§ 5.37 p.m.
§ The Attorney-General (Lord Goldsmith)
My Lords, I beg to move that this Bill be now read a second time.
The Bill creates two new organisations. First, it brings together the Inland Revenue and Customs and Excise to create a single new department called Her Majesty's Revenue and Customs. That was the key recommendation of the O'Donnell review which considered the best organisational arrangements for delivery of the Government's tax agenda.
Secondly, the Bill establishes a fully independent Revenue and Customs Prosecutions Office to conduct prosecutions on behalf of HMRC where appropriate. That was an important recommendation of the Butterfield review and introduces a new layer of independent scrutiny in relation to HMRC criminal prosecutions. The office will also have the power, alongside the Crown Prosecution Service, to prosecute cases generated by the new Serious Organised Crime Agency.
Perhaps I may consider first the creation of HMRC. When we talk about forming HMRC, we talk about "integration". Integration is not the same as a merger: it is a more fundamental change that brings services together to produce new and better solutions. But the goal is not integration for its own sake. Integration in parts of the business that share customers or functions—such as Customs' work on VAT and Inland Revenue's work on direct taxes —can deliver real benefits, and here it will be pursued with vigour.
But some Customs' social protection and border functions may have little obvious overlap with Inland Revenue functions. Here, too, however, there are opportunities for improved working, as they link into the HMRC structure and develop wider opportunities to enhance co-operation with other agencies at the frontier.
The integration of Customs and the Revenue is a huge job, and it will take time to deliver it. It will be an ongoing process of improvement, dependent on the introduction of new technologies and working methods to support a more coherent and consistent approach across HMRC. This Bill cannot of itself deliver that, but it establishes HMRC and thereby allows it to make some changes now and to begin working towards more substantial reforms.
There are clear benefits from integration. One of the most important is the improved customer focus that an integrated department can deliver. That will flow from a better understanding of taxpayers as a result of looking across their affairs, allowing the delivery of more joined-up services that better meet taxpayers' needs.
Integration will also improve the effectiveness of revenue administration. For example, better use of information will allow more effective targeting of resources to areas of risk, improving fairness by making it harder for the dishonest to avoid their 588 obligations and reducing unnecessary interventions in the affairs of honest taxpayers. Integration will also produce efficiency savings of 3,200 full time equivalent posts by 2007-–08.
I turn to the content of the Bill. On its structure, the Bill establishes HMRC as a non-ministerial department with the statutory functions of the two existing departments. Commissioners, acting under the general directions of Treasury Ministers, will be responsible for the management of the department and its functions. This non-ministerial status maintains the arm's-length relationship between Ministers and revenue administration, continuing the existing principle that Ministers do not intervene in individual cases.
The Bill creates a new framework, with enhanced parliamentary scrutiny, for managing and accounting for the revenues and other moneys that HMRC collects and pays out.
This Bill allows HMRC to be treated on the same basis as ministerial departments for the purpose of transferring functions into or out of the department. These arrangements, in the Ministers of the Crown Act, allow routine machinery of government transfers of functions between departments without the need for primary legislation. They work effectively for ministerial departments and, subject to certain exceptions that I will outline in a moment, it is sensible to apply them to HMRC. HMRC will be a large department with a wide range of functions, and it would be unnecessarily inflexible to exclude all of them from the transfer provisions that apply across the rest of government.
I mentioned certain exceptions to the transfer arrangements. The Bill ensures that these arrangements do not permit the transfer out from HMRC of its tax, duties, national insurance or tax credit functions. These functions are those where the O'Donnell review saw synergies in administration in one department. This restriction therefore maintains the integrity of the tax system and underlines the principle that the administration of revenues is held at arm's length from Ministers.
The provision in the Bill is sensible and allows for the effective use of parliamentary time. At this point I want to say that my right honourable friend in the other place, the Paymaster General, has listened to the concerns expressed in debate and has talked to the trade union representatives of staff who will be working in HM Revenue and Customs. We want to put on the record that this transfer provision will not be used to circumvent proper consultation with the recognised unions of the effects on their members of transfers of functions out of HM Revenue and Customs to another government department or agency. I understand that talks are due to take place between the management of the Inland Revenue, HM Customs and Excise and the recognised union representatives of Revenue and Customs staff on a Memorandum of Understanding, which will set out certain agreed forms of consultation on such transfers. 589 I turn to the question of powers. This Bill deliberately makes only those changes necessary to establish HMRC. It therefore transfers the powers of the two existing departments to HMRC, but ring fences them to prevent their inadvertent extension within HMRC. There are therefore no changes in the way that powers can be used as a result of this Bill.
