Session 2010-11
Publications on the internet

To be published as HC 731-iii




Treasury Committee

Administration and Effectiveness of HM Revenue and Customs

Wednesday 16 March 2011



Evidence heard in Public Questions 132 - 308



This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.


Any public use of, or reference to, the contents should make clear that neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.


Members who receive this for the purpose of correcting questions addressed by them to witnesses are asked to send corrections to the Committee Assistant.


Prospective witnesses may receive this in preparation for any written or oral evidence they may in due course give to the Committee.

Oral Evidence

Taken before the Treasury Committee

on Wednesday 16 March 2011

Members present:

Mr George Mudie (Chair)

Mark Garnier

Andrea Leadsom

Mr Andrew Love

John Mann

Jesse Norman

Mr David Ruffley

John Thurso

Mr Andrew Tyrie


Examination of Witnesses

Witnesses: Dame Lesley Strathie, Permanent Secretary and Chief Executive, HMRC, Mike Clasper, Chairman, HMRC, Dave Hartnett, Permanent Secretary for Tax, HMRC, Simon Bowles, Chief Finance Officer, HMRC, gave evidence.

Q132 Chair: Mr Clasper and Dame Lesley, we will start. Thank you for coming and thank you to your two colleagues. Mr Hartnett we all know. Mr Bowles, I don’t think I have had the pleasure.

I will start with Mr Clasper. I note from the accounts that you started off doing three days a week and then I presume you varied your contract to work two days a week. Is this significant of anything?

Mike Clasper: I think it is significant of the fact that when I joined HMRC, as I said to the Treasury Select Committee, the top team needed to be put in place and basically, in the first year that I was there, Lesley and I put in place the new top team. Going forward I think it is important that there is a separation between the executive role and the independence of the board, which is common in the corporate world. I shouldn’t be doing executive responsibilities. I should be doing what my core role is, which is chairing the board. That is why I think going down from three days to two days is a smart idea and of course it saves some money for the public purse as well.

Q133 Chair: Yes, but if you were even more effective than you are we might save a lot more money for the public purse, yes? After two years in the task, I would say you are at a dangerous stage, with cutbacks and some of the changes being a bit rocky. Do you see some light at the end of the tunnel?

Mike Clasper: The answer is, yes, but I would like to look at the last two years and where we are now. Let us talk about what is in place and then what we need to do better. What is in place-I think this is crucially important-is that Lesley and I have built a new top team. That includes the non-executives but crucially it is the leadership group of HMRC. When I joined the department there were an awful lot of interims, temporaries, acting-up and so on. So I think we have a top team that I have a lot of confidence in.

The second thing is that when I joined the department, although there were individual elements of a strategy for the total department, basically an overarching strategy for the total department-a one-HMRC strategy-was not in existence. We put that in place. It started with explaining what our purpose and vision was. Then we worked through what our strategic objectives were. Then we worked through what the strategy should be to deliver them, accepting that of course tax policy stands outside the department.

The last Administration endorsed the strategy, and now the new Administration has endorsed the strategic direction and we have a spending review and a financial plan that fits that strategy. I think that gives you some confidence for the future.

The third thing that has happened is that our intervention tax yield has gone up year on year on year. Before the last spending review it was £7 billion. It moved to £11 billion last year. We think it is going to be somewhere between £13 billion to £14 billion as the out-turn for this year, and our target at the end of the new spending review is £20 billion. Those are quite significant numbers for the national purse, as you can imagine. We have done all that while reducing our cost base and reducing the number of staff.

The two areas where we must do better are customer service and engagement. I see strong light at the end of the tunnel on both of those. On the customer side, the challenge is to get through clearing up the legacy issue of dealing with eight tax years in one year instead of what we should be doing, which is in effect dealing with three tax years in one year; the last year, the current year and the future year. As you know, Lesley has committed publicly to getting that sorted out by the end of 2012. It will be ups and downs until we get to the end of that period, but from then on in we will basically have the tax records of the country in the right place. Then we will be able to provide a significantly better customer service. It will improve between now and then, but until we have done all that it is going to be difficult to be anywhere near the sort of level that we would like.

On staff engagement, I think the sense of direction, and many other things that we will probably cover later in the hearing, would give me hope that we can make significant progress. I guess, on the financial side of the department and on the strategic direction of the department, we are in good shape. We need to do a lot better on customer service and we need to do a lot better on our staff engagement.

Q134 Chair: On those two things and the department generally, how do you find it now? How would you describe it now? We had a short debate in the House a month or so ago and I can’t think of any speaker who spoke in glowing terms about the department-not even the Minister, who said some things had to improve-which is sad in a way, isn’t it? The great danger in life is believing your own publicity, isn’t it? Where do you think the department is?

Mike Clasper: The first thing, to reassure everybody, is that there is no sense of anybody on the board, or the top team, not recognising that we have a significant issue with staff engagement. I am not sitting here saying that we are in great shape. It is about where we are going. I think the best thing is the common server that is done across the civil service. There are some dichotomies in it, which I think some of the unions brought up when they talked to you.

Our staff are committed to the purpose; if you go out there, or even if you look at the data, you see people who believe they are doing a very important thing for the country. They are committed to get the money in so that we can fund the nation’s public services. The second thing-this is the one that suggests a sort of dichotomy-is that in general they like their work and they want to stay. Normally, that doesn’t come with the next two things, which are that they don’t feel a positive sense of direction in the department and they don’t like change. I have to say, from my private sector experience, there is a difference between-

Chair: Nobody does though, do they?

Mike Clasper: Yes, but I think there is a difference between the public service and the private sector, in terms of the acceptance of change. That is compounded by the fact that we have not managed change well over the last few years. I think Francis Maude has said that one of the challenges going forward is to significantly improve the public sector’s management of change. It is one of the things that has come up, and not just in HMRC.

Looking forward, we have to continue changing. There is no way we can deal with the financial state of the country and the fact that our customers are changing all the time; economic issues and tax policy-we have to deal with change. I think one of the two most important things we have to do, going forward, is to deliver that sense of direction and opportunity that we have not been doing as well as we should have been. The great advantage is that we now have a spending review and a financial plan that fits the direction of travel. The second thing is to have much better linkage between the top of the organisation and the bottom. If I told you that we have today, in a large part of HMRC, 13 management layers and that we are going to move to seven or eight, you can see the scale of change in trying to get the top of the organisation and the bottom of the organisation into a much faster dialogue.

I think we need better leadership. We have a great top team now, but we are going through the process of both development programmes for our leaders and making sure that the leaders below the people who are here today, and below them, are the right people to lead an organisation. Sometimes that has not been part of the full criteria for certain roles that have large battalions of people.

We have to be persistent and persuasive in explaining change and we have to give the people who are affected by that change more tools to deal with the change. Again, if you want a 20/20 hindsight, I am not sure that in the past we have given the people who had to deal with change all the tools to do it well. That is what makes me feel that we can see a significant shift on that.

Q135 Chair: I think that has all been very helpful to start, because there is nothing worse than a defensive situation and an attacking situation. This should be a dialogue between politicians and people we have entrusted with a job, and a realistic assessment of where we are going with it. Because it is serving the public, and the public are on occasion being hurt by actions that are taken.

Just something that I don’t think Dame Lesley can say, or whoever was sitting in her place could say, but I can say as Chairman. I am tempted to think that cuts have gone too far, that you can’t keep going back to a department year on year. This has certainly contributed to the disengagement with the staff. They never know whether they are going to have a job in six months’ time or a year’s time. You have had four or five years of that and you are now facing another 15% real cut. Is there a time when somebody like you says to the politicians, "Enough is enough. With the best will in the world you can’t keep coming back. Accept that we have a job to do"?

Mike Clasper: I think the answer to the question is, yes, there is, but do I feel that the last spending review-

Q136 Chair: Have you reached it?

Mike Clasper: I don’t think we have and let me explain why. I will take a small example. If you are dealing with eight tax years in one instead of three; if you are dealing with a situation where the taxpayer and ourselves are dealing with something three or four years ago-I am very conscious of the impact that has on customer service, and I am sure we will come back to it-it is very difficult to go back and say, "You owe us money for three or four years ago". If you are not doing things in a timely way, if you are having to do eight years in three, then you get very challenging outcomes.

The good news is, when you are dealing with three years in three and you get to a position where you are dealing with things in a timely way, there are clear efficiencies, and we have had significant investment in the IT systems to be able to deliver those efficiencies. On the flip side, what the Government has done-it would be fair to say that I was as passionate as anybody that this should be done-was to invest back some of those savings in going after one of our core purposes, which is to close the tax gap and the £900 million that has been talked about. I think it is wise and sensible investment to close the tax gap and therefore improve the financial position of the country.

Could we do more? We could debate that, but given the scale of investment-we are talking about going from £13 billion to £20 billion-I think we need to get a bit down the track to show that we are definitely delivering that progress, but I will tell you that if we are, and we see opportunities that are not being taken, I will be one of the first people to go and say it is wise for the country to invest more in this effort.

Q137 Mr Tyrie: You said a moment ago you have to make progress on staff engagement but in fact staff are disengaging from the customer, aren’t they, with the centralisation programme and the decision to close local offices?

Mike Clasper: Firstly, I don’t think the vast majority of the staff are disengaged from the customer at all. If I go out and talk to our staff about the customer, I think they are a very engaged group. Part of the thing about the lack of sense of direction and engagement issues is that, in fact, the staff are so passionate about being engaged with the customer that they don’t like what has gone on, any more than we do, in terms of the issues that we have caused.

On the centralisation issue and closing offices, we are still going to have a massive presence around the country. We are not all concentrated in London.

Q138 Mr Tyrie: But you are disengaging, aren’t you?

Mike Clasper: I don’t agree at all.

Q139 Mr Tyrie: There are fewer customers having the contact that they feel they want.

Mike Clasper: I don’t agree.

Q140 Mr Tyrie: There are more customers with the contact they want from HMRC?

Mike Clasper: Let us take some examples. The question revolves around channels. If you said, "Let us look at the number of people who are engaged with us in a way that they feel comfortable in self-assessment", we are in the order of 7 million people-I can’t remember the exact number-who do self-assessment online. It is something like 75%; three-quarters of the population that could do it online are doing it online. If you look at the areas where we have our biggest challenge, they are that people want to contact us on the phone, and if you also look at the research it shows that when they get through-

Mr Tyrie: If they get through.

Mike Clasper: I recognise that is what we have to do massively better. But when they get through, the general reaction to the quality of information and advice they get from our staff is positive.

Q141 Mr Tyrie: Just on that, perhaps I can read you a couple of extracts from a letter that I received from a pensioner immediately after the debate that was held in the House of Commons. I am summarising a tiny bit of it, but he says, "I received from HMRC a letter saying I owed £6,759. I did not owe that sum so I tried to call HMRC on five occasions. The constant reply was, ‘One of our advisers will be with you shortly’. One of my phone calls lasted two hours and 21 minutes without reply." I am not giving you all the bad story in this letter, I can assure you, these are only excerpts: "I then received a letter dated 11 February from HMRC Banking saying, ‘You need to pay £10,276 now’. The letter was aggressive and intimidating. ‘If you do not pay now the debt will be passed to our debt collection service. Enforcement action will add legal costs to your bill and a 5% surcharge can be made on any balance unpaid at 28 April’". He ends by saying-this is a pensioner-"I am sorry to trouble you with this catalogue of ineptitude". People are not getting through. There isn’t so much engagement, is there? There is less.

Mike Clasper: No, as I said earlier, our huge issue is that people could not get through when all the issues started to arise. I would like a copy of the letter and I would like to be able to think that we can deal with that individual case.

Q142 Mr Tyrie: Okay, but could I just say, what we are getting round this table, and what we are getting from colleagues in the House of Commons, is similar experience. I am sure this gentleman-who does not want to be named-will be delighted that his case somehow gets priority because I have read it out in the Committee, but that shouldn’t be the way business is done. We have thousands, tens of thousands, hundreds of thousands of cases like this, snarled up, not being dealt with properly.

You know very well that I have the highest regard for the culture of the Revenue, from the time when I worked in the Treasury myself, but something really has gone wrong, hasn’t it? I am hoping that you are going to tell me that it is more than just the fact that you had eight years to deal with in three. The Chartered Institute of Taxation said: "Ten years ago the Revenue had the reputation of being one of the best run departments in Whitehall. Today’s HMRC’s reputation is in tatters as one disaster has followed another". Do you really disagree with any of that?

Mike Clasper: I don’t know what the Inland Revenue reputation was before. I am not happy with the service that we have been providing and none of us is; none of the top team is. Basically, our contact centres have been overwhelmed by the number of calls that were created by-I am sorry to repeat it-dealing with eight years in three. The consequences of that-the distress of the individual you talked about, and of many other individuals finding out that they have a tax bill back for three or four years-are something that everybody in the room would have sympathy for. It is almost invariably tax that they should have paid.

Q143 Mr Tyrie: But it is all caused by this "eight years in three" problem, is it?

Mike Clasper: The eight years in three is a large part of the issue. We estimate-

Mr Tyrie: The lion’s share of the issue.

Mike Clasper: If I can go back to the-

Mr Tyrie: I just want an answer: is there some other massive issue sitting alongside eight years in three that we have yet to hear about?

Mike Clasper: There are several core issues around the same thing: the number of phone calls that are made to reassure, or that could be so easily done by another channel, and that come in and over time we have to not have come in. Because what happens when you are running anything like a call centre is that there can be relatively small increases in demand; we only have 10% more callers than we had last year, but the issue is they are not getting through, so they recall and they recall and they recall, and somebody ends up with a two hour 20 minute phone call and it is not acceptable. If we can reduce the amount of demand-there are two aspects to reducing the amount of demand, and one is dealing with stuff in a timely way. I have listened to calls. The number of calls that are chasing-

Mr Tyrie: Now we are back to how you are going to deal with that aspect of it. What I am asking you is whether there is some other major driver of this crisis other than the eight years in three?

Mike Clasper: And some processes that have the customer contact us when they didn’t need to.

Q144 Mr Tyrie: Can you give us a date at which you think you will have got through this problem?

Mike Clasper: I think there will be a period of steady improvement. I think we will see-

Q145 Mr Tyrie: When are we going to arrive at what you consider and what we will start to feel is reasonable as far as complaints from the public are concerned?

Mike Clasper: I think we are not going to be in a great place until 2013. We have to get through-

Mr Tyrie: Beginning or end?

Mike Clasper: Well, I am not talking about individual-

Q146 Mr Tyrie: Do you have a plan? When do you think you will be able to do this by?

Mike Clasper: We think we will be in a much stronger place in 2013 and stronger again in 2014.

Q147 Mr Tyrie: I want to know when you will have handled the backlog created by the "eight years in three" problem.

Mike Clasper: That one will be solved by the end of 2012.

Q148 Mr Tyrie: That will be by the end of 2012, so when you come before us at the beginning of 2013 you are confident that we are not going to have a pile of these letters?

Mike Clasper: By then we will be in a much stronger place. We will be in an even stronger place if I come before you in early 2014.

Q149 Mr Tyrie: You are confident you are not going to be faced with colleagues reading out letters like this, and you are confident that we will have dealt with the "eight years in three" problem?

Mike Clasper: I am confident with dealing with the "eight years in three" problem. I am confident that there will be massively fewer letters like that, but in an organisation that deals with tens of millions of people, and hundreds of millions of contacts, I can’t guarantee that sort of letter will never occur. There are just too many transactions; too many people.

Mr Tyrie: It is a reasonable answer.

Chair: Dame Lesley, you were straining at the bit.

Lesley Strathie: I am not used to having so much support. We feel deeply, deeply sorry for the distress that we have caused to many customers in bringing personal tax records up to date, and particularly vulnerable customers. I think one of the big groups in each of those years has been pensioners, and of course pensioners span people of many decades now. That is because we have introduced a system that brings everyone, every single source of income, into one place, and that of course is where we have discovered that many pensioners have not paid the right amount of tax. We do understand how distressing that is, and we have been working through each of these years with Ministers and seeking counsel on how we can ameliorate the impact of all of that.

By the end of 2012, we will have cleared all the open cases for the back years and we will have been through a full-year cycle of the new system. If I might give you some hope, we have almost completed the annual coding cycle and, because of the learning that has been applied and the testing regime that we have gone through, that has produced an accuracy rate of over 97% as against 80% last year. That says we have been able to clean up records throughout the year and then test and find out what is in the system. We have a full annual cycle to go through, from annual coding and then reconciliation. We will never be in a position, with a payment and accounts system, where absolutely everything reconciles, because people have life changes throughout the year.

Chair: We will come back to customer care service.

Q150 Jesse Norman: I would be grateful for the shortest answers that you are capable of giving if that is okay. Mr Hartnett, do you think the continued public controversy over the Vodafone case has damaged HMRC?

Dave Hartnett: Maybe a little, Mr Norman. Can I preface what I want to say by saying that, before coming here today, I spoke at length to our lawyers because in the past we have normally, under taxpayer confidentiality legal strictures on us, refused to say anything about a particular taxpayer.

I thought it might be helpful today if I could say something about the mistakes and misconceptions that are out there, because they are significant. I have legal advice that enables me to answer those questions, but I cannot answer detailed questions about the actual tax liability.

Q151 Jesse Norman: If the Chair is comfortable, I would be very interested in that. Thank you.

Chair: The Chair is always comfortable.

Dave Hartnett: Do you want to ask me some questions, Mr Norman?

Jesse Norman: No, if you have a prepared statement.

Dave Hartnett: I do not have a prepared statement but I have some notes for myself.

Q152 Chair: How long is it, David? We only have a couple of hours.

Dave Hartnett: Thank you, Chairman. I thought I might start with the £6 billion, if that was all right, because that seems to have captured the public imagination, but it is not a number we recognise. So I thought I would construct the £6 billion for you, very quickly-how we think it was constructed and why we think it is simply wrong.

The profits to which the £6 billion allegedly relates arose in Luxembourg from activities in Germany and Greece. The calculation is based on gross income, not on profit, so the calculation takes no account of non-taxable amounts-tax losses, overseas tax paid and all the things you would normally set off in getting to a tax liability. There are a lot of roundings and extrapolations in it, and there is no attempt at all to analyse the controlled foreign company legislation and look at exemptions. Our view is that the £6 billion is frankly-I hope this is not an inappropriate word-absurd, and that no serious or reputable practising accountant in this country, be it public sector or private sector, would be able to endorse it.

Q153 Jesse Norman: For the avoidance of doubt, it is much higher than the actual liability although you can’t discuss what the actual liability was?

Dave Hartnett: Vodafone put in the public domain the sum they paid, which we believe to be the actual liability, which is £1.25 billion. That is the real issue, Mr Norman, about the £6 billion. This is-may I repeat myself?-an absurd figure.

Q154 Jesse Norman: Is there anything you want to add?

Dave Hartnett: There are a few other things, if I can pick two or three things at random. There have been allegations, which we haven’t felt able to counter before, that Mr Connors of Vodafone and I met regularly and in secret to cook up the deal. At no stage during my involvement with Vodafone did I meet Mr Connors. I never wrote to him. I never received a letter from him. I never had a text from him, or an e-mail, or telephoned him or received a telephone call. We had nothing whatever to do with each other.

Secondly, I think there are allegations that I and my colleagues stood aside, experts and lawyers, in order to reach that settlement. Not true. We escalated the Vodafone matter to the very best people in our organisation, the director of our international division and one of her deputies, and our lawyers were involved throughout.

The third thing worth saying is that I think I have read somewhere that I brought Mr Cruickshank of Deloitte into the matter. No, not at any stage. Of course I know Mr Cruickshank, he is one of the country’s leading tax accountants, but I did not bring him into anything. We don’t do that.

Q155 Jesse Norman: On that point, do you mean that you did not bring him in, or he was not brought in?

Dave Hartnett: He came in, I think, at the request of the company.

Jesse Norman: So the company brought in Deloitte?

Dave Hartnett: Yes. We don’t do that.

Q156 Jesse Norman: He is someone with whom you have had no other relationship?

Dave Hartnett: No. Over probably 15 years in tax I have seen him on many occasions, on many different matters, because he is one of the country’s leading tax specialists.

Q157 Jesse Norman: He has advised HMRC?

Dave Hartnett: No. He has not advised us. He has always acted for taxpayers.

Q158 Jesse Norman: I understand. Thank you for that. Can you tell us how the case was settled? What was the procedure by which you settled the case?

Dave Hartnett: The director of our international division and her deputy began a negotiation with Vodafone and their advisors. When that stalled, I and another commissioner in HMRC became involved and negotiated a settlement with the chief finance officer of Vodafone.

Q159 Jesse Norman: So it was a negotiation. It was not what you thought they actually had to pay, it was what you were prepared to settle for.

Dave Hartnett: What we do most often, Mr Norman, is to negotiate the very best settlement we can. We had to balance out whether we were going to get more money for the country by litigating or more money by getting the right negotiation, and there were plenty of tax QCs in the UK lined up telling us and the media that we were not going to get a penny through litigation.

Q160 Jesse Norman: How many large business corporate tax avoidance cases have you litigated or taken to the Tax Tribunal in the last five years?

Dave Hartnett: Quite a lot. We protected through litigation last year-most of this number will be big business-about £6.25 billion. I am trying to find a list I have brought because I thought that it might be helpful. Can I just illustrate with one or two?

Jesse Norman: The number that you have taken to the Tax Tribunal is the question I really want to get to.

Dave Hartnett: I will have to let you have that in writing-the number to the Tax Tribunal. But we have, across all our tax litigation, about 10,000 cases in litigation at any one time.

Q161 Jesse Norman: But how many with what you might call your large business service? How many of those were litigated?

Dave Hartnett: I can’t give you a precise number but quite a lot of the 800 or so entities that are in there.

Q162 Jesse Norman: Were the procedures you followed on Vodafone ordinary ones for a case of this kind?

Dave Hartnett: There was nothing special about this case. It was worked by the most senior experts in the field, two commissioners of HMRC.

Q163 Jesse Norman: Are they board members?

Dave Hartnett: Yes. It was me and the director general for business tax, and our lawyers were involved as well.

Q164 Jesse Norman: Was there any difference of view as to how the case should be prosecuted as between the board members and the team involved?

Dave Hartnett: Not once the case had been escalated. I think one or two of our colleagues-not working on the case but elsewhere in the department-felt that we should have said to everyone in the department how this case was progressing. When you think of the scale of it, this was incredibly market sensitive in terms of an amount of money, so we could not explain to large numbers of people how the matter was being dealt with, but it wasn’t dealt with differently from other cases.

Q165 Jesse Norman: In 2008, the Public Accounts Committee was very critical of the Revenue’s failure to charge penalties to big businesses when they understated their tax payable. The number was about £15 million and the Revenue promised to do better. How much better are you doing now?

Dave Hartnett: If better is in terms of amounts of money, the most recent year has been a lot less than that but the crucial issue is that in order to collect a penalty, there has to be at the very least a failure to take reasonable care. Most of the issues we resolve with big business in the UK are very significant differences of view on technical aspects of taxation, and we cannot charge a penalty in relation to those.

Q166 Jesse Norman: The actual number is that six penalties were charged-

Dave Hartnett: I knew it was small.

Jesse Norman: -in 2009/2010 for a total of £442,000, which was one one-hundredth of 1% of the tax that was under declared, which I have to say strikes me as a lamentable failure. It seems to me that it isn’t better than you promised to do in 2008. It feels a lot worse. What is the equivalent percentage of tax under declared for small business?

Dave Hartnett: I don’t know precisely, Mr Norman, but there is a fundamental difference. Small business in the UK makes up about 50% of the tax gap; big business makes up less than half of that. We have more evasion in small business than we do in big business. In fact I cannot remember-maybe if I went away for a couple of hours I could think of something-seeing a case of evasion in very big business in the recent past. The crucial issue-

Q167 Jesse Norman: Could you repeat that? You cannot remember having seen a single case of evasion by big business?

Dave Hartnett: It is mostly avoidance, Mr Norman.

Q168 Jesse Norman: I find that extraordinary, I must say. Okay. The equivalent rate for small business is about 200 times the rate for the large business service. If you fiddle your tax credits you go to jail, if you do it in a systematic and fraudulent way. Why are you so much less tough on big business?

Dave Hartnett: I don’t think we are less tough on big business. We will take penalties from big business-

Q169 Jesse Norman: It is 200 times lighter, the amount they pay relative to the tax that is under declared. That feels like pretty unequal treatment to me.

Dave Hartnett: What we have to measure is the incidence of at least failure to take reasonable care, or worse, and that incidence is higher in small business than it is in big business.

Q170 Jesse Norman: So just to round off, the situation is that you barely fine big businesses who underpay their taxes. You say you take them to the Tax Tribunal but I would be interested to see the numbers on that. Do you think you are offering a credible threat to big business, in line with HMRC’s stated objective of charging people the right amount of tax and collecting it?

Dave Hartnett: I do, because looking at the intervention yield, which I think Mr Clasper referred to earlier on, over the last four years we have increased that in relation to big business by more than 25%. If I look at the list of cases we have taken to the Tribunal-this is all public domain information. Firstly, the Prudential in relation to tax-efficient off-market swaps was a very large avoidance case, which we have won. There were 30 other major companies behind that. They were not named but they funded, in part, the running of that case, so it was not a single case. We are still considering for some of those whether there is a penalty position.

If I go back to the £15 million you mentioned earlier on, I happen to know one element of that £15 million rather well, and a large part of that £15 million was one case.

Q171 Jesse Norman: In other words, when you can levy a good fine you do it?

Dave Hartnett: Absolutely, and the advice we get from the private sector is that a big fine puts senior officials in big companies in serious jeopardy, and that is a very big deterrent.

Q172 Jesse Norman: It does raise the question why you do not do more of it to more companies, given that when you do it, you can raise a reasonable sum?

Dave Hartnett: Every time we settle an issue, Mr Norman, we look at the penalty position and if necessary we take legal advice; sometimes external legal advice.

Q173 Jesse Norman: Do you think you have adequate transparency in the derivatives profits made in the big banks-as to the tax creep of those?

Dave Hartnett: Well, it has improved, very significantly. It has improved through the code of tax for banks that we drew up. The top 15 banks and another 190, roughly, have now signed up to that. Transparency is a key part of it, and we are monitoring that transparency very carefully. With a number of the biggest banks we now work in real time.

If I can turn your question ever so slightly; do we necessarily understand all the derivatives? Maybe not as quickly as I would like.

Jesse Norman: We know that in many cases, they do not understand the derivatives so that is not very surprising.

Q174 Mr Love: Can I just come back to Vodafone briefly? How would you explain the widespread reports in the newspapers that Vodafone had set aside double the amount of tax that they actually paid? How did it come about that they estimated it much higher than you did?

Dave Hartnett: I don’t know how they made the estimation, Mr Love, but we frequently see very conservative provisioning in relation to tax; very conservative provisioning indeed, where it is massively more than the sum of money we could possibly collect under the law. We did not collect a penny less from Vodafone than we thought we could.

Q175 Jesse Norman: That cannot be true because you have already said you negotiated. So you had an ambition for how much you wanted to take from Vodafone, which was thwarted by the company and then you went into a negotiation. So what you have just said cannot be true.

Dave Hartnett: No. Mr Norman, with respect, I don’t think I ever said that I had a figure. We looked at the position; we did our calculations during the negotiation and we reached what we thought was the right number.

Q176 Mr Love: You indicated earlier that all the tax lawyers were telling you that-

Dave Hartnett: Half of them, Mr Love. Sorry.

Mr Love: Well that is a slightly different impression than you gave originally, but the overwhelming view of those in the know was that you could not go to litigation. Vodafone would have known that as well. Are you seriously asking us to accept that Vodafone would have made a greater estimate than you about what their tax liability was?

Dave Hartnett: My experience, Mr Love, is that happens regularly. If I can go to another matter, far enough away, to illustrate the point, I remember that we were pilloried in the media some years ago for not collecting every penny of tax under a provision. We couldn’t get there. In law we could not reach the provision. But I think I ought to make way for Mr Clasper.

Simon Bowles: If I may come in, just by way of introduction I have spent 30 years in the private sector, many years as a finance director in public companies, so it has been my practical experience that faced with a tax liability, one would try to be as conservative as possible because what you don’t want is two surprises: first that you make a provision and secondly, you discover you haven’t put enough aside and there is another shock coming. So my experience very much echoes what Dave has described.

Mr Love: So the headline for tomorrow is, "Vodafone got it wrong; they are even more incompetent than HMRC".

Chair: David, do you want to come in in this area?

Q177 Mr Ruffley: Thank you, Mr Chairman. Can I say, Mr Hartnett, that I think your opening statement has been very helpful to Mr Mudie’s sub-Committee.

Can I just get one thing straight? You described the £6 billion figure in relation to Vodafone as an absurd figure, and I take it that you are saying that £1.25 billion was-did you use the words "real liability"?

Dave Hartnett: I don’t remember using those words.

Q178 Mr Ruffley: What was the £1.25 billion? How did you characterise that?

Dave Hartnett: It was the actual amount of money for which the matter was settled. It was our largest ever cash settlement.

Q179 Mr Ruffley: You are saying the £6 billion was absurd and you suggested that was because it was a gross income figure, and did not take account of exemptions under the Act or any other write-offs or losses, so that-

Dave Hartnett: Yes.

Q180 Mr Ruffley: Okay. Just so I understand that.

I take your point that you are trying your best. I certainly don’t suggest-like some rather cruel commentators-that you have sold out to big business. I am not going to be as populist as that, but I have to say that some facts suggest that there is huge disquiet on the part of technicians in HMRC. Let me just ask you these questions.

Is it the case that you removed five officials from the controlled Foreign Companies Act legacy team following reports in various newspapers? I think we need to be forensic. Were five people removed from that legacy team?

Dave Hartnett: I don’t know the number, Mr Ruffley.

Q181 Mr Ruffley: Was anybody removed from that legacy team?

Dave Hartnett: We moved the work in order to provide assurance to the markets and companies that that work was being kept confidential. Moving the work was the important issue.

Q182 Mr Ruffley: Did you conduct a leak inquiry, or anything similar to a leak inquiry investigation, following the complaints about the treatment of the Vodafone case appearing in the press?

Dave Hartnett: I think that is probably one for the chief executive rather than me.

Mr Ruffley: No.

Q183 Chair: Who would have taken that decision? Was it you? Can you answer the question?

Dave Hartnett: The decision, Chair, about the formal leak inquiry lies with the chief executive.

Q184 Mr Ruffley: Is there a leak inquiry? Let us establish that, shall we?

Lesley Strathie: If I can answer that question, on any occasion where we have a leak of significance, and particularly where the evidence, or the assertions or the print media or any other source, suggest that confidential taxpayer information may have been leaked, I would mount a preliminary inquiry, a fact finding, first of all.

Q185 Mr Ruffley: Not "would". Did you, in this case?

Lesley Strathie: Yes, I am just putting it in context because the first thing is to establish what we know. The second is to have an inquiry and, yes, there is an ongoing inquiry.

Q186 Mr Ruffley: Right. That is helpful. Don’t you think that is unusual, Dame Lesley?

Lesley Strathie: I think every one of us who is employed by HMRC takes taxpayer confidentiality very seriously, and I do distinguish between that and any other kind of leak where someone decides to share some information about our operation.

Mr Ruffley: Or talk about your expenses or anything.

Lesley Strathie: I think taxpayer confidentiality is very serious.

Q187 Mr Ruffley: I am agreeing; we’ve got that. I want to get to the heart of the issue that Mr Tyrie raised in his question, and I agree with it. HMRC, or the Inland Revenue, when Mr Tyrie worked there and when I worked in the Treasury afterwards, was a byword for excellence. Leaks like this never happened, but they are happening now. I want your assessment as to why you think officials are now under investigation. Are there other examples in recent history that you can give this Committee where such a serious leak inquiry was instigated? Something is going wrong with HMRC, isn’t it?

Lesley Strathie: I honestly don’t know the history. I didn’t work in-

Mr Ruffley: You should. You are the Permanent Secretary. Now, come on.

Lesley Strathie: I am sorry, I never worked in the Inland Revenue and so I can’t tell you how many inquiries it had. I can tell you that we have had several preliminary inquiries-

Mr Ruffley: As serious as this?

Lesley Strathie: Nothing as serious as this.

Mr Ruffley: Nothing as serious as this?

Lesley Strathie: I would like to put in context that the action we took around this, just in case you are asking it specific to Vodafone, was after three different suggested leaks. That is when we felt we had to, in order to give confidence back. Bearing in mind that the relationship with large business is predicated on shared trust and transparency, why would companies share their information with us if they felt that we would not hold it according to the law as it requires us.

Q188 Mr Ruffley: We agree with all that; you are telling us the mindlessly obvious, with respect. We all agree that taxpayers have to trust the organisation. But can I put it to you that trust and transparency do not seem to be in evidence in relation to the senior management’s relations with its middle management and junior staff, because we have leaks here that you, in your own words, have suggested are the most serious in recent times. You agree with that. It does rather suggest as a bit of evidence that something is going badly wrong within the Revenue, in terms of trust between the senior management-Mr Hartnett, yourself and others-and the people who are leaking. They feel so outraged or suspicious that they are leaking in an unprecedented way. Would you not accept that characterisation?

Lesley Strathie: Mr Ruffley, I would say from a generic perspective leaking in an organisation is a sign of bad health.

Mr Ruffley: Yes.

Lesley Strathie: I accept that point.

Mr Ruffley: You accept that. Very good.

Lesley Strathie: What I would say is there are a whole range of channels for whistle blowing inside the organisation, and indeed they are used by many colleagues. People have access all the way up to me, as the chief executive, and indeed to a board and a chairman-there is a range. People can do that anonymously, so there is an issue as to why people choose-if it is on the inside-to give certain information outside and not use any of the channels that are available to them.

Q189 Mr Ruffley: Before you go to sleep tonight, Dame Lesley, I would suggest you ask yourself this question: why experienced professionals in the Revenue, rather than speaking to you, as you have indicated, decide to leak it to Private Eye. That is a depressing commentary on the organisation of which you are Permanent Secretary.

One final question, Mr Chairman, and it is a technical question. If you do not have it to hand, either Mr Hartnett or the Permanent Secretary will be happy to receive it in writing: how many cases have been settled under the controlled foreign companies legislation, so as to produce a lower yield to HMRC than would have been the case if such legislation had been applied in full in each of the last two years, where the settlements in those cases were between £100 million and £1 billion and, secondly, over £1 billion? The last two financial years and between £100 million and £1 billion and over £1 billion, do you have those figures to hand? Mr Hartnett.

Dave Hartnett: I don’t think there is a single case, Mr Ruffley.

Q190 Mr Ruffley: Not a single case?

Dave Hartnett: Not a single case. I think we have settled the cases entirely properly, with good governance, and I don’t think there have been any dodgy deals in relation to controlled foreign companies.

Q191 Mr Ruffley: I wouldn’t be so defensive. I didn’t use the word "dodgy".

Dave Hartnett: I was trying to be helpful.

Q192 Mr Ruffley: Yes, or overly defensive. You have not settled for lower yields than would have been the case if the legislation had been applied in full. You have not settled any case between £100 million and £1 billion in the last two years, or over £1 billion in the last two years. Is that what you are saying to this Committee?

Dave Hartnett: I am saying that, Mr Ruffley, but I need to say one other thing. Not about numbers.

Q193 Mr Ruffley: It is not a "but"?

Dave Hartnett: No, no. It is the legislation. The legislation does not lend itself to the precision you are imbuing it with. That is the important issue here. Remember this is legislation, which works very simply: it says, "Is there tax avoidance? Could the transaction have taken place in the UK?" and then if it did-with Vodafone we have said it is Greece and Germany with Luxembourg-"How much of it do you tax in the UK? What are the exemptions, losses and all sorts of other things?" It is not simply a case of applying the rigour of the CFC legislation to get to the precise number, because there is no precision there.

Q194 Mr Ruffley: You are denying that the question means anything?

Dave Hartnett: I am saying that it is a very difficult question, but I was trying to go to the heart of what I thought you were asking, which is, "Have we gone soft"-I know you didn’t use those words- "in relation to controlled foreign companies?"

Mr Ruffley: That would be a populist version of the question I have read out twice, yes.

Dave Hartnett: I don’t think so.

Mr Ruffley: You don’t think so?

Dave Hartnett: I don’t think so.

Mr Ruffley: Chairman, thank you.

Q195 Chair: Just for the record, can we go back to Vodafone and Sue Cameron’s allegation in the Financial Times that five members of staff had been moved as a result of the leak on Vodafone? The answer as I heard it was, "No, it was more that some staff had been moved pending an inquiry after three leaks". What were the other two leaks? We missed that.

Lesley Strathie: There were three cases where stories came out in the media and there were complaints from customers that suggested there was a problem.

I think the other issue-

Chair: Sorry, Dame Lesley. Were there three leaks regarding Vodafone? Three separate leaks?

Lesley Strathie: No. There was one concerning another company as well.

Chair: So there were two for Vodafone and one about another company.

Lesley Strathie: Yes.

Chair: Is there the feeling in the-

Dave Hartnett: I was trying just to remind-

Q196 Chair: Are you confirming that or saying that it wasn’t right?

Lesley Strathie: Dave was confirming that it was three companies.

Chair: Three separate companies?

Lesley Strathie: Three companies.

Chair: Three separate companies, one of which was Vodafone?

Lesley Strathie: Yes.

Q197 Chair: How many people were actually moved, and are being inquired into?

Lesley Strathie: I think the important issue here is that the work was moved rather than the people. That was the first issue. This was a fairly large project that was coming to its end, so we completely changed where the work was and set up a clean environment for the legacy that was left to be dealt with. We did that as much to protect all of our people from allegation of wrongdoing.

Chair: So these people have been moved for their protection.

Lesley Strathie: Nobody has been accused of anything at all. We moved the work. Because we knew the number of people that had been involved in the work and were privy to the information, and what could potentially have been leaked anywhere, we created a clean environment where only the legacy maintained very strong control so that if there was any further leakage it would be much, much easier to identify. But we did it as much to protect our people and the reputation they hold because of that trust and transparency.

Q198 Chair: To the best of your knowledge, can you tell me whether the people appreciate they are being moved for their protection?

Lesley Strathie: Certainly, the two directors involved in that decision-making went to considerable effort to see all those people and explain. We also ensured that the director general for business tax put a communication on our intranet explaining exactly what action we had taken and why, and stressing that there was no suggestion at all that any of the people involved were guilty of any wrongdoing.

Q199 Chair: I hear that, but it still does not answer my question. Do the three people accept and appreciate they have been moved for their protection?

Lesley Strathie: I can’t answer that.

Q200 Chair: Have you asked the union to check that their members are happy?

Lesley Strathie: I know that the director general for business tax has certainly talked to the trade unions as well. But I can’t answer.

Q201 Chair: I am just trying to reconcile that with your first brief answer to David, which was that these people were moved as a result of three leaks and you were conducting an inquiry. Are you still conducting this inquiry?

Lesley Strathie: Yes.

Q202 Chair: Are these three people or five people subject to this inquiry?

Lesley Strathie: I can’t tell you where the inquiry will end up. I can tell you that leaks are notoriously difficult to prove.

Chair: I can see why staff morale is pretty low.

Lesley Strathie: There was no question of anybody there being suspended or accused or anything else.

Q203 Chair: Dame Lesley, if you were moved from your job and you felt you were totally innocent, although I said to you, "Oh well, we have moved you for your own protection, for your own good", you would be aggrieved because you might enjoy doing the job that you are doing.

Lesley Strathie: I absolutely agree with you, Chair. I have spent many years doing formal investigations for other parts of Whitehall, and I know exactly the distress that it causes individuals, but we had to put the business first.

Q204 Chair: Just for the record, do you keep a careful record of all apparent leaks? Are they logged?

Lesley Strathie: Yes, we do.

Q205 Chair: Good. Can you give us the figures over the period of time, for example, since you have come.

Lesley Strathie: Yes.

Chair: Thank you.

Lesley Strathie: We will give you a note on that, yes.

Mr Tyrie: So that we can see over a run of years-all the period that you have records.

Q206 Jesse Norman: For the avoidance of doubt I think we should have it for the last 10 years if you have the figures available, so we can see the trend.

Lesley Strathie: I shall have to look to Mr Hartnett for what we have, going back. The department is only five years old.

Jesse Norman: The department is only five years old?

Lesley Strathie: Yes.

Mr Tyrie: But you will be able to get the aggregate of the numbers.

Lesley Strathie: I am simply saying that I will give you what I have. I can speak for HMRC because that is what I run. I will tell you what we have.

Q207 Mr Tyrie: Well, I would be grateful if you would take a look at the organisations from which you were formed as well, so we can have these figures and see them over a run of years. Do you think that they might serve as a proxy for morale? The higher the leaks, the lower the morale?

Lesley Strathie: I think morale is much more complex than that.

Mr Tyrie: Yes or no?

Dave Hartnett: It is definitely no. It is far more complicated.

Chair: We are going on to customer care.

Q208 Jesse Norman: A very quick tangential issue. Can I ask how many employees, staff or advisers to HMRC, are in this room at the moment?

Chair: Put your hands up.

Jesse Norman: There are lots. I count 12 or 14. I was under the impression it was a public hearing rather than just an HMRC hearing. It is helpful to know that. Thank you very much.

Q209 Andrea Leadsom: I would like to come on to the subject of customer service. Mr Clasper, when we started the Chairman asked you about your moving from three days a week to two days a week and you said that you feel now that you have your strategy, your vision, your objectives and so on. Can I ask you what your vision for customer service is? Where does HMRC intend to be in three years and five years time?

Mike Clasper: In broad outline, I think the important thing is that we are able to deal with people’s tax affairs on a timely basis.

Q210 Andrea Leadsom: What is that defined as?

Mike Clasper: I think it depends. If you are talking to a major company, it might be being right within the last two years. If you are talking to an individual who has sent in some mail to us, it is getting back to them in days, not months.

Q211 Andrea Leadsom: Is that specified? Is there a document that you can send us as to what your specific targets are for large companies or for pensioners, such as the gentleman that Mr Tyrie mentioned?

Mike Clasper: We have sub-targets in various areas but I don’t think there is anything as precise as you are requesting. To be honest-going back to my earlier comment about some of the things we are going to have to change-we are going to have to change the way we do things in process terms to stop some of this unnecessary contact and burden on the customer, and that might change again. If you want the vision rather than precise details, then the vision would be that we deal with people on a timely basis and that their access is through the channel that they want to access us through, and when they do access us they get the right sort of advice. I know that sounds very motherhood and apple pie, but if you are talking about a vision, that is what we have to do.

Q212 Andrea Leadsom: Okay. So far, so good. But obviously from a vision you then have specific measurables and you have service level agreements and the customer needs to know what they can expect, and so on. Are you saying that you do or you do not have your own internal service agreements?

Mike Clasper: We have a series of surveys that we do about people’s reaction.

Q213 Andrea Leadsom: But do you have specifics? If I as a taxpayer want to know how long I can expect for my affairs to be dealt with if I make a phone call, or whatever, is there a target turnaround time that I can look to?

Lesley Strathie: For what specifically, sorry?

Andrea Leadsom: As I said: I as a taxpayer.

Lesley Strathie: In terms of service standards, as an individual taxpayer?

Andrea Leadsom: Yes.

Lesley Strathie: We have a range of standards like turnaround times for certain types of post and others, right across the different lines of business. Suffice to say-I think you will know from your postbags-we are not meeting a lot of those standards because of the history that we have spoken about.

Q214 Andrea Leadsom: So you do have specific service standards. If those are written it would be very helpful to receive an outline of what your turnaround times are, and also an idea of how you perform against them.

Lesley Strathie: Yes.

Q215 Andrea Leadsom: How many people on the board of HMRC have specific call centre expertise and customer service expertise as their professional training?

Mike Clasper: Four or-

Lesley Strathie: Five.

Q216 Andrea Leadsom: There is genuine expertise about the need to have service level agreements, measurable targets for staff and measuring the ratio of staff to calls, and so on?

Lesley Strathie: Yes.

Q217 Andrea Leadsom: That is very reassuring. It would certainly be very helpful to have some information on what you target and what you are achieving against those targets.

Can you talk us through your stated intention to recruit 1,000 extra contact centre staff between April and September to deal with volumes? Is that happening already? Where are you going to recruit those people from? How will they be trained?

Lesley Strathie: We will recruit them, first and foremost, from staff who require redeployment from other areas of the business, where that is shrinking. One of the things we have done in response to staff morale is to remove all the barriers right across the department to people applying from one business line to another. We think that will probably attract about 25% of those posts. The other 75% we will recruit using the Government’s job-broking agency, Jobcentre Plus, as the main deliverer of those people.

Q218 Andrea Leadsom: How will they be trained?

Lesley Strathie: We have very specific training for contact centre staff. It has been a fairly ring-fenced part of the business since HMRC started to move work to the telephone.

Q219 Andrea Leadsom: You don’t have any concerns about the quality of the call centre training?

Lesley Strathie: Yes, I have a lot of concerns because we have so many different business lines and, in its history, the department has constantly moved things on to the telephone. The purpose of bringing these 1,000 people in is because we moved the renewals of tax credits, which is an annual process when we need to establish that people are still entitled and calculate the final award, and because of that peak business on the telephone. While we want to make sure that the customers that have suffered through the stabilisation of PAYE don’t get a deteriorating service, we feel we have to meet that peak, which is through July. So we need to bring them in and train them, but we will be training these staff on specific areas of business, not right across the whole 14 lines.

Q220 Andrea Leadsom: You told us in a written submission that in 2010 the majority-that is 60% of all calls to HMRC-went unanswered, yet in that same written submission you say that customer satisfaction exceeds industry standards. How can those two statements-

Lesley Strathie: I think there are two things: one is the answering of all calls offered, which could be for example one person on redial as opposed to actual callers, but the satisfaction figure that you are quoting is an independent survey that measures customer satisfaction across the various lines of business, including agent satisfaction and individual’s satisfaction. That is quarterly. What that tells us is that the great British public will suffer quite a lot, in return for the service they get when they get through to speak to our staff, because the satisfaction level when they do speak to our staff is very high. I think it is about 87%.

I think what it tells us, Ms Leadsom, is that many people have no interaction at all with HMRC, and many people would prefer to have no interaction with HMRC, but people speak very highly in the main about our contact centre agents when they get to speak to them.

Q221 Andrea Leadsom: I have to contradict you. We have heard several submissions, from various organisations, saying that there has been a complete drop-off in the level of expertise of call centre staff in tax matters over the last five or six years. We had evidence from the Low Incomes Tax Reform Group who said, "You can ring up and get the right answer but, equally, you can get the wrong answer…The question of training has been raised. In one call that we took just this week, somebody had been told by a call centre operator that they should be keeping records for seven years, an individual not in business", and that they are required to provide the records if HMRC can’t find them.

We all have countless examples-as Mr Tyrie read out-of individuals, small businesses, who are unable to get the service that they need from call centres. In fact, we had evidence from the Federation for Small Businesses, I think it was, who said that for some people starting out in business it was a deterrent to signing up for VAT, because staying in the black economy was much easier than trying to get on to a level playing field and signing up for HMRC, because it was so difficult to do it.

We had examples from various corporate representatives saying that what used to take an hour or two-to change a PAYE coding-now can literally take three months, of constantly having to call and call and call again. The issue is that the onus, the burden, and therefore the cost, is falling on the individual who is wishing to pay their taxes and the company that is wishing to pay its taxes, because HMRC simply does not have the expertise or the capacity to deal with those issues in a timely fashion.

Lesley Strathie: I would accept all of those.

Q222 Andrea Leadsom: How can you then say customer satisfaction is high?

Lesley Strathie: Because we deal with 1 billion transactions a day. We deal with 60 million phone calls, so never on any day is everything going to work for everybody in that sort of volume. I have to accept them and apologise for them. What I would say is that there are a whole range of services in there that we are talking about-through personal taxation to business taxation. I talked about VAT registration recently with the London Chamber of Commerce when I went to talk to them and their tax committee, and we absolutely have had to tighten VAT registration. That has been about looking at the entire process from end to end and managing the risks associated with VAT registration.

Part of our change programme, going forward in the next spending review-a lot of it-is focused on small and medium businesses through a one-click programme where they will be able to register online; they will be able to register a range of services, and a lot of what we will do will improve a lot of the things that you have spoken about. About 70% of small businesses deal through agents. It is the others who need some help because either they are not aware of the web-based help, or they have difficulty getting it. In our calls, we prioritise agents who are trying to help people, and we work very hard to turn VAT registrations round with speed, balancing the risk from fraud that we face.

Q223 Andrea Leadsom: Looking again at the training of call centre staff, you use to a great extent automated scripts to help call centre operators. Some of the criticism has been that the staff do not really seem to understand the scripts that they are being asked to use. Is that your experience? How much testing do you do of whether your operators understand what they are doing?

Lesley Strathie: I think it is an improving picture. NPS and the new PAYE-

Q224 Chair: Can I stop you there, Dame Lesley? I have been reading all your appearances before our Committee and I think it is a very interesting form of words to use, "I think". We are not exactly probing to find out what you think. Is it an improving situation or is it not an improving situation?

Lesley Strathie: I believe on the-

Chair: No, that is as bad as "I think", "I believe". If I am running something, I know whether it is getting worse or getting better or staying the same. Which is it?

Lesley Strathie: Well, I know-

Chair: Because it tells me about how in touch you are with your organisation, your answer, not what you believe, not what you think. The worst thing somebody can say before a Committee is "I believe" or "I think" when they are running something. You either know or you do not, and if you don’t, you worry. Tell us, tell Andrea, is it an improving situation?

Lesley Strathie: It is an improving situation, Chair. Thank you very much.

Chair: Now wasn’t that good? There you are.

Lesley Strathie: But I would like to add a few caveats. What is available to our staff on our main contact centre lines now, and the IT, is much improved. In many cases, they are not working from a script, they are working to help individual customers and they have all the information there. There are many cases where in dealing with backlog of work people have desk aids, various scripts to follow, and I would accept that people do not get that right on every occasion.

Andrea Leadsom: Is it not the case-

Lesley Strathie: Can I just say, in terms of being in touch, I spend every evening dealing with MP correspondence at the end of the day, as you will know from the many letters that I respond to. In terms of my understanding of where it is getting better and where there is more to do, there is clearly more to do.

Q225 Andrea Leadsom: Does it not concern you that, potentially, part of the reason for this mass of unanswered calls is the amount of repeat calls that you are getting from people who were not satisfied the first time around, that you did not manage to solve the problem and so they keep coming back, so all you are doing is building up a bigger and bigger problem?

Lesley Strathie: I do not believe there is any evidence to support that. I do think that people do not always get the right answer, or sometimes they think they have the right answer and then there is another issue, they receive a letter and they come back to us. I still go back to the independent measurement of what people say, and this is only testing the people that have experience in using the service. We know, for example, when we dipped and we know that we dipped in our agent service in the second quarter.

Q226 Andrea Leadsom: I have some information here that suggests that there are 7.34 million calls chasing progress, annualised, every day, so that is a significant number of calls that are chasing the progress.

Lesley Strathie: We have a programme of work to eradicate 13 million of what we would class as non-value calls because, generally speaking, they are people who do not trust us and want to ring up to check. There is no value to the customer, and there is no value to the organisation. It is how we move those through, improve face to face for the 25% of people who will always need some kind of help, with better messaging and telephones to direct people through electronically, and improving capability in our work force.

Q227 Andrea Leadsom: You are telling us as a matter of fact that the statistics are improving, that you are improving in this area of meeting customer requirements?

Lesley Strathie: No, I said I was improving in terms of the skills that we have.

Q228 Andrea Leadsom: But that is not resulting in better customer service?

Lesley Strathie: No.

Q229 Andrea Leadsom: Why is that not resulting in better customer service?

Lesley Strathie: Better customer service, for me, starts with people being able to access, and not enough people are able to access our telephone service first time. We did a lot of work and delivered on a programme of work that took our calls offered up to 76%, but then the NPS-the PAYE failures that we had when we introduced the new system and the capability to deal with that-knocked us off course in being able to meet the demand.

Q230 Andrea Leadsom: Are you projecting that your improvement in customer service will also take until 2013?

Lesley Strathie: It will take at least until 2012 to be delivering the sort of service that I would like to be delivering on the phone, but it is not just a phone issue. I think that it is about service and not the past and existing channels. We have to get right face to face, where it is located and for the people that need it. We do increasing outreach, working with other partners to meet customer need. We do an increasing number of home visits to help elderly and vulnerable people who can’t operate in the system, and we will do much more web-based. The Government strategy is digital-

Q231 Andrea Leadsom: But you are projecting improvements in customer service and you have targets to reduce your number of fails?

Lesley Strathie: Yes, we have, but I absolutely do not believe-I would not like to mislead the Committee at all-we can deliver what I regard as excellent customer service, meeting 90% of calls offered first time, in the next year, until we have stabilised PAYE.

Q232 Andrea Leadsom: Final question. You currently use 0845 numbers. Obviously with the amount of time people spend on the phone and not being answered, and bearing in mind particularly that some of the poorest people rely on mobile phones to ring you, which costs them significant amounts, what moves are you making to move to 0345 numbers?

Lesley Strathie: It is something that we spent quite a long time working on across Government. We have a vast range of telephone numbers at the moment. I can’t give you a clear answer here as to when we could move any of that to the 03, but I would be happy to write to you.

Q233 Andrea Leadsom: Why not?

Lesley Strathie: Because it is a vast business, and because we are trying to move incrementally in bringing things down to one number. My aspiration is that people can operate our services at lowest cost possible.

Q234 Andrea Leadsom: These are all aspirations. We are not hearing anything about actual achievement and progress; it is all aspiration. Surely, a telephone number is a relatively easy thing to change and would be a commitment to trying at least to ensure that some of the cost to individuals, particularly vulnerable people, of trying to access HMRC could be reduced. Surely that would be a quick win. Don’t you feel you need some quick wins?

Lesley Strathie: I certainly think we do, but we have a huge programme of change to bring on board over the period. Let me accept that as a challenge and let me agree to take it away and look at what we could do to move it faster. It is not just about putting the telephone in. It is all the places that use our numbers, that publish them right across Government and elsewhere, so when we move a telephone number it is quite a big deal for us in terms of cost and the amount of letters, and so on.

Q235 Mark Garnier: What is your revenue from 0845 numbers?

Lesley Strathie: Sorry?

Mark Garnier: How much money do you make from having an 0845 number?

Lesley Strathie: We don’t have any revenue from 0845 numbers. That is something that has been explained several times before.

Q236 Mark Garnier: That is absolutely right, is it? I think I saw an e-mail this morning or something going around. You do not charge 2p a minute?

Lesley Strathie: No.

Mark Garnier: Absolutely nothing at all?

Lesley Strathie: No.

Q237 Chair: You do accept, though, that it costs the customer or the taxpayer more to ring on that sort of number?

Lesley Strathie: Yes, and I certainly had experience in my previous business in moving-

Q238 Chair: What concerns me, Dame Lesley, is that 2009-10 report to the Public Accounts Committee, "The Department uses 139 telephone numbers. It plans to reduce this number". It is back to Andrea’s aspirations. How many numbers are you using? This is 2011. How many have you dropped? Do we know? We do not know. Do we believe that we have dropped some? Do we think we have?

Lesley Strathie: No, I did know it. I did know it when I quoted what we were going down to from the 139, I think it was 54, but-

Q239 Chair: You were asked by the Public Accounts Committee to move to the 03 numbers as soon as possible, and that was 09-10. Do you see where we are coming from? There is a very good football manager, I think it is Ferguson, who was asking a player to do something and the player said, "I’ll try" and Ferguson-a Scot like yourself, Dame Lesley-said, "In my book, you don’t try, there’s not such a word as ‘try’. You either do or you don’t". Are you going to reduce these 139 numbers and when? Are you going to move from the 0845 or whatever number to 03 numbers and when?

Lesley Strathie: I have already accepted the challenge, Chair, but we do not have a single telephony platform. I have experience of this, of actually going down to a single telephone number and putting an entire contact centre service for Jobcentre Plus on to 0800, and we have not-

Q240 Chair: No, but you said to the Public Accounts Committee you would do it two years ago.

Lesley Strathie: Not two years ago.

Chair: Well, 18 months ago, then. We will split the difference.

Lesley Strathie: We will do it within the resources available. The chief finance officer and I will do that.

Q241 Chair: But that’s no good, is it? That is no good. Andrea has put a figure on it. It is no use coming to a Select Committee and promising you will do something or you think you will do something or you are keen to do something. When will you do it? Can we have an end date? There is a note coming from young David. What is he saying? "Bail out as soon as possible."

Lesley Strathie: No, he has confirmed that when I said I thought we were going down to about 54, we have reduced the 0845 numbers by 60 from the 139. That is factual.

Chair: You have taken it down to or you have reduced it by?

Lesley Strathie: We have reduced it by 60 so far.

Chair: Since when? So far?

Lesley Strathie: Yes, in this last year.

Q242 Chair: What about the move across to cheaper numbers?

Lesley Strathie: I have already made clear that I can’t answer it. I have agreed to take it away and I have agreed that if we can do that we will, but I can’t guarantee we can because it is a huge investment.

Q243 Chair: You see, Andrew read out a letter. When I came in today, the Daily Mail had sent me a pack of letters; you know they have been doing stuff in Money Mail. The letters-if I had time to read some of them out-are just ridiculous: people waiting 30 minutes, people phoning and phoning and phoning, writing and writing and writing. The elderly are having the toughest time with this.

Let us take your percentage of calls answered. Chairman, you are running a business and you start up a call centre in 2005-06. There is an industry standard, not as you quote 90%, but the National Audit say 96% is the industry target. You start off at 37%, so two-thirds of the calls are not answered when you start. If we go one, two, three, four, five years later, you peaked at 75%, and you are back to 40%. Now, I do not care whether it is 75%; that means a quarter of people are not getting through, and the industry standard is 4%. If I send in a striker and after four years he has not delivered, what do you think I would do with him? Do you think I would continue believing, "Just let me go, carry on, because I’m going to do it some time"? You would not do that in real life, would you?

Mike Clasper: Chairman, I think Alex Ferguson would have got rid of him, yes.

Q244 Chair: Yes, he would. Is that the answer?

Mike Clasper: No, I don’t think it is.

Q245 Chair: Why? These are many millions of people, many of them elderly, and because of their particular circumstances we have sent out letters asking them, amazing numbers, to pay thousands of pounds within a month, via letter. They want to speak to somebody to get reassurance, or to tell them their side of the story, but they cannot get through. That is not something we can sit and wait for. We have waited five years.

Mike Clasper: I think, Chairman, you read out we had progressed to 75%.

Q246 Chair: No, Michael, that is not so good, because I anticipated that. Your first year went up from 37% to 68%: commendable. If you had done the same the next year, we would be at the industry standard. You put on 2% the next year, and then the next year you dropped 13%. If you can’t get somebody to run a call centre, then how on earth are you dealing with the rest of the complicated stuff?

Mike Clasper: I have limited previous experience of call centres. The productivity in our call centres has been consistently improving. What I mean by that is the people-

Chair: It is not showing in results.

Mike Clasper: The other part of running a call centre is what you would call demand management. If you look at what has happened in the last year, the number of calls went up 10%. We did not expect that. I will come back to that in a second. The number of callers went up roughly 10%, but the effect of that is to increase the number of calls. I don’t know whether I have the exact right answer, but it is to go up 70%.

This is not about running the call centre, it is about managing demand. We have failed to manage demand because we did not anticipate the scale of problems when we started up the new system. I am sorry to go on about it, but timeliness-

Chair: No, we are more sorry. I will bring Andy in because we are going to break in 14 minutes for a vote and Andy and Mark have something, and then John has a very serious subject. Well, I am not suggesting you are not serious.

Q247 Mr Love: I want to return to resource management. Since 2006, HMRC has dropped from 92,000 to 69,000 employees. During that time £1.1 billion has been made in savings, yet in your submission you said that that was without overall negative impact on performance. Would you still stand by that statement, Mr Clasper?

Mike Clasper: What I would stand by is the fact that, as I said right at the beginning, the intervention yield, bringing the money in for the country, has significantly improved over that time period. I don’t think associating precisely the scale of the problems that we have been talking about for a long time, which is this customer service issue, is a function of it or would be solved by throwing massive resources at it. I think the solution lies in what we have been talking about, which is getting the system timely, getting the unnecessary contacts down, and making sure that in all channels we deal with people quickly and efficiently. That is the way to do it, and I am afraid our problems in solving the legacy issues of the past have taken us off that path.

Q248 Mr Love: I take from that that you would not wish to justify that statement that performance has not suffered, especially after all that has been said so far about the difficulties that you face?

Lesley Strathie: I think performance in terms of the Department’s core business is to collect the revenue and pay out the benefits and credits that we do. As Mr Clasper said right at the start, customer service and employee engagement are the two things that we are not proud of and we know that we have to do a lot better. I think the point is we are on target to make a total of £1.4 billion of savings by the end of this year, with that staff reduction of 29%, and manage the machinery of Government transfer of 4,600 to the UK Border Agency, increase our revenue yield and reduce fraud and error in benefits and tax credits at the same time. I suppose for us that is performance, but we know that we are not delivering the kind of service that we want to deliver to everybody.

Q249 Mr Love: I think we will reach a point of agreement, which is that the word "performance" is perhaps not the best one to use because it would encapsulate the services you are providing. After all, there are millions of people and businesses out there that interact with you, and they certainly do not feel, and I think you have admitted that they don’t feel, as if they have received the service that they are due.

Lesley Strathie: Absolutely.

Mr Love: So that aspect of performance you accept, but in the other aspects that you have touched upon you feel that performance-

Lesley Strathie: Yes.

Q250 Mr Love: You have already indicated that there are significant further savings that have to be made, and I will come to the issue of compliance where some money has been put in, but let me choose the area of business. I don’t know which one to ask, Mr Hartnett or Dame Lesley. It received over the last five years a significant increase in funding, even though the whole of the department was going down, yet one would suspect that over the next five year period it will receive a significant reduction. Are you happy that you will still continue to be able to deliver? You are being asked to deliver £7 billion additional tax. Are you satisfied that you can do that with the business section facing significant reductions?

Lesley Strathie: I think that the change programme we have lays out broadly what percentage of reinvestment will be used in each part of the business. On the additional £7 billion, we expect only 5% of our investment to go into that area this year. The biggest chunk of our investment-I think about 60% to 65%-will go into small and medium-sized companies and into evasion, because that is where half the tax gap is, rather than what we have been doing for the previous years on large business.

We will be extending our large business model down to the next 8,000 companies from the first-tier large business. Clearly, we can’t give a one-to-one customer service relationship there, but we have a point of contact for those businesses, so we are building on that model.

Dave Hartnett: Mr Love, can I come in just very quickly, if I may? One of the big strategic changes for us in relation to compliance, more with the smaller end than the large end, is that a smaller department cannot continue to constantly engage with smaller business on a one-to-one basis, so we are developing approaches. You may have seen in the media some reference to our campaigns, where we are developing a one-to-many approach with a number of pilots so far: offshore compliance, doctors and, most recently, heating engineers. It is early days, but it looks as though the one-to-many approach will make a big difference to us going forward.

Q251 Mr Love: I take that point on board. Let me come to the issue of compliance because I wasn’t sure where your focus would be on compliance. If you look back over the last four or five years, there has been a cut year on year of just over 7% in compliance. Now you are going to put £900 million back in. Would I be right in interpreting that as the holes started to appear in your compliance effort and you had to plug the holes, so that is why you have been given the £900 million?

Lesley Strathie: No. No, I would absolutely refute that.

Q252 Mr Love: Can you tell us, then, what does a 7.1% real-terms cut over five years mean in terms of funding? Would it be £900 million by any chance?

Dave Hartnett: Can I give you some numbers, Mr Love, which may help?

Mr Love: That would be helpful.

Dave Hartnett: Since 2005-06, across the department, we have increased compliance yield from £7.4 billion to £13 billion, which I think is a pretty significant increase. At the same time we have reduced compliance resource by around 20%. I think the message of that from 2005-06 onwards is we know how to do more with less; different techniques, different approaches and, above all else, much better risk management over the most recent years. Our risk engines now are very sophisticated indeed. We can profile individuals and businesses to great effect, and I think that will stand us in good stead going forward.

Q253 Mr Love: Mr Clasper, as you know, all other departments have faced roughly a 25% decrease because of the additional investment being made. Yours is somewhere around 15%.

Mike Clasper: That is right.

Mr Love: Did you or have you ever had a conversation with the Treasury that said, "If you reduce us by 25% we simply will not be able to operate effectively at that level of funding"?

Dave Hartnett: I was going to come in.

Mr Love: I was asking Mr Clasper because he has special responsibilities as the chairman.

Mike Clasper: Thank you.

Dave Hartnett: Sorry, go ahead, Chairman, and I will follow you.

Mr Love: Has there been a conversation of that nature?

Mike Clasper: There has been a conversation about the fact that we needed the investment that was agreed in order to improve the intervention yield, to take it up from the 13 to the 20.

Q254 Mr Love: We could say that you had a conversation that said, "It would seriously impair our ability to collect the tax level you are asking for, if you reduce us by 25%."

Mike Clasper: You are putting a lot of words into a conversation that I did not use, but what I would say is that we were passionate that there is a tax gap we can close and that if we were at 25% reduction we would not have been able to close the tax gap any further, but with this reinvestment that we have talked about we will close the gap by £7 billion a year, which on any account is both an excellent return for the taxpayer and the right thing to do for business. For me, this issue of closing the tax gap is not just about bringing the money in.

My father is no longer with us, but he ran a small business and he paid his taxes when they were due, and it was in the small building industry. There is a really big additional issue when people do not pay their taxes, which is that the person who is cheating gets more business because he undercuts the honest trader. If you like, there is a family reason why I believe passionately we should be going after this, and we got the money that we asked for to do it.

Q255 Mr Love: I am always tempted-other people have asked me this question and I am sure it has been asked of you before: why £7 billion? If we invest £900 million to produce £7 billion, wouldn’t investing £1.8 million produce £14 billion? But I do not want you to answer that question.

Mike Clasper: I could if you wanted me to.

Q256 Mr Love: What I want you to do, finally, because I know that one of our other Members will go into this in more detail, is just to tell us the basis of the calculation of how you reached the figure of £7 billion as an increased tax take?

Mike Clasper: Do you want to go through item by item? Because we can.

Mr Love: If it is going to take too long, maybe you can write to us.

Simon Bowles: Very briefly, if I can speak on this as I led the spending review for HM Revenue and Customs on behalf of Lesley Strathie, we demonstrated from our past record that we could deliver efficiencies to meet the 25%, which was the constraint we operated under, but we also demonstrated case by case how £917 million over the period could deliver that run rate of £7 billion. It was not a high level, "Here is £907 million". It was built up area by area across each strand of the business.

Q257 Mark Garnier: Mr Clasper, can I pick up on one point you mentioned? This £900 million being invested into closing the tax gap, did you actually say it is going to increase revenue by £7 billion per year?

Mike Clasper: Yes.

Lesley Strathie: By 2014-15.

Mike Clasper: 2014 end year position.

Q258 Mark Garnier: So it is not £28 billion over the four years?

Mike Clasper: No, it builds up over time.

Dave Hartnett: It is about £18 billion over the spending review period.

Q259 Mark Garnier: It is £18 billion. Let me just also be clear. You are putting 5% of the resources into tackling big businesses and 60% of the resources into small business. I am not sure if I caught that right. Basically, of this £900 million, that is where the money is going to go.

It is quite an interesting point because I was at a conference this morning with ARC-your union-where Mr Graham Black, who I am sure you know very well, was talking about exactly this point, which they are very enthusiastic about. They do argue the point to a certain extent that if you spend £1.8 billion, you will get £14 billion back. Somebody was going to answer that point. Do you want to address that?

Dave Hartnett: I am happy to lead on this. In order to get the £7 billion, we are going to be doing lots of things differently from before. There is a capacity issue: as you add more and more ideas, can you deliver them effectively? I think what I said earlier on one of the questions is that if we start feeling that they are all working and all the changes that we are going to go through in order to deliver that £7 billion are all working extremely well, I think we have a very powerful case to go back and say that more might deliver more.

As I also said at the beginning, one of our issues is managing change well. It is a fabulous return, as any of us can work out. To deliver that scale of improvement, we will not be able to do it by doing things only the way we have always done them. We have to deliver change. I think there is this balance between our capacity to deliver change, our certainty that the changes are all going to work, and then, if they all do work, the ability to go back and say we think we can get even more with more money. I can say this: we did not ask for more money as a leadership team because we recognise that capacity issue.

Q260 Mark Garnier: How big do you think the tax gap is?

Mike Clasper: I think it is around £40 billion but I will defer to the expert on my left.

Dave Hartnett: It is an estimated £42 billion.

Mark Garnier: £42 billion is where you think it is?

Dave Hartnett: £42 billion is our best estimate.

Mark Garnier: I have seen some at £70 billion, some at £120 billion, £140 billion.

Dave Hartnett: £120 billion proportionately is where Mexico would be. I don’t think we are Mexico.

Q261 Mark Garnier: One of the points that was raised this morning, which I thought was quite interesting was that there is a lot of tax that could be paid perhaps by the bigger businesses. We had a lot on Vodafone earlier. That is where you are going to get the big hits but, of course, you then have all the other smaller businesses. You have the builders who have been rolling over your dad by offering 20% discounts for cash. Surely it is much more capital intensive to go after those smaller businesses?

Dave Hartnett: Absolutely. It is more capital intensive. I will remember the sentence.

Sitting suspended for a Division in the House.

On resuming.

Chair: Thank you very much for your patience. We had two votes but we have saved a bit of time. Mark, are you ready?

Q262 Mark Garnier: Yes. Sorry, we were rudely interrupted. Good to be back.

Dave Hartnett: I was halfway through, I think.

Mark Garnier: You were. Can you remember what you were answering?

Dave Hartnett: I do. I think, Mr Garnier, the proposition was that dealing with small and mid-sized business is capital intensive.

Mark Garnier: Yes, it is.

Dave Hartnett: I think-tell me if I have this wrong because I am going to answer this-there was an implication that we might make more out of big business.

Mark Garnier: Yes, that is exactly right.

Dave Hartnett: If I can pick that up again, we would not dispute for a second that small business is capital-intensive compliance, which is why we are trying to change things. Let me give you two or three illustrations. The first is by suggesting to Ministers that the law is changed. What sort of law has been changed recently? Massive penalties now, doubling the penalties in certain circumstances for people hiding money offshore. Small businesses that are cash rich sometimes do that, and-

Q263 Mark Garnier: But not a builder’s firm.

Dave Hartnett: Sorry?

Mark Garnier: Not a builder. Or do they? Do builders now have Jersey-based trust companies looking after their affairs?

Dave Hartnett: There is some of that, certainly. I was thinking more in terms of-you have seen some of this in the media-hiding money in Liechtenstein, hiding money in Switzerland, hiding money in havens, which we are now addressing quite forcefully.

I think as well the whole new approach to penalties is helping because they are behavioural penalties in the way that they work now. They are higher: the worse the behaviour in relation to compliance, the more. It is all focused on this issue of how we change behaviour, because we can’t manage a one-to-one approach.

Finally, I touched on with Mr Love the big risk engines, our Connect risk engine, which is like a big hopper, we pour stuff in and then profiles come out. That is helping us, too, with the one-to-many approach.

I will go on to big business and if I may, I will draw Mike in to say something. There is a tension, if you like, in relation to big business. The whole process of the UK moving to a territorial tax system will mean that there will be some reduction of tax, I think, in the UK and some reduction in compliance. Reform of CFCs, which as a tax administrator I think is excellent in terms of getting business into the UK, will have an impact as well. Our risk management in relation to big business is also probably better than it has ever been, and we are putting more people into tackling avoidance. You may have seen last week, for example, the double-dip leasing scheme that was stopped. We had only seen that a couple of weeks before and were able to move very fast, so we are improving our intelligence sources in relation to that sort of thing.

One other thing that applies to big business, and I should have said it to Mr Love earlier on-sorry, it was Mr Norman. I am not going to get very technical, but the way that group relief used to work for corporation tax meant that a large group of companies could move under-statements or technical adjustments or anything around the group to cover those with group relief. It is one of the reasons that they were mainly able to escape penalties. That law has been changed as well, so they can’t do that any more. Our risk engines for big business, which are largely human but not entirely, are seeking out avoidance all the time. Where we can counter that it is usually on a one-to-many basis and will bring in quite a lot of money. I think Mike wanted to add something.

Mike Clasper: Yes. On the discussion around avoidance versus evasion, I want to make a point about evasion in the context of large businesses. I can make this point because I sat as a director of two plcs in the FTSE 100, and was chairman of the audit and risk committee of one of them until I joined HMRC. Evasion, which implies dishonesty and fraud, is a massive issue for a business. If you are caught with fraud and evasion, it is not about fines and so forth. Everybody on the board is probably in the position of losing their job and the company will go down. There is obviously going to be some case somewhere in the world where this is not true, but companies will not evade. What they will do is construct their affairs in a certain way that they think legally reduces the amount of tax. Our challenge is, first of all, to block some of those ways by things like disclosure regimes and so on, and then, secondly, when they interpret what they have done as legally meaning that they do not have to pay the tax, challenging that interpretation and getting the money in. There is this thought that it is laughable that companies will not evade tax, but the issue is they will not commit fraud because of the consequences.

Q264 Mark Garnier: Can I just come into this? It is quite an important point because there is a lot of talk about tax avoidance. What is your definition of avoidance?

Dave Hartnett: I brought it with me, if that is all right.

Mike Clasper: Thank you, Dave. I was going to try.

Mark Garnier: My goodness me, you look relieved.

Dave Hartnett: There are so many, Mr Garnier, but the two we favour are planning involving a tax position that is tenable, or appears to be tenable, but has unintended and unexpected tax revenue consequences. The second one is taking a tax position that is favourable to the taxpayer without openly disclosing that there is uncertainty whether the significant matters in the tax return accord with the law. Those are the two practical interpretations of avoidance that we use and we find they work pretty well. They are interpretations that we devised which, I am really proud for HMRC, have gone round the world.

Q265 Mark Garnier: Yes, that is very good. David Gauke was asked, in a written question from Andrew George, to define it, and he said, "Taking a view of the tax treatment of a transaction that is tenable but has tax consequences that were not intended by the legislation", which is what you said. He went on, "Tackling tax avoidance is essential and we, the Exchequer, make every effort to do so". I think it would be very helpful if you were to expand on that because, according to written figures on behaviours driving the gap, avoidance is 17.5% of that £42 billion, which is quite significant. Further down, the list states that evasion is 17.5%; legal interpretation is 15%. How is legal interpretation different from avoidance after what you have just said?

Dave Hartnett: There can be circumstances, indeed there are circumstances, where there will be utterly different understandings of what the law means, which is one of the reasons why we will litigate sometimes if we cannot reach a shared conclusion. They will not be interpretations that stretch the meaning of the law or that involve carrying out transactions in a way that bends the law in some way. We regard those as avoidance. These are pure technical issues. A good example would be what does the word "payment" mean? Tax litigation is littered with cases around what the word "payment" means in particular circumstances. They tend not to be avoidance cases. Some are, but it is literally around the meaning of the word. That is the legal issue, as opposed to bending the rules.

Q266 Mark Garnier: There are some wider issues on tax avoidance, because surely one of the problems is that we have a ferociously complex tax system in the first place. What discussions are you having with the Chancellor to try and simplify this?

Dave Hartnett: Most of our conversations now about simplification are with the Office of Tax Simplification. I represent HMRC on the board of the Office of Tax Simplification. The Chancellor-I think I can probably stretch the rules a little to say this-is committed to tax simplification, and we believe in it deeply as well. If you look at particular areas of tax law-leasing for example, the thing we stopped last week-they are fiendishly complex. I think it is a fundamental truth that the more complicated the law is, the greater the opportunity.

Q267 Mark Garnier: Do you feel that you have sufficient resources to pay for the legal boffins you are going to need to be able to get stuck into this?

Dave Hartnett: We have always had a basic principle-we have come close once or twice to stretching it-that where there are legal issues that require us to go outside, we will find the money. In a very large case we took not very long ago, we went all over the department-I hope Lesley does not mind me putting it in this way-to find the money we needed to fund the legal advice, but we did it. We always will.

Q268 Mark Garnier: You are happy that you can get sufficient resources to pay for the A team to meet the A team of the other side, if you like?

Dave Hartnett: Remember, though, we have an A team inside our department. We have some stunningly good lawyers when it comes to dealing with this.

Q269 Mark Garnier: Fantastic. I think there is probably one last thread, a slightly more philosophical one. Clearly, when tax is at an acceptable level, everyone is very happy to pay tax. I think we are all part of the club that is the UK and we are happy to pay our membership fees to get the services we want. But everybody has a line in the sand, I suspect, at which point they will start looking to adopt avoidance measures and then, perhaps, evasion measures. If you look at something like the tobacco industry, which I think in 2001 suffered a £3.5 billion estimated tax avoidance through smuggling and all the rest of it, there is an argument that the higher up you push duties, the more you create the opportunity for a black market. Do you think that is a fair comment?

Dave Hartnett: I think it probably is. May I just take issue with one word only? I will do it very briefly. I think what you have described really is evasion and fraud rather than avoidance.

Q270 Mark Garnier: I think it is, but my point is about creating opportunity; if you buy a 40-foot container load of Silk Cut or something in the Ukraine and smuggle it successfully into the UK and sell it at half the price, you are going to make £1 million on a container load. That is quite a valuable commodity. It is a light commodity. It is an easy one to push around. I am not specifically getting involved in facts, but it illustrates well the point that the more you push a consumer, the more they are going to be prepared to do that. Most consumers, I think, would be perfectly happy to pay the duty on cigarettes. Some would maybe buy a few more cigarettes at the duty free than they would normally have done because the tax is getting quite high, but when you have people buying in street markets what are clearly illegal cigarettes and things, it is the behaviour of people who feel possibly they have been pushed too far. My question revolves around that fact. Do you think that high levels of duty, high taxation and that kind of stuff, is going to push people increasingly into that very grey, and indeed illegal, area? Do you think, therefore, that there is a responsibility by those who set the taxes to have a mind towards that?

Dave Hartnett: Let me tell you about our experience, if I may, because I am not sure I can properly comment on the minds of those who set the rates. Our experience is of two things, and I will do it by relation to tobacco, if I may. The first is that cheap offerings from India and China and other places-we and our colleagues in the Border Agency stopped a big consignment, I think it was this morning; it might have been last night-really test the resolve of people all over the country who might be prepared to pay in the way you described, but actually see an opportunity.

The second thing is coming through in our work in behavioural economics: tax rates, compliance costs and all these things have a big effect on how people are going to behave. We are starting now, more significantly than we have ever done, to tailor our responses to behaviour, but I don’t think there is very much between us in what has been said. Sorry to be so careful.

Q271 Mark Garnier: No, that is fine. I think my final question comes back to what Mr Love was talking about earlier-the fact that we have seen a 25% cut in your budget for the next four years. You have obviously had a significant cut in your budget in the past. You have a hand-back, which is £900 billion, which gives you an effective 15% cut. Do you feel sufficiently resourced to not only tackle the tax gap but also to deal with the other problems we were discussing earlier, which are poor morale, call centres and all the rest of it? Do you think you can cope with that?

Lesley Strathie: I think it is a huge change programme and the total capacity to manage the change is what I see as our biggest risk. Without going over the ground about employee engagement and customer service levels, I think we recognise managing change through that, but given how we are going to deliver that additional £7 billion and the skills required, the specialist skills that we will be recruiting into, I believe we have the resources to make the change. Because this is very much about reshaping; it is not just downsizing. It is about having skilled investigators on evasion. It is about 20,000 extra visits to small and medium businesses to help them in record keeping. There are lots of specific changes to the work that we are doing and I feel that we do have the resources.

I also feel that we have evidenced our case to the Treasury to such a degree that they have recognised that if we continue to show the delivery in revenue that we have done, they will be open to strong business cases for further investment if we can create the capability to deliver against those. In some of the areas you were talking about, Mr Garnier, like tobacco and alcohol, there are fast-moving risks. We constantly change the methods in which we manage smuggling in the country, but we have had huge success with our fiscal liaison officers abroad, as well as our work with the UK Border Agency, in reducing tobacco smuggling in particular.

Q272 John Thurso: I have one quick question to Mr Bowles, following the discussion earlier about telephone numbers. The 0845 does not cost you anything; you do not get anything from it. But if you move the numbers to the other numbers that we discussed, there is a cost to HMRC. Have you made an estimate of what the cost to the business would be if you were to move completely away from 0845?

Simon Bowles: I do not have that estimate to hand but I will see what I can write to the Committee on that.

John Thurso: That would be useful because obviously at the moment, with the cost being on the consumer, there is no particular incentive for it to come down. If it is your cost you might start to manage it.

Simon Bowles: I take the challenge, as we did earlier.

Q273 John Thurso: Can I come to Mr Clasper? I want to ask you about the governance on the board, because you obviously lead the board. According to the website, the board’s main role is to develop and approve HMRC’s overall strategy, which you described earlier so we do not need to go there again, but presumably you are now monitoring it to ensure its delivery. How do you monitor it and what measurements do you use?

Mike Clasper: I think the other two roles are, first, to monitor the delivery and, secondly, to make sure that in areas of classic corporate governance we have the very highest standards, whether that is auditing, financial, health and safety, and so on.

We have a series of management information measures that go through the leadership team that Lesley leads. That is looked at once a month. Or is it once a fortnight?

Lesley Strathie: Once a month.

Mike Clasper: Once a month, and the same numbers and the same monitors come to the board. They are grouped in six areas. One is progress on closing the tax gap. The second one is on the customer experience. The third is on whether our cost base is sustainable, so that we are running the ship efficiently. The fourth one is in areas of our professionalism-things like data security, whether our staff are behaving in the right way in terms of integrity of the system, not leaking and so on, and measures against things like incidents that the Information Commissioner sees.

We have two further areas that are related to how well we are using our IT systems to deliver a better service, and how well we are using our people to deliver a better service. It is no surprise that on four of those we are doing reasonably well to very well, and on two of them, because we have gone round it several times, we are not doing as well as we should. Underneath each of those broad groupings there tend to be between five or six to three or four specific numerical type measures; Simon will go through all of them if you like. Between three and six measures are reported on monthly, checked as consistent and sensible by the leadership team, and then the whole board gets the data.

Q274 John Thurso: I noticed transparency on the website. Do you publish your board minutes?

Mike Clasper: Yes, we do. They are published.

Q275 John Thurso: What appraisal do you undertake of individual board members and the executive committee, and of the board function as a whole?

Mike Clasper: Let us take the board function as a whole. We have had reviews of the board I think effectively once a year since it was created. In the first year, we had a fairly light review. We had interviews by John Spence, who is the chair of the audit and risk Committee. He led a series of conversations with all the board members talking about effectiveness, which is the light version of what happens in the corporate world. Recently we had a review done by somebody from outside to go through the same process-but obviously with the benefit of not being a member of the board-about how we could improve and how we needed to move on. That is how we assess the overall board, and we are about to make some reasonably minor but sensible adjustments, to a smaller board and less frequent meeting.

In terms of the non-executives on the board, I take the role as chairman of getting feedback from the totality of the board, and from Lesley and the executive, about how well they are contributing. I do a performance interview with the non-executive members. When it moves to the executive members, Lesley obviously takes the lead. She counsels the board, and often counsels the board on the performance of the executives who sit on the board or sit on her team.

At the moment, as I said earlier, we are going through a process to improve the leadership of the whole organisation. So a similar exercise is being done with the people who report to the people who report to Lesley, and both I and two other non-executives have sat through it to make sure that the process is being done both thoroughly and fairly.

Q276 John Thurso: I remember a quote from a leadership lecture at Cranfield that said there were only three things a leader has to do to be effective: one is to have a vision; two is to communicate it; the third is to ensure the resources are there for it to be effectively implemented. Of course the chairman’s role is to ensure that the leader is doing that. Are you satisfied?

Mike Clasper: I am very, very confident in the top team. Thinking of those three things, I am both confident and proud of the strategic thinking that has gone in. It has been tested by two Administrations and intensively tested by the Treasury in the process for the spending review. I think we get a big tick there. In terms of the resources, I think we now have the resources and the plans that fit the objectives and ambitions that we have.

On the middle one, I think the current team has all the skills, and in a sense the confidence in the direction of travel, to be able to communicate well. It is a bit hard for me to say but coming in when I did, you would not think that that communication had been done well in the past. It is difficult for me to assess why it had not been done well in the past but of the three things you said, it is as good as any three things around leadership. I would say the communication one was a failing in the past and something we are definitely going to fix.

Q277 John Thurso: I am going to come to Lesley in a moment, but this is my last question for you. The vision that was published on 3 November 2008 is, "We will close the tax gap. Our customers will feel that the tax system is simple for them and even-handed, and we will be seen as a highly professional and efficient organisation." We have had evidence that the tax gap is not closing. I think you would agree we have had quite a lot of evidence that our customers don’t feel the system is simple and there is quite a lot of evidence that you are not seen as a highly professional and efficient organisation. You probably get a tick for being even-handedly awful with everybody, but the others? You are expressing satisfaction. I don’t think it is terribly difficult to run through that list. If I was still at Terra Firma or something like that, or BAA, I might not allow that to happen.

Mike Clasper: On the tax gap, there is the fact that the interventions by the department have gone from £17 billion to close this year somewhere between £13 billion and £14 billion, so I am sorry but I think I need to correct you. I think we get a very big tick on that one. In terms of even-handedness, although you say that obviously the level of service is an issue, I think we should be proud of, and I am proud of, the way that the people in the department deal with people in an even-handed way and there is no bias in the system.

I think, feeling simple, we are obviously failing them. We have talked about that and we are not proud of that at all. If I look at the word "efficient", we have made hundreds of millions of savings and reduced the size of the organisation dramatically and yet delivered a higher intervention unit, so I think we get a tick on that.

In terms of the progress that we have made on data security, the year I joined HMRC we had six incidents that went to the Information Commissioner. That is not a good record at all. Obviously, behind that are a lot more issues if you are getting six that are as big as that. The last two years we have had zero. So I think we get reasonably good marks on everything other than the one that is really disappointing for us, which is the sense the customer feels the tax system is not simple for them.

Q278 John Thurso: Dame Lesley, if we take the vision as agreed and we look at the business model that has been used to execute it, I picked up some of the things that have been said about call centres. People are given a script to follow. There were other things about no-value calls, which is a way of saying, "Customers are ringing us and we don’t quite know why". You talked about improving face-to-face contact, doing more with less, and so on. The all-customer satisfaction level in 2008 was 72.8%; it peaked in March 2010 at, I think, just over 76%. It is now down to 72.5%. If you look at the graph it is pretty flat, with a little bump in the middle. I would argue very strongly that any service business that was content to even think about a low 70s score was just not in the ballpark. High 80s or low 90s is where certainly any hospitality business would want to be.

I look at the basic move away from a people-based organisation spread round the country to a contact call centre-based operation, and I ask: is that a business model that can succeed?

Lesley Strathie: I take all your points as read; as far as satisfaction levels are concerned, I think the first thing I would say about the vision, and I don’t need to defend it, I wasn’t part of its creation but I am proud of it and it guides-

John Thurso: But you own it.

Lesley Strathie: I own it, exactly. It sets out the organisation we want to be. There is no claim in the vision that that is where we are, but it is very much where we want to be. I think for many customers in the various business taxes there are a lot of services, as evidenced by 6 million on self-assessment, and so on, where service has definitely improved. The areas where we have fallen have generally been in our agents, but we track that. Every month we discuss it at the performance committee and look at what it is.

In terms of the contact centre business, it is part of the business but everything is not on the telephone. I think that the question we have all been asking ourselves as we planned for the spending review is what is the service we want to offer? What do our customers tell us they want from our service, and how do we get that right as we have to shrink our estate further? I said some of these things earlier.

I sat in one of my offices this week where I saw an excellent face-to-face inquiry service, excellent meeting and greeting, then directing customers to the right telephone for the service but encouraging the customer to come back if they weren’t satisfied with the service. Some people are reticent in the first instance.

The Government strategy is digital; not the telephone. It is that we move as much of our service online and then we provide assistance for people who can’t use online, which was part of my concern about signing up to a massive investment in a single telephone platform that we would need for some of the changes. Because that is the strategy, I think that we have to provide the services that allow people to engage with us to meet their need. Particularly with an ageing population, and as we cease to be in every small town, I think that involves more outreach, more home visits. It is service we want.

Q279 John Thurso: I am interested because a whole range of financial service businesses, and other service providers, are in the process of abandoning the model and reverting back to a more localised base, having discovered that while you can have efficiencies in a cost base, your actual yield goes down. I just wonder if you are still five years behind the curve, and you are going into this when everybody else is coming out of it.

Lesley Strathie: Having spent most of my life delivering labour market policy or creating it, I think we all forecast that when those jobs went and that change occurred, lots of it would come back. We were forecasting that before it left the banks, left these shores, and so on. I think we are well aware of the model in creating the change. I am not saying that HMRC did all of that brilliantly, but I think it does come back to now, and that for those people who want to use the phone we deliver a good service. For those people who want to do it electronically, the biggest complaint I get when I go out and meet business and individuals is, "Why can’t I communicate by e-mail?" They don’t say to me, "Why can’t I have an office here or come in here?" or the phones. They actually say, "Why can’t I just do everything on email?" That is the biggest concern.

Q280 John Thurso: If I may just continue this, and I will certainly come back to you. I thought one of the most interesting submissions we received is a longish thing, so I will only pick out the core of what it says: "HMRC appears to have adopted the wrong strategic plan for undertaking its activities. It has established inappropriate key performance indicators, which appear heavily focused upon crude measures of labour productivity and which ignore the social significance of tax collection, and which also undervalue the important and highly significant contribution that experienced members of staff can make to the overall effectiveness of the organisation".

Because I am sure Retford is going to be talked about shortly, I will get in first with Wick, which since I wrote to you asking you not to close it you have speeded the closure up. I was thinking maybe I had better not ask a question because it might be closed next week. You have a team there that is doing a very good compliance job on film partnerships, which is a particular area that I am sure Dave Hartnett is interested in. Because they are there, and they are competent and trained, a lot of people can go and get a very good and efficient answer from them. The next tax office is a four-hour train journey away, or a three and a half hour bus journey away, or a two and a half hour legal car journey away. Is it right that a quite substantial community of people-small businesses and individuals-have the choice of either complying with the electronic and the phone, or if that doesn’t work they have that level of journey to talk to somebody, if that is their choice? Or are we saying that, no, it is not the right of everybody to be able to access a tax officer at some point? Because the key point is the fact that they are part of a compliance team doing a valuable job, which will have to be replaced somewhere else-that work will not stop-and they are able to offer that at a very low cost and very effectively.

Lesley Strathie: At the last count I think we had about 20 colleagues in Wick.

John Thurso: Clinging on by their fingertips.

Lesley Strathie: Indeed, those individuals have been invited to apply for severance, and that is a process we are going through. We have made a commitment that we won’t close before 2012. As you know, all this was consulted on and decisions were made on where we located. We have been working very hard. I will deal with the staff first. We have been working very hard, including with the Scottish Government, to look at how those skills would not be lost for people who choose to stay in the organisation. I think we are also committed to finding a way of delivering a face-to-face service, but there is the need to reduce our estate costs and to vacate the premises. I-

Q281 John Thurso: Forgive me-just a small question on that. I believe that property is part of the PFI arrangement. Nobody else is going to take it, so you will be going on paying it until the end of the PFI.

Lesley Strathie: No, we won’t.

Simon Bowles: We have the ability to exit approximately 60% of our estate under the steps contract.

John Thurso: You did better than DWP, with the job centre.

Lesley Strathie: No, we give 12 months’ notice and then we can vacate.

John Thurso: They are still paying.

Lesley Strathie: Yes. We do realise the saving, but I do understand the labour market, I do understand the jobs point, and I also understand the service point. As I say, we are working through the individuals first and when we come to the end of that process we then look at what service is needed in Wick, and how we provide that, because we want to deliver more and more in partnership with joined-up services.

Q282 John Thurso: Before I came in I tied a knot in my hanky and said, "You will not mention Wick", but, John, it was your presence that brought it out in me. It is a good illustration, but the point I am making is not specific to Wick. It is about the way you do business across the whole country and whether in fact a big call centre model where, of necessity, you have lower skilled, and lower paid, people following a script, as opposed to a knowledge-based technically driven work force in a more disparate set of offices, is not actually a more effective way. Because if you do have it wrong we will find out too late to do anything about it and after we have missed the boat on the tax take.

Mike Clasper: What we are trying to do is follow where the taxpayer is going. This is an apples for apples comparison. In 2006-07, in inquiry centres face to face, versus where we are today, on the number of people coming into those places, the footfall had declined 40%. Although there are still lots of people going into those inquiry centres, and Lesley has already explained the efforts we will need, outreach and so on, the number is going down and down and down every year. The number of people who are going online to file self-assessment is going up and up and up. Approximately 550,000 filed self-assessments on the last day, and we delivered that service without it going down for one second of that last day.

The bit in the middle is the contact centres, and getting people who are choosing to use the phone to call on a valuable call. We do know why they call us, and if it is a wasted call it is often our fault; it is because we are not on time and all those things. I think what you have to do is follow the way the taxpayer wants to go and, as Lesley or Dave was saying, it is e-mail. Lots and lots of tax agents have said to me, "We want to contact you with e-mail". I don’t know how we can do that. There are obviously security issues. I think we are trying to follow the customer, not drive the customer.

Q283 John Thurso: The core of my argument, or the point I am putting to you, is that one of the measures I have of your success is what I see in my clinics. If I go back to what happened in the DWP office, and the changes there, around about the time that happened, which from memory was 2003-04, the level of cases that I dealt with on what was previously dealt with by DWP, increased by an order of magnitude of 10 to 14 times. I mean it was a step change, you could see it, and it has continued ever since.

Lesley Strathie: With no improvement?

John Thurso: No. Because I have a wonderful person who works for me, I have some numbers that I am probably not meant to have. I have a work around the system and I go nowhere near the call centre. I have people I can get to and I am not telling you who they are because I don’t want to share that valuable information. If I look at tax, I can foresee that happening as well. I can foresee you not getting them, but I am getting them, my colleagues are getting them, and we end up doing it. So the work is not in HMRC, it is in MPs’ surgeries-not all of it obviously, but some of it; it is in the cost of running Parliament, it is in ministerial time and it is in head office when you have to reply to the letters I write to you about it.

If that is a measure that I have observed in one area where this has happened, and I suspect it is going to happen here, why should I have confidence that this is going to work the way that you are saying?

Mike Clasper: You can look at the online stuff and say-

Q284 Chair: Can I just stop you? You see, I think there is a difference between you and Dame Lesley. I was enormously encouraged by one of the answers to John, which ended up saying she looked forward to appreciating the need for outreach, for even home visits, and so on, but you are on a different tack. I think that is the difficulty we are trying to tease out. That you are almost saying-even Dame Lesley said it-ministerials say, "Online, telephone, and so on. We are going that way", and you are saying that is what people want. That is what a lot of people want but there is a sizeable majority, and they are in your reports, and they are in papers, and we have been spoken to them, who do not want that. Not because they are being pig-headed but because they cannot manage it for various reasons; it could be age or it could be education. There are a number of reasons, and I think the number of older people has been pointed out in terms of demography.

I was encouraged that you appreciated it, but you shrugged your shoulders and I can understand that, "I know that need is there but I have no brass to do anything about it", but you see, while you are building a new Jerusalem there are millions who are bereft at not being able to get a sensible conversation, a decision or a continuing dialogue. They phone up your call centre and finally get through, speak to Kevin, and then a week later, phone the same number and say, "I’d like to speak to Kevin" and they say, "Kevin who?" There is no continuity, no dialogue, and tax is complex.

I would accept all the sort of problems you are having as you are building this fresh system, but you cannot forget that there are a number of people who don’t want that system and can’t use that system. You have closed the offices. You have closed them all over the country. Against that central infrastructure of the computer, the call centre and lines, there is no sign of a human face, where people can wander in and sit down and say, "Look, can you sort this out for me?" It has largely disappeared. When it is there you have reduced the hours. Now that could only be either that you do not value it or you cannot afford it, and we need to know which.

Mike Clasper: There isn’t a difference between Lesley and-

Chair: Why isn’t it happening? Is it because you cannot afford it or you do not-

Mike Clasper: No, I think the important thing is we are moving into a world where the number of people in the group that you are describing-at least based on what they chose to do, not what we chose to do-is declining; the number of people who want that face-to-face interaction. Will there be lots of them? That was your point, Chairman. Absolutely there will. It is just we have to deal with-

Chair: A significant minority.

Mike Clasper: Forty million. A very small percentage is still a lot of people.

Q285 Chair: I don’t know. In terms of special educational needs, Warnock used to say it was 20% of the population and work your education system on that basis. That is a hell of a number of people.

Mike Clasper: No, we have a group. It is part of our strategy that people will always need help. In other words, no matter how clever we are with simplifying it, how clever we are with information, how clever we are with online, they will continue to exist.

Q286 Chair: It is also wanting to speak to a human person and carry on a dialogue with some outcome.

Mike Clasper: I think within that group there are some who are happy to use the telephone, and are using it, but we have to provide the service that we are not providing at the moment. We fully accept that. The second thing is that we have to take all these opportunities for the residual group, which is-your point-going to be thousands and thousands of people.

Chair: Millions. No, it is not hundreds of thousands, it is millions of people and the figures are there in all the reports.

Mike Clasper: Let us not argue about it because we do not know the number but it is a very large number. What we have to do is find cost-efficient ways, because we do have a cost pressure on us.

Q287 Chair: Right, now hold on; just stop there, because that is what we normally get in Select Committees, "We have to find". I have not seen any realisation, until Dame Lesley articulated knowledge of the problem, that you were finding it. That comes back to a question we have asked time and time again in this Committee, it is all right saying you are going to find it, but the old kid that is 76 or 80 that can’t handle e-mail or call centres doesn’t have time for you to wait around and find it. "Go on, he is getting a script. He is getting a telephone script from the call centre."

Lesley Strathie: I believe from all of our customer insight that roughly 25% of the population will always need help around major events, like retirement and bereavement, as a couple of examples, and clearly, while we have been through this transition on PAYE, that is a lot of people of any age, but particularly older people.

One of the things that we planned in the spending review is to build on the work we have done in the voluntary sector and organisations like LITRG. There are a lot of organisations who are much better than us at helping people. We fund £2 million in grant and aid on that at the moment, and we feel that as we focus on service, as I was saying, on what people need-

Q288 Chair: Dame Lesley, you gave them £165,000; one was two years, another one was three years and I think one was four years. That is not even acknowledging the problem.

Lesley Strathie: But what we do believe is that we will focus on the service and meeting the need. I spoke to an old lady from Glasgow last week. When she spoke to her tax office and said she could not handle this, the contact centre said, "Come into Glasgow and we will do it for you". She said, "Son, I haven’t been into Glasgow for years" but we sent someone out to do it for her.

Chair: Yes, very good.

Lesley Strathie: So there are lots and lots of people who don’t want face-to-face.

Q289 Chair: Just to save time, because John has to finish and John Mann has to come in, can you do us a note about how you are implementing a policy that deals with those who, for one good reason or another, cannot use the methods that Ministers in the brave new world think they ought to? Because that would start a dialogue between the politicians and yourself about the pressure that we can put on to get Ministers to face up to the fact that face to face is needed in a tremendous number of circumstances. Can you do that note?

Lesley Strathie: Mr Thurso, before you move on to your next point, having lived through the DWP experience with you in Wick and HMRC, I would be very happy for us to have a conversation on the broader welfare and tax and the service for Wick.

Q290 John Thurso: That is very kind of you. I will not take up the Committee’s time on that. I am trying to be good. My overall concern, which I will just put to you both and not expect you to respond because you have responded on this point, is that I have a serious concern about the business model. I fully accept change. My last three paid employments before coming into this place were to take failing companies and change them and turn them round. So I completely understand. I am not sure if it is easier in the private sector. I think sometimes that can be pretty tough if you have entrenched companies, so I quite understand that. I have quite a fundamental concern that the actual business model is not necessarily correct, but I am not going to be any more right or wrong on that than anybody else.

What I am concerned about is that there are robust and real measures, so that if you start to get that you can say, "Right, time to change course". Because the worry, particularly about public sector organisations, is you get such huge buy-in from everybody round about you, that you can’t find the handbrake when you need it.

If I just leave you that thought, and ask my last question, which is on real-time information. I am allowed to do that, aren’t I, George?

Chair: Yes.

John Thurso: Thank you. The universal credit is only capable of being introduced if there is real-time information, which is a huge benefit as well, because you will be working within a month rather than six or seven years or whatever, so we all accept that. This comes from BACS, that will come from VocaLink, and the information will come through for use of yourselves and DWP. You have a contract with Capgemini that runs until 2017, I think-2015 or 2017-which means that every single piece of IT work has to go through them. Will this new work be subject to that, and if that is the case are you just paying a percentage for something that could be done without it?

Lesley Strathie: A couple of points would be helpful. First and foremost, we absolutely want to build real-time information under PAYE, because payment-on-account systems only operate on maximum information. It is a goal of HMRC to have the information much quicker, be able to keep people’s codes up to date and have fewer under or over payments at the end of the year. The sharing of information with DWP is our ambition for universal credit. Clearly, universal credit will have to deliver regardless of RTI but we are working hand-in-glove to bring those things in. That is why we have to go through all that we have to go through to get PAYE into the shape we want.

In terms of our IT contract with SPIRE, that does not cover new work and there will be a procurement route for what we need in order to deliver real-time information.

Q291 John Thurso: I am slightly worried about your ambition. You are talking about an ambition, but I am talking to Ministers who tell me it is going to happen. How would you rate percentage that at the introduction of universal credit real-time information will be there available to you and to DWP? Will it happen? Percentage: 50:50, 60:40?

Lesley Strathie: I would be a fool to say 100% but that is how I feel. I believe that we can do this.

Q292 John Thurso: You are saying that barring unforeseen it is going to happen?

Lesley Strathie: Yes. I think the biggest challenge for real-time information is data quality, because remember this is not about what we hold. We have gone through that. We went through all that cleansing exercise. It requires a much higher level of clean data than anything HMRC has had a standard for in the past. Bearing in mind how many errors come into the system-as simple as VAT registration numbers, or it doesn’t reconcile, people give employers the wrong NI numbers, and so on. Data quality is key. The other thing is that we have to take 4.8 million businesses with us on this journey. So it is not the technology. From where I sit, that is the least of my concerns in the amount of work that we have to do to deliver.

Chair: We will be sending you some questions on it because we don’t have time to do it tonight. I would underline that this universal credit is important to the Government. We may have different political opinions, and so on, but it is our pledge to deliver it by 2013. If there are any concerns about not being able to do it you will not be thanked for saying it later than sooner. That is the whole point I keep trying to get across to you. We are not daft. We understand the financial pressures you are under. Do not be saints and then get crucified for your trouble. If it cannot be done you don’t have to shout it from the rooftops, but I will be starting to say through the system that there are difficulties here, because I would not want to be the person who cuts across a Government policy and has to take the blame. If you don’t think it is going to be done, it wants flagging up now, not in a month or 10 months.

Q293 John Mann: My apologies. I was debating petrol crises in the Chamber before you broke to vote on those important matters, but I have come in a little perplexed having heard the answers to Mr Thurso’s questions. Mr Thurso raised Retford, so I had better reference the tax office in Retford, but also the Cranfield School of Management, where I used to do some work on the management of change, although I do not recall any Ministers, past or present, ever partaking in such courses, so I thought I had better start with that.

Let us start with, Dame Lesley, your word "customers". In the short time I have been here you have used it quite a lot, but as a taxpayer I am not a customer because I do not have a choice of where I go. You are a public servant and it is a public service to me, so why do you keep using the term "customer"? Where has that come from?

Mike Clasper: Mr Mann, we have been spending a lot of time talking about the service that we provide to-I will use the word "taxpayer" as a neutral phrase.

John Mann: "Customer" is not a neutral word and when it is used in places like Cranfield on public service training, for example, and other management schools, it is not a neutral word. "Customer" is not a neutral word. That has connotations of what the service should be.

Mike Clasper: Exactly.

Q294 John Mann: So let us talk about informed customers, or uninformed. You were giving some figures. How do you know those figures are accurate? How do you know how many people would want to come and meet you in the modern communications era?

Mike Clasper: We do lots of customer research sample levels, so when we are talking about percentage of customers-as Lesley was in particular groups-it is based on very large customer surveys.

Q295 John Mann: How do you do those customer surveys?

Mike Clasper: Sorry, I literally don’t understand the question. We ask people. We observe behaviour. We combine the two things together.

John Mann: How?

Mike Clasper: Professional research organisations.

John Mann: So you contract professional research organisations?

Mike Clasper: To do surveys.

John Mann: How do they do it?

Mike Clasper: I am still not understanding the question-in the sense that they do questionnaires or they do detailed groups?

Q296 John Mann: Let me tell you how they do it. This is rather a fundamental point, Chairman. The way they do it is they look at groups of people and they take statistically valid samples-people who have, say, telephones in the register; or they write to people and they get the information that way. That is how they make their appointments. I put it to you that if we take one group, let us take retired mine workers, who are about 500,000 in this country, what I am able to ascertain, having taken over 2,000 cases against individual cases of my constituents against solicitors, is that client vulnerability was never once assessed by any of them. Client vulnerability would be literacy, for example, or access to telephones, being used to dealing with professional bodies and professional institutions. In your sampling those people don’t get sampled.

Mike Clasper: Can I just come back, Mr Mann? Proctor & Gamble’s in-house research organisation is one of the largest in the world, and in my Proctor & Gamble career, I spent 23 years in areas of customer research. Let me give you an example challenging the very issue that you are raising, which is that it is clearly very difficult to get to certain people. We have been working on how to improve the information that we get from our tax credit customers. So we found groups of tax credit customers and we did tests on how often they got certain mathematical questions right. In those tests we found one sort of question, which we asked them to do when they were doing their renewals, 5% of them got right. So what do we do? We start working on the fact we have to change the nature of that renewal process and the form, so that they no longer have to do that mathematical calculation. It is a little anecdotal example of the sense that we don’t just do blind surveys and don’t ignore the consequences.

Q297 John Mann: It is a good one. I come back to the question, how many taxpayers would benefit from a face-to-face appointment?

Mike Clasper: How many taxpayers want a face to face?

John Mann: No, how many would benefit?

Mike Clasper: I don’t know how to answer that question in the sense of we know how many want a face-to-face contact. We know how many use by their behaviour-

Q298 John Mann: But you don’t. You know how many have asked for one when one is available. That is a different scenario. That is not logic, is it? You don’t know how many want one. You know how many have asked for one. I might want a bar of chocolate but there is not one on the table. I would have to leave the room to get one. It is the same. You are selling in Proctor & Gamble, and it is the same when it comes to the Inland Revenue, isn’t it, and Customs and Excise, exactly the same thing. You don’t know.

If, Dame Lesley, you are offering home visits, is there a maximum available if requested in a particular area? Let us take my area. Take the Retford area, because there used to be 37 staff there working for you. I think there are three left now, although they may have gone, but there were three. What is the maximum number of home visits that are possible?

Lesley Strathie: I can’t answer that question, Mr Mann, and I can’t even promise to write you a note on that.

John Mann: But give me an impression. I mean is it one a year, 10 a year, 100, 1,000?

Lesley Strathie: I think what we are seeking to do is follow the customer, and if you would rather I will use the word "taxpayer", but we have a lot of customers who are not taxpayers. We try to follow that need. We try to find a way of meeting it efficiently. I am taking your point but our customer insight work is extensive. It is not just a survey on satisfaction because we survey people who use the service to find out what they thought of it. A lot of our work shows that a large proportion of our customer base would rather have no contact from us at all. They would rather be outside the tax system or they would rather an agent is handling it, or third parties are handling it, and that it works. They would rather have no contact.

Q299 John Mann: Until they have a problem.

Lesley Strathie: Until they have a problem, yes.

John Mann: I can assure you most of my constituents would like no interaction at all but if they have a problem they want it.

Lesley Strathie: Yes.

Mike Clasper: Let us take some statistics we do have. Of the number of people coming to one of our inquiry centres, and there are still lots of inquiry centres around the country where the access is exactly as it has always been, we offer them an appointment within three days, somewhere between 99.5% and 100% of the time.

Q300 John Mann: The number who ring up?

Mike Clasper: The number of people who come in and request an appointment, we do it between 99.5% and 100%.

Q301 John Mann: Sorry, the number who come in where?

Mike Clasper: Who come in requesting an appointment at our inquiry centres. Our inquiry centres are marketed, so to the point of where the demand is.

Q302 John Mann: Where is the nearest one to Retford then?

Mike Clasper: I am talking about the general trend. I am not talking-

John Mann: Yes, but where is the nearest one to Retford?

Mike Clasper: I can’t answer that. I don’t know whether anybody can, but I can’t answer where the nearest one to Retford is. I don’t know where they all are.

Lesley Strathie: They still have an inquiry centre there.

John Mann: Is it Nottingham, Sheffield?

Lesley Strathie: No, sorry, I don’t know.

John Mann: If I want to walk in where is the nearest place I can go?

Mike Clasper: We can get back to you on that. We don’t know every place in the country.

Chair: Equally, you can say you don’t know where Retford is.

Mike Clasper: I know where Retford is, I used to work on the railways a long time ago.

Q303 John Mann: My point is that of those 2,200 households that I took action on behalf of in relation to mis-selling-let us call it that to save time-by solicitors, the number who contacted the solicitor themselves was well under 1%. All 2,200 had a legitimate claim, but it was under 1%. In fact it was well under 1%. Why is that?

Mike Clasper: I clearly don’t know the situation, but I think what we are talking about in that instance is do people know their rights and can they contact the right people to give them the professional advice to proceed?

Q304 John Mann: Are people confident? Do people know how to? If they get on the phone are they prepared to? This is the section of society that might walk into Retford tax office. Some of them will be the same cohort of 2,200-former miners with their redundancy money who have invested in a taxi company, or whatever else. They are not very good at handling accounts and they have problems. Now, they have nowhere to go any more.

Mike Clasper: Can I just say, because somebody has passed me some information, that Retford and Gainsborough, both of which are on the old railway system at least, will both have inquiry centres that will remain open and available.

Q305 John Mann: Who will be in them?

Mike Clasper: HMRC staff.

Q306 John Mann: How many? Are we increasing the staff? It is good news if we are.

Mike Clasper: The right number is the ones that meet the demand that turns up and what I can say, as I have said already, is somewhere between 99.5% and 100% of people who request an appointment get one within three days. We will continue to be in that space. I can give you those numbers. I happen to know them, I might be 0.2% out, but I am pretty confident in my numbers.

Q307 John Mann: Across the country there is going to be the same range of walk-in centres available?

Mike Clasper: No, it depends. Retford and Gainsborough are going to be fine. A tiny little place may not have it, and then we are into what Lesley was saying, which is different ways of doing it. I should not say we need to find ways, Chairman. I should have said that in some cases we know what it is, and in some cases we need to find ways, because some of these things we have already done.

Q308 John Mann: My final question is on staff morale. Obviously you have the worst staff morale in the public sector. You have plans to deal with it, but you did before. How many in-depth discussions have there been with Government Ministers in the last three years over the problem of staff morale? What input has there been from Government Ministers? This could be in a note if there isn’t time now. What input has there been over the last three years from Government Ministers in how to raise staff morale, so that staff are motivated to come into work, motivated to perform well and motivated to stay with the service?

Chair: That was the last question, so when we finish is in your hands.

Lesley Strathie: I have served two Ministers in two different Administrations since I arrived in HMRC, both of whom have been deeply concerned about staff morale, deeply concerned about engagement score, as indeed I am and everybody round this table and the executive team. I would also say that both of those Ministers have been very active in engaging with the work force and getting out to visit people and see their work.

I would like to make a plug for my staff, in saying that the great thing we have to build on in HMRC is their passion for their work, their pride in their work and their determination to give good service to their customers. They are not engaged with HMRC as a department, as a brand, and that is a huge part of their work as we go forward as one single department. In my conversations with the trade unions on this subject, some of the things we have already done, like removing barriers from people, moving from one line of business to another, being able to up-skill them and redeploy them, and starting to paint a picture of hope for careers and better investment and targeting investment, and opportunities for jobs, are some of the things we have to do.

I do believe that people need to understand just how passionate and committed and how interested our people find their work, even if they think that HMRC has not helped them to do it always.

Chair: Dame Lesley, Mr Clasper and gentlemen-

Mr Love: Can we thank the audience for staying so long?

Chair: Some of them might be on overtime I suspect. I hope they are.

Lesley Strathie: I think it is important to remember that many of these people are involved in the work and the briefing. It is part of their development to see how we perform.

Chair: I think it has been very, very useful, and I think it has been more civilised than some sessions we have seen in the past. I think we have started a dialogue, which I hope we can continue. Thank you very much.