q472 John Thurso: I do not want to pursue this any further but I would like to come back to it on perhaps another occasion, but there is a key principle in the private sector here which is that you can always find somebody who has ownership, and if we went back to or got to a situation where somebody in the organisation had ownership for every client out there so somebody could actually put their hand up if it went wrong, that would be a huge step forward, so I will just leave that suggestion with you.

Mr Hartnett: Can I give you a couple of examples? We have recently surveyed, for example, not agents but taxpayers, our customers, on the on-line service we provide for self assessment, and 71 per cent were very satisfied, or better, with what we were doing and because we worry about the contact centres and we hear from members of Parliament and tax agents examples of the sort you gave to us we used an utterly independent body to get to real customers - again, I will make the distinction between taxpayers and tax agents - of our contact centres, and they came back and said that 90 per cent of our taxpayers using contact centres were satisfied or better with the service we are providing. That is not good enough yet, but it is a start.

Q473 John Thurso: One last question. On the efficiency side, the 25 million data loss affair clearly cannot be regarded as efficient, and therefore by definition it was inefficient. How will that be accounted for and set against the efficiency gains? Will it be measured? Will those costs appear?

Mr Hartnett: I think that is a challenge for us to work out. In relation to the data loss the two elements that I and my colleagues on the executive of HMRC have been focusing on are improving data security and improving the stability of our organisation so we can focus on the service we provide to our customers. Those are the two big issues right now. The accountability issues of the sort you describe we will get to shortly but it is important for us to get there, and we will see how we work out how to do that. That is the best I can offer you right now.

Q474 John Thurso: Take it as a warning that we shall return to it and I shall probably ask you the question again.

Mr Hartnett: I understand.

Q475 Mr Cousins: What was the headcount reduction at Waterview Park?

Ms Walker: I have some figures for the child benefit office --

Q476 Mr Cousins: For Waterview Park?

Ms Walker: The staff in the child benefit office have reduced by roughly 300 --

Q477 Mr Cousins: When you say the child benefit office, what are you referring to?

Ms Walker: Most of the people at Waterview Park do work for the child benefit office. There are some other units who have people in Waterview Park.

Q478 Mr Cousins: So the figures you are giving us are the headcount reductions at the child benefit office at Washington.

Ms Walker: Yes, and over the past four years there has been a reduction of around 300 staff.

Q479 Mr Cousins: What proportion of the starting figure is that?

Ms Walker: That is about 20 per cent. It is down from 1300 to just over a thousand, but that is as a result of new ways of working and of more efficient ways of working. It is not an arbitrary cut.

Q480 Mr Cousins: Mr Hartnett, you were very clear that headcount reductions could not play any part in what has happened.

Mr Hartnett: I was. I do not think headcount reductions have played any part in this. This is a dreadful mistake.

Q481 Mr Cousins: Yes. Of course, that statement itself might be considered to be a little prejudicial to the outcomes of the inquiry, bearing in mind we have just been told there is a 20 per cent cut in headcount at the relevant child benefit unit.

Mr Hartnett: I had no intention of the statement being prejudicial to the outcome of the inquiry. The many inquiries that are happening may well look at that. Mr Poynter so far has given me no indication he is going to look at that but he has only recently started his work.

Q482 Mr Cousins: One matter we would want assurance about is, in the light of the statements you have made here this afternoon, that Mr Poynter himself does not feel inhibited.

Mr Hartnett: I would be very surprised if Mr Poynter, Chairman of one of the major accounting firms in the United Kingdom, felt inhibited by anything I said, but I will take that issue to him when I next see him.

Q483 Mr Cousins: To lose one Chair of HMRC ... but to lose two ... Are you not going to overachieve your headcount reductions overall in HMRC? Are you not going to overachieve your target reductions in April 2008?

Mr Hartnett: We may well exceed the target reductions.

Q484 Mr Cousins: Do you have any idea of the scale of that over achievement?

Mr Hartnett: Something around 2000/2500 --

Q485 Mr Cousins: That is the over achievement?

Mr Hartnett: That is the amount over the 12,500 net, but we have efficiencies to achieve in the next three years, and that will help us towards those efficiencies.

Q486 Mr Cousins: I asked you earlier about whether you had part-time staff employed in the security guarding capacity, and you did not know and you said you would look in to it. Fair enough. Are you engaged in an outsourcing exercise for security guarding duties?

Mr Hartnett: We have a number of private contractors providing us with security guards.

Q487 Mr Cousins: Is that number increasing? Do you have a programme to increase security guarding privatisation?

Mr Hartnett: I am just getting there, Mr Cousins. We are planning, or have been planning, to further outsource security guarding. The incident that has happened here has caused me to question that, and I want to understand on the back of Mr Poynter's work, and other work whether that outsourcing in any way increases risk.

Q488 Mr Cousins: Is it correct that one of the companies to which you were in the process of outsourcing security duties was, in fact, the Mapeley company?

Mr Hartnett: I believe that is right.

Q489 Mr Cousins: Is it correct that the outsourcing that has been already done to them was done without competitive tender?

Mr Hartnett: I do not know the answer to that.

Q490 Mr Cousins: Will you let the Committee know?

Mr Hartnett: Of course.

Q491 Mr Cousins: On VAT, when are you going to achieve the target that has been set of 70 per cent of VAT registrations within 14 days? When is that going to be achieved?

Mr Hartnett: We believe that will be achieved by 31 January. We have made very good progress and that is our target date.

Q492 Mr Cousins: The Minister has told Parliament that it may not be achieved, but you are confident it will be?

Mr Hartnett: We realise how important that is; I am certainly not aiming to say anything different from the Minister but we are determined to get there. Business has told us how important it is for us to get VAT registration firmly back on track, and we are determined to do that.

Q493 Mr Cousins: Could you let the Committee know the number of VAT registrations and the time that it takes to make the registration, including the median time and the time that is achieved within the present target?

Mr Hartnett: Yes. Of course.

Q494 Mr Cousins: Do you happen to know right now what percentage of VAT registrations are being achieved within 14-day target?

Mr Eland: In October it was 45 per cent, and we are seeing month-on-month improvements which is why we think by January we will be able to meet the target.

Q495 Mr Cousins: Could you in the information you supply to the Committee also supply the number of complaints in the comparable periods of time so we can see the relationship between the registration targets and the complaints?

Mr Hartnett: Yes.

Q496 Mr Cousins: Do you think that some of your efficiency savings will turn out to be inefficiency savings?

Mr Hartnett: That is a very difficult question to answer, Mr Cousins, because framed that way it means looking into the future, but we are constantly looking at our efficiency savings to make sure they are sensible and we are delivering the quality of service that our customer needs. But can I just drop back for a second to the question you asked me before? There are a number of factors in relation to VAT registration, and it would be helpful if you could let me know how you want me to handle these. We know that part of the reason for delay has been the need to make risk assessments to prevent new registrants having an opportunity to engage in missing trade fraud, but a huge number of new companies were registered in January, February and March this year in advance of the managed service company provisions which came in in the budget in the finance bill with some firms of advisers registering as many as 15,000 companies in very short order. They are in our present statistics around VAT registration, and my question is simply do you want them in or out, because they are a special factor, not an underlying factor, in the quality of service we are providing.

Q497 Mr Cousins: I think we would want them in, but if you want to in some way separate out that particular factor, of course, I am sure you could do so.

Mr Hartnett: We will do our best.

Q498 Nick Ainger: In a submission made by the PCS unit to the HMRC office closure programme in Wales, part of it suggested that there were one million pieces of mail unopened within HMRC offices. Is that correct?

Mr Hartnett: No, it is absolutely not correct. I met the leadership of the PCS two days after I think I was asked to be acting Chairman and asked for their help with this. If there are a million pieces of unopened post we do not know where they are --

Q499 Mr Mudie: They are with the discs - sorry!

Mr Hartnett: No. Whimsy is hard for me at the moment! The important thing, Mr Ainger, is this - we do not know whether there are a million pieces of post unopened; we tell our people to open them. I spent three days back on the shop floor, I had not done it for a very long time, in Cardiff recently doing frontline work; I saw no unopened post; and I have invited both the trade unions and tax advisers to come and have a look for it, if they want to.

Q500 Nick Ainger: In response to Mr Cousins' question you were not quite sure if you were going to achieve your efficiency targets as a result of the closure programme. Where in your calculations of efficiency is the climate change agenda, because my concern is that the office closure programme that you have already started which will continue through to 2010/11 is basically a centralising programme; you are radically reducing the number of officers and centralising in certain places. The result of that means that your existing staff will now travel considerable distances compared to what they do now; that members of the public may find they have to travel more than they do now; in fact, I have had one example given to me of two offices closing or proposing to close in Wales where the carbon footprint of those offices will increase by four times. Is the climate change agenda included in your efficiency programme?

Mr Eland: In carrying out those workforce change assessments we do look at all social factors including factors like sustainability and also other factors such as are they discriminatory in any way, so that is all part of the consultation process.

Q501 Nick Ainger: In this process, because this is one of the issues which I have already highlighted with the Financial Secretary, what discussions have you had with other government departments about the co-location, and I will give you an example of why I do not think currently the procedures are working properly. You have announced you want to close your Newport HMRC office. A few weeks after that announcement DWP announced that they were closing their Cardiff office and transferring the staff to Newport, so if those two go ahead we will have the ridiculous position of staff from Newport travelling to HMRC jobs in Cardiff, and DWP staff in Cardiff travelling to DWP jobs in Newport. That is nonsensical. Have you got any comment on that?

Mr Hartnett: I have.

Q502 Nick Ainger: And how is your department, HMRC, working with other government departments to address problems like this? Co-location surely is a way forward rather than the lock, stock and barrel closure problem you are going forward with?

Mr Hartnett: Co-location is a way forward, Mr Ainger. We have in Llanishen in Cardiff physically a huge office which we can make better use of. We want to keep the expertise and experience of the people in Newport; they are very good at what they do and we would like to move them to Cardiff. I am aware of the issue you raised: I went to Newport while I was back on the shop floor in Cardiff to talk to our people, and I have asked our workforce change planners just to make sure we are doing the right thing here, but we are in constant dialogue with other departments on co-location, and in some parts of the country now we have moved into the same offices to make efficiencies for all.

Nick Ainger: I hope you do really emphasise that as an option. Certainly the current consultation is that there is no reference to co-location, no attempt has been made or referred to in these consultation documents about the fact you have examined co-location, because there are many other examples, certainly in my experience throughout Wales, where there could be co-location.

Q503 Chairman: I have a couple of wrap-up questions. When you answered Jim Cousins, I was not quite clear about future staff reductions. Paul Gray told us that for CSR07, which starts April '08, he envisaged a further reduction of twelve and a half thousand. Is that still the plan?

Mr Hartnett: I think that broadly is still the plan, yes, and what I was trying to say to Mr Cousins is this: that the plan was for 12,500 in the further period. The number over the initial target for the period 2008 helps us going forward to manage our finances.

Q504 Chairman: And will the 12,500 target for 2008 to 2010 or 2011 be voluntary?

Mr Hartnett: There may be some compulsory redundancy. We do not know at the minute because it is back to the issues Mr Ainger was raising and how we manage our estate.

Q505 Chairman: On VAT returns, in your Departmental Report you show the percentage of VAT returns filed on-line. The target is 50 per cent by next March, and you show for March '07 the percentage is only 9.9. How are you going to meet a target of 50 per cent in three months' time?

Mr Hartnett: With difficulty, Chairman, but for a reason that we understand fairly clearly the VAT return now is much more straightforward and simple than it used to be.

Q506 Chairman: But are you going to meet the target?

Mr Hartnett: I do not think we will get to the 15 per cent target by 31 March, but I do want to say is that the Carter programme, which massively increases electronic delivery into the tax system, will, through mandation, drive that number up. We will not meet the 31 March 2008 target.

Q507 Chairman: You said you were going to get 70 per cent of the ordinary applications done within 14 days. I corresponded with Paul Graham and a company in my constituency that took three months to get a registration through, and the helpline he found completely useless, 0845 711 21114, and my office tried that helpline and also found it completely useless. It simply did not answer. Were you aware of that?

Mr Hartnett: I was not, but what I did do before I came here - because I recognise how important effective and speedy VAT registration is for business - was I talked to our directors who are responsible for this area, and they told me they were both determined and confident of getting there for 31 March.

Chairman: Do you understand the frustration of people who find the helplines themselves useless?

Q508 Mr Cousins: 31 March or 31 January?

Mr Hartnett: 31 January, Mr Cousins. I am sorry.

Q509 Chairman: Finally, your minister is the Financial Secretary?

Mr Hartnett: Yes.

Q510 Chairman: How often are you meeting her?

Mr Hartnett: At the moment nearly daily, and regularly before the data loss.

Q511 Chairman: "Regularly" is what?

Mr Hartnett: Some weeks twice, three times; other weeks maybe once.

Q512 Chairman: Thank you very much.

Mr Hartnett: May I clarify one small point for you? I did say I would go away and get an answer for Mr Thurso on call costs. My colleagues behind me have said that to put any precision into this would be very difficult because the call costs of the 0845 number will depend on the tariff of the caller, but we will go away and do our best to come up with a number.

Chairman: Thank you very much.