Of course, some reform may be necessary to deliver integration and ensure that HMRC has powers suitable for a high performing, 21st century revenue and customs administration. To that end, on 8 December in the other place, the Paymaster General announced a consultation exercise to consider issues around powers and linked matters such as rights of appeal.
The Bill confirms that HMRC may pool information internally, so that, subject to the usual rules about appropriateness and proportionality, information supplied for one of its functions can be used for any of its other functions. That enables HMRC to develop joined-up services and to realise the improvements to effectiveness that will arise from making better use of information.
Of course, taxpayer confidentiality will be just as important in HMRC as in the predecessor departments: there will be no let-up in the commitment of HMRC to safeguarding taxpayer confidentiality. The Bill therefore introduces a statutory duty for all officers to maintain the confidentiality of information that they acquire in the course of their duties. And all new HMRC staff will be required to sign a written acknowledgement of this duty when they join the department, emphasising the serious nature of this obligation. The duty is reinforced in the Bill by a criminal offence of unlawful disclosure of confidential information about an identifiable person by an HMRC officer. This extends the existing offence for Inland Revenue and HM Customs and Excise staff to all functions of the new department.
Underlining this high regard for taxpayer confidentiality, the Bill makes explicit the occasions when it is considered appropriate for officials of HMRC to disclose information held; for example, where permitted by another enactment and for the purposes of its functions, ranging from advice to Ministers on policy matters to day-to-day operational activities. Noble Lords will be familiar with many of these "disclosures" that provide information such as bulletins for employers and tax practitioners.
The Bill also introduces a provision that restricts the Commissioners to authorising disclosures of information in limited circumstances, defined in regulations, where there is a public interest case for doing so. The power will be used only to permit disclosures in accordance with the Human Rights Act. In particular, it will not be used unless necessary for the purposes of public health or safety, for the prevention of crime or for the prevention of fraudulent conduct. This much tighter provision replaces an existing authority for the Commissioners in either department to authorise disclosure of information without restricting the circumstances in which they can do so.
590 I refer now to the issue of external scrutiny. The Bill introduces new arrangements for ensuring the highest possible criminal investigation standards within HMRC. It provides for Her Majesty's Inspectors of Constabulary to inspect HMRC's compliance with the requirements of the criminal justice system. It also gives the Independent Police Complaints Commission a key role in monitoring and reviewing HMRC's procedures for handling complaints of criminal or gross misconduct by HMRC officers. The Independent Police Complaints Commission will have responsibility for investigating the more serious of these matters.
These two measures implement the Butterfield review recommendation that Customs identify how additional external scrutiny can be introduced into investigation work. They will provide valuable external validation of the standards of conduct which are rightly expected of HMRC.
The Bill also provides for criminal offences of obstruction, assault or impersonation of HMRC officers. These consolidated offences replace provisions relating to the predecessor departments and align their penalties with their police equivalents in order to deliver consistency across the criminal justice system. The Bill stipulates that only officers authorised by the Commissioners to exercise the power of arrest for these offences will be able to do so. This gives statutory effect to existing administrative arrangements under which officers who do not need to use powers of arrest in their current jobs are administratively barred from using them.
I turn now, briefly, to the second important function of the Bill. The Bill establishes a fully independent Revenue and Customs Prosecutions Office. By advising HMRC investigators and conducting any subsequent criminal proceedings, the office will provide independent scrutiny of criminal cases investigated by HMRC. This was a key recommendation of the Butterfield review. I have referred already to the power to conduct prosecution cases generated by the new Serious Organised Crime Agency.
The director of the prosecutions office will be accountable to me rather than to Treasury Ministers. This important change ensures a clear separation of responsibilities from HMRC. This independence of the prosecutor from the investigator in cases requiring criminal proceedings helps maintain public confidence in the criminal justice system as it will ensure that the decision to prosecute is based on an entirely impartial assessment of the merits of a case.
The constructive relationship between HMRC and RCPO, the new prosecution office, will provide clearly defined and distinct roles for the investigator and prosecutor, allowing the prosecutor's expert and independent advice to be brought to bear on cases at all times. This independent involvement, ensuring the highest possible standard of work. is a development I strongly welcome.
The Bill places a duty of confidentiality upon RCPO staff that is comparable with that for HMRC staff, and backs this up with a criminal sanction for unlawful 591 disclosure of information. These measures ensure that confidentiality will be taken just as seriously in the prosecution office as in HMRC.
The Bill also provides for the Crown Prosecution Service Inspectorate to inspect RCPO to provide independent assurance of the professional standards of prosecutors. I welcome this external scrutiny of the office. Like the creation of the RCPO itself, this provides public assurance of high standards throughout the criminal justice system.
Noble Lords will appreciate the scale of the challenge we are embarking upon. The Bill begins a lengthy process of change that will, over time, deliver real improvements to the administration of Revenue and Customs functions. The Bill is a crucial first step on that path and I commend it to the House. I beg to move.
Moved, That the Bill be now read a second time.—(Lord Goldsmith.)
§ 5.52 p.m.
§ Lord Thomas of Gresford
My Lords, there are clear advantages in having a single body responsible for the administration of the tax system. This merger—or integration, as the noble and learned Lord put it—should be taken as an opportunity to rationalise and harmonise the different procedures of both departments.
One of the concerns which we propose to address is the extent to which the Bill permits the disclosure of confidential information. Confidentiality is certainly stated as a principle in Clause 18(1) but subsection (2) appears to give the widest powers of disclosure to various people. Similarly, Clause 20 gives wide disclosure powers under the guise of public interest. We shall need to look at these clauses very closely. My noble friend Lord Newby will address other issues that arise under the creation of HMRC.
I turn to the Revenue and Customs Prosecutions Office, which we welcome. The creation of that office under the direction of a director responsible to the Attorney-General is something that we have sought for some years.
The report of Mr Justice Butterfield, to which the noble and learned Lord referred, into the collapse of the London City Bond prosecutions in November 2002 highlighted how the existing system of prosecution had imploded. There were 13 separate prosecutions in which 109 defendants faced charges. Of these, 52 either pleaded guilty or were convicted, 16 were acquitted and the prosecution offered no evidence in respect of another 40. But, following the result of an abuse of process hearing in Liverpool, all the convictions, both of those who had pleaded guilty and who were found guilty, were quashed by the Court of Appeal, so that, ultimately, no one was convicted.
The public purse was allowed to lose up to £688 million according to the National Audit Office. The fees of prosecuting counsel alone amounted to £3.5 million, while legal aid for the defendants cost £14.3 million. They have not even begun to work out 592 the compensation for the defendants who were successful in their appeals against conviction. Such was the state of the prosecution service that no defence lawyer would ever advise his client to plead guilty.
What went wrong? Mr Justice Butterfield found muddle, confusion and uncertainty, mostly stemming from a lack of systems to ensure co-ordination between the various investigations at any stage. This resulted in the prosecution failing to comply with its obligation to make full and proper disclosure to the defence of relevant documents. Fair trials were impossible.
The learned judge identified in particular with regard to Customs investigators, first, a culture of excessive secrecy, with information closely guarded and disseminated only on a need-to-know basis; and, secondly, a culture where the need to fulfil the requirements of the criminal justice system was not accepted as an essential part of the investigation process.
Those findings cause me to welcome very much the provisions of this Bill which permit Her Majesty's Inspector of Constabulary to oversee the work of investigators. I also welcome the fact that the Police Complaints Commission can be involved in matters of abuse that may arise in the course of an investigation.
Such a culture is nothing new. I recall a case of alleged heroin importation being thrown out by a trial judge as long ago as 1983 as a result of oppressive questioning by investigators over many days. The prosecution service of Customs and Excise lost the confidence not only of the lawyers involved in the case but of the judges as well.
The Gower/Hammond review, set up in 2002, recommended that the Customs and Excise Solicitors Office should retain its prosecution function but that the solicitor should be responsible to the Attorney-General. That was the beginning of the move to what we have in the Bill, which is a great improvement on that. Even so, the Gower/Hammond review led to significant progress. A report by the Crown Prosecution Service Inspectorate in December 2004 found that the lawyers in the service were beginning to think much more as independent prosecutors and not merely as an arm of the Treasury, and that the problems of disclosure which had caused the collapse of the Liverpool case were being addressed.
However, the report found that the additional demands made on the organisation and the increase in the size and complexity of the cases had not resulted in additional resources being made available to it by the Government. The report found that lawyers often did not appear to be in control of their cases, largely because they did not attend all court appearances to instruct counsel, either in the magistrates' court or at the Crown Court, and counsel was left to its own devices.
A further specific criticism of the inspectorate's report was that local Customs and Excise staff still prosecute cases, a practice which has long ceased where the CPS are involved. I ask the noble and learned Lord the Attorney-General whether the 593 practice of using investigators to prosecute will cease. It takes me back 50 or 60 years ago to the days when my father, who was an inspector in the police, a town inspector, was prosecuting in the magistrates' court.
Despite progress, therefore, the inspectorate concluded that some aspects of the work and organisation constrain the prosecutors. There is a need to improve staffing levels and case coverage; there is still inadequate accommodation; there is a lack of some basic equipment and services; and there are cumbersome IT systems to support management information requirements. That is as the office now is.
So it all comes back to resources. The CPS was under-resourced for many years, to the extent that one began to wonder whether the Government replaced cash with the rebalancing of the criminal justice system in favour of the prosecution to which the noble Lord, Lord Kingsland, has referred in recent days. It may be better to introduce evidential presumptions of dubious legality in sexual offences and the previous convictions of the accused. Better to abolish jury trial in an attempt to secure more guilty verdicts and to risk wrongful convictions and improve the statistics than to invest in a thoroughly modern and competent investigatory and prosecution system.
Things have greatly improved with the CPS. I hope some new money will be put into the new organisation to ensure that it has the competent staff and technical resources so that it can be a first-class and, above all, a fair and responsible prosecuting authority, which commands the confidence of the judiciary, the legal profession and, of course, the public. The appointment of Mr David Green, QC, as the director, is an excellent beginning.
The essential element is that this new prosecuting authority is seen to be wholly independent of Her Majesty's Revenue and Customs, just as the CPS is independent of the police, making its own decisions and protecting not just the Revenue but the individual citizens against whom allegations are made.
We welcome these provisions; we hope that the resources will be available to back them, and we look forward to seeing an improvement in what has been a very difficult and unhappy area of prosecutions.
§ 6.1 p.m.
§ Lord Barnett
My Lords, I welcome my noble and learned friend the Attorney-General to our debate on the Inland Revenue and Customs and Excise. As we normally say after maiden speeches, we look forward to hearing him again often in our debates on these matters.
I hope that my noble and learned friend will forgive me if I do not reflect upon the legal parts of the Bill but deal rather with what I thought was the major part of the Bill— namely, merger. We are told by my noble and learned friend that it is integration rather than merger. I do not know whether that is a legalistic phrase. He sought to spell out for us why it was integration rather than merger; perhaps we will debate that further on another occasion.
594 Much as I am delighted to see my noble and learned friend here, I wonder why he opened this debate. On Second Reading in another place, they managed to find two Treasury Ministers to speak; they did not bother with any legal Ministers. Despite that, I am delighted to see my noble and learned friend. Of course, the Bill is not party political; even the noble Baroness, Lady Noakes, will find it difficult to take a party political view of the Bill.
Initially, my main concern was whether the department and the Government were ready to implement the Bill. Reading Gus O'Donnell's excellent report, I am even less certain about the benefits that will accrue from this integration. Introducing the Bill in another place, the Paymaster General said that it was, as my noble and learned friend the Attorney-General said, a huge task, and she explained why. It is worth repeating what she said:The new department will have more than 30 million taxpayers and stakeholders, of which 4 million are businesses. HMRC will collect more than £400 billion a year in receipts and pay out over £25 billion in tax credits and child benefit. The costs of running HMRC will amount to some £4.8 billion a year, and the department will have nearly 100,000 staff; 20 per cent of the civil service".—[Official Report, Commons, 8/12/04; col. 1171.]To put it mildly, it is, as my noble and learned friend said, a huge task.
We were told that the integration could not start until after Second Reading in the other place, which was on 8 December. The new chairman is David Varney, a businessman whom we wish well in his task. We were told that he could not do anything until 8 December, but he was appointed, and took up his post on 1 September. Presumably, all he could do in the interim period was think about the task. I hope his thinking took him well on the way to understanding what is going on here.
Despite having a comparatively short time in which the new chairman will have to work, paragraph 30 of the Explanatory Notes states that the Government hope to implement this huge task "shortly after Royal Assent". I find that hard to understand, but will come back in a moment to what my noble and learned friend the Attorney-General said about it. Do we not need to worry about whether we are ready to have this integration in the timescale set out? In practice—this seems to flow from what my noble and learned friend was saying—little will happen initially. The two departments may be called HMRC but, in practice, they will simply carry on as before. Nothing will happen when the new chairman takes over, except that he will start on integration. I should be glad to know whether I am right in assuming that.
I have a few questions on the Bill. Paragraph 9 of the Explanatory Notes states:The Bill identifies all of the functions previously carried out by the Inland Revenue" —as set out in Schedule 1. It goes on:It provides that powers previously available to the Commissioners of Customs and Excise and their officers may not be used for these former Inland Revenue functions, while powers previously available to the Commissioners of Inland Revenue and 595 their officers may only be used for these functions. This is to prevent any inadvertent widening of powers in the new department".I suppose it is all right if it is advertent, and that this is only to prevent inadvertency. I hope that I am not being too legalistic.
Paragraph 12 of the Explanatory Notes says that Clause 17 and Schedule 2,enable information acquired by HMRC in connection with a function to be used for any of its other functions … Management controls ensure that the use of the information will be appropriate and proportionate".What are the management controls? I am sorry to trouble my noble and learned friend the Attorney-General with these little matters, but perhaps he will tell us.
Paragraph 14 says:Clause 18 sets out the statutory duty of officers. Commissioners (and others acting on their behalf …) not to disclose information held by HMRC unless authorised to do so".I should like a little more information about who will authorise them to do so.
We are told that Clause 19 widens the current criminal offence of unauthorised disclosure. Why is it necessary to widen it? Paragraph 16 of the Explanatory Notes says that Clause 20 will introduce a provision enabling the commissioners to instruct officers to disclose confidential information where it is in the "public interest" to do so. What is the reason for the change, and what is the public interest referred to?
Finally, we are told in the Explanatory Notes to Clauses 24 and 26 that rewards may be paid by the commissioners. That is very interesting, and I think we need to know a little more about it. What size are the rewards likely to be—large, small or medium? Perhaps my noble and learned friend could give us some idea of the level of reward. Would the size of the reward relate to the amount of revenue saved or tax obtained? It is an interesting new idea, and I look forward to hearing my noble and learned friend's answers to those questions.
On the question of benefits, we are told that there will be staff savings—apart from the Gershon review, which we have all heard about. We are told that there will be some 3,200 staff savings or cuts by 2007–08. That is out of 100,000 staff, so I do not think that my noble friend Lord Brooke need worry too much. Then we are told that that is only a working assumption and that the cut is not definite. There will not be huge cuts so my noble friend can leave the room now.
My main concern remains that this is a huge task. Has the solution to this huge task been properly thought through? I still have my doubts. On page 8 of his excellent report, Gus O'Donnell told us that the initial costs were likely to be about £75 million. Clearly, we do not know whether that is a working assumption, because the costs of £75 million could be spread over two years. We are told that, above all, the benefits will be long term, so we cannot expect to see benefits in the short term, in the next few weeks or months. When will we see the benefits? I am sorry to 596 intrude on my noble friend's Inland Revenue and Customs experience in these matters, but perhaps he could tell us when we can expect see the whole of these benefits in the "long term".
Finally, the implementation of this Bill, when it becomes an Act shortly after Royal Assent, remains a concern to me. I hope that the Government will not seek to rush it through. We are told already that it will initially be only a start of the proceedings. Assuming that there is an election on 5 May, if we have to wait until after that, I hope that the Government will not try to wash it all up together with other Bills in agreement with the usual channels. There are important matters to be resolved. It would remove the concerns that I have—and I imagine that others have—if the Government do not rush to put the Bill on the statute book and try to implement it very soon thereafter.
§ 6.12 p.m.
§ Lord Sheldon
My Lords, my noble friend commented on the important speech made by the Attorney-General and I welcome what he said, especially when he mentioned that there was a change in the approach to this matter from what we thought were the main financial aspects to some of the legal consequences, which I had not gone into. He said that it was a huge job; it is an ongoing job. I can see that there are a number of matters to be dealt with over a long period of time, but I had not realised quite how long that time was likely to be. The implication of my noble and learned friend the Attorney-General was that it was rather longer than we had heard from Dawn Primarolo in the debate in the House of Commons on 8 December.
The task of bringing together Customs and Excise and the Inland Revenue is a major undertaking. It must not be underestimated and my noble and learned friend the Attorney-General certainly did not do that. The savings of staff— whether the 16,000 to which my noble friend Lord Barnett referred arising from the Gershon proposals or the 3,200 through efficiency saving—are important, but they are by no means the main consideration. The main consideration of this merger, coming together or whatever we like to call it, must be the revenue collection and the maintaining of the standards of honesty. Those are the crucial issues.
These revenue departments have been called,the least corrupt revenue service of any major country in the world",—[Official Report, Commons, 8/12/04; col. 1181.]which is absolutely right. This is an enormous advantage that we have had over so long a period. When one considers the vast amount of money handled by these departments, it is a wonderful tribute to our Civil Service and the consequence of the invaluable reforms introduced by the Northcote-Trevelyan report in the middle of the 19th century.
Looking at these two large departments with so long a history I would have expected that some coming together would have resulted in an increase of staff at the outset. There are problems and one does not normally deal with problems by reducing one's staff. I would have thought that that increase of staff would 597 continue for a very considerable time until the eventual efficiencies—if they are to be there—were introduced over a longer period. I am surprised and a little sceptical that efficiencies that may be obtained in the long term are expected so early.
Both departments have a long and successful past. The Inland Revenue, dealing with income tax and other matters, dates from 1842 and the customs part of the collection of these monies dates from the 13th century. They are two great historic departments with quite different patterns of working. On the one hand, the Inland Revenue deals with financial matters after they have taken place. There are records that can be examined and the time to deal with them is not a problem. On the other hand, Customs and Excise deals with actions as they take place—the transfer of goods in particular—and the department as it now is follows that precedent.
Another important difference between the two departments is the kind of expertise that they have of necessity acquired in the course of so many years with their very long pasts. The history of Customs and Excise, which comes from intercepting smugglers and dealing with criminals, is something that we know and is well recorded in so much of our history. Although the present day approach has over the years altered the attitude of that department, it is still rigorous; more rigorous than the Inland Revenue. The Inland Revenue's history comes from dealing with mostly honest but certainly unwilling taxpayers. It is not easy to see how these two different kinds of expertise will survive, still less be transferred with success from one part of a new department to another. It is still more difficult, given the present level of work by each of these two departments which are under considerable strain at the present time.
As Financial Secretary to the Treasury, I remember seeing the volumes of Inland Revenue legislation in Somerset House. There was one volume, which was enough for a large chunk of the 1840s. By the time we came to the 1970s, volume after volume was required for each year. Since then, the changes have not been slow. Indeed, in many ways, they have accelerated. Bringing about this coming together with profound and fundamental changes at such a time will lead to a great upheaval in government administration and we must not underestimate the importance of that.
David Varney, the chief executive designate to the merged departments, told the House of Commons Treasury Select Committee that he was not able to commit himself to the financial benefits of the merger because he thought that the details were not known. I would have thought that a full investigation, however difficult it would have been to undertake, would have preceded a decision to merge, let alone to produce a Bill to lay before Parliament. I would have thought that, like Andrew Tyrie, who commented in the Second Reading debate in the House of Commons, we should have had,a quantitative analysis of the costs and benefits".—[ Official Report, Commons, 8/12/04; Col. 1186.]598 I do not understand the pressure to act with such haste. After all, the House of Commons Treasury Sub-Committee recommended this merger in April 2000 and it was rejected by the Government. The sudden change of mind now is not easy to understand. But even if one understands it, the speed at which the change is taking place is more difficult to comprehend. Given such a reversal, much work might have been expected to have been done to justify coming to a completely opposite conclusion in such a short time on so important a matter as this.
The work that is only now proposed could have been undertaken with a longer time-scale. As David Varney, the new chairman, has said. there is much work yet to be done. The very size of the new department will present problems, with 30 million taxpayers and £400 billion of revenue. We have never seen anything like this in this country and we are not likely to see anything like it again—such a merger, or "coming together", as we see here. We must look at the matter in a rather different way from the way we usually look at the alteration of government departments.
Efficiency savings by collecting taxes across both Customs and Excise as well as the Inland Revenue arc expected to save 3,200 posts by 2007–08. If a coming together of departments led to such a reduction in the posts required, there would be much more of this sort of thing happening. But there is a danger— that the great control that government can obtain over such a large department can be perhaps too great. But there will be a saving of 3,200 posts expected by 2007–08, with other departments pooling information and decision-making, among a number of other activities. There is a danger, too, to confidentiality. The more the sort of information that we are talking about crosses these larger departments, the more danger there is to confidentiality.
The strongest case for coming together would be if it could be shown that the large sums of money escaping the Revenue through evasion could be substantially reduced. The present estimate—subject, of course, to great uncertainty—is that 8 per cent to 10 per cent of revenues are uncollected. Following the coming together, much of the avoidance would remain, but the merger could in theory have an effect in reducing the amount of evasion. The estimate on the other side, from the other part of the department, for the uncollected VAT—again, subject to great uncertainty—is 12 per cent. It is difficult to see whether the coming together will have much effect on the VAT figure.
The savings estimate comes from the 3,200 posts. The Paymaster General suggested that it would represent a saving of £500 million, although that was later altered by the Economic Secretary to £100 million, in the debate on 8 December. The idea of cost reduction at a time of momentous change appears surprisingly optimistic; surely such changes will discover unforeseen problems that can be helped only by spending more money. When you have unforeseen problems, you do not save money: you have to spend money and employ staff to deal with them. A serious 599 danger is that, in the effort to save money and jobs in administering the service, there could be very considerable losses to the Revenue. You are dealing here with two very complex departments. In joining them together, you are not going to get more money out of it immediately, because the changes will create loopholes and all kinds of problems that can be exploited. Like many others who have commented on the net saving of the merger, I share their doubts about what will be gained, certainly in the short term.
The Revenue and Customs department is to be a non-ministerial department. It is proposed that the VAT inspectors will retain all powers and corporation tax inspectors will retain theirs, with no access by the one to the other. When speaking in the House of Commons on 8 December (Hansard, col. 1175), the Paymaster General said that powers will remain as they are, but that this was only a "temporary position". She then added that there would be a "thorough review" leading to legislation in the 2006 Finance Bill.
As my noble and learned friend Lord Goldsmith said, we have an incremental timetable of fundamental legislation, with at least two bites foreseen and possibly more to come. He suggested that there may be quite a number more to come and that there would be a rather slower move to creating the one department than we heard from the speeches in the House of Commons. I know that frequently legislation has to take into account matters that cannot be known at the time of legislating, but to leave such large gaps is rather surprising.
Another aspect is that the Bill pools information internally. What are the limitations? Any removal of the barriers between departments of state will always help to collect more revenue, but where do we stop? If all departments of state were to join together to provide information, no doubt the Revenue might gain; but taxpayers' confidentiality would be the first loss, with an over-centralised administration at the end of the road and consequent inefficiencies.
There is one change that I do not fully understand: that there is to be a statutory duty to maintain that confidentiality, and an individual statutory declaration will replace the Inland Revenue oath. I do not see the advantage of replacing that oath. There is something about tradition in all these matters; tradition plays an important part in keeping the flow of ideas and standards over a long period. The long history of the two departments has been an enormous advantage, not a disadvantage. We must retain those advantages while bringing them up to date, and we do not want to lose the one while we get the other. Surely the oath has had the advantage of tradition: it has worked well. At a time of major changes, financial weaknesses may be revealed, leading to disclosures and to a decline in standards.
The new department will have 250 major information technology systems, and 3,000 people working them. There will be 100,000 desk computers and an integration of computer systems. That is a long-term and large-scale undertaking, as John Healey, the 600 Economic Secretary, accepted (at col. 1231 of Hansard) in the debate in the House of Commons on 8 December. There are real dangers here. The Government's record on innovations in IT systems has had some spectacular failures, which I have seen. I shall not list them, but there are a very large number. To assume that all these changes will work satisfactorily and will save money in the time-scale envisaged is surprisingly optimistic.
We know that the House of Commons Treasury Select Committee is going to monitor the coming together. I welcome that, as it is important that the effects on the rights of taxpayers as well as the revenue stream and the operation of the department have some outside observation. I look forward to an interim report arising from this valuable initiative.
What disappoints me most in this exercise is the failure to quantify the benefits and their cost. There was the surprising statement that the Government do not have the legal authority to spend money to analyse options in sufficient detail. Not possible to quantify costs! Sir Peter Gershon was quoted as saying:No government initiative (including legislation) dependent on IT to be announced before analysis of risks'".—[Official Report, Commons, 8/12/04; col. 1233.]Surely that is of fundamental importance. We have to look at all the risks—these are the dangers of which account must be taken.
I am not talking about precise calculations, but some quantification should surely have been made prior to the decision to bring the two revenue departments together. The taking of so momentous a decision may be the right one; but, without a proper analysis of the costs and benefit, it is surely not a decision that fits with our conception of the Treasury, which has rightly exercised rigorous scrutiny before embarking on any project of this kind. We may be right to proceed, but as the preparatory work has not been done we need to proceed with quite exceptional caution.
§ 6.29 p.m.
§ Lord Brooke of Alverthorpe
My Lords, it is with some trepidation that I follow two former Treasury Ministers. I have been a long-term advocate of merging the Inland Revenue and the Customs department and I welcome the Gus O'Donnell report. I point out to the noble Lord, Lord Barnett, that Mr David Varney provided an additional submission to the O'Donnell review, which can be found in the appendix, when he had already given his ideas of how he saw the merger going forward. He gave a good deal of thought to what is likely to happen even before he was formally appointed in December.
I believe that over time the integration will produce a better and more efficient service for taxpayers and especially for businesses. I think that we should be able to look forward sometime in the future to one-stop tax shops. We should be getting away from businesses having to cope with separate visits from Revenue officials and Customs officials dealing with VAT or pay-as-you-earn or national insurance contribution 601 audits, or indeed with tax collectors coming to collect separate general taxes. That is what life has been like in the past for many businesses. Often they have been faced with visits from three or four different people within a couple of months. That should come to an end under an integrated process. I know that it will not happen overnight, but that is what we should be looking for in due course.
The merger also presents opportunities for simplification of tax and VAT collection systems. Without the two departments coming together, that could never have been contemplated. You could never get them into the same room to sit down and do the forward planning and the necessary risk analysis and costing. It is only under the umbrella which is being created that we will be able to move forward and do this kind of work. For example, we currently have three separate systems for submitting and collecting taxes. VAT is paid on a quarterly basis, but pay-as-you-earn and national insurance contributions are paid monthly. As everyone who has submitted a self-assessment return will know, the self-employed pay one-half at the end of January each year, followed by a second payment in July. There is scope within all of that. Work has been done over a number of years on integrating some of those systems, but on each occasion no steps have been taken forward. I believe that it has not happened for the very simple reason that you could not get the two departments to work constructively together.
For both departments' employees—and this is where I pick up the point made by the noble Lord, Lord Barnett, as he anticipated—there will initially and understandably be concerns about the changes in prospects. However, if the issues are handled sensitively —and I believe that the staff as well as the unions are directly involved—I think that the integration will create opportunities for better career development and better job satisfaction for the staff.
Both departments have many talented staff of a high intellectual calibre. The challenge for the new management is to find ways of liberating them and inspiring them to participate in building the new organisation. I know from past experience that that will not be easy: Revenue staff are trained to be suspicious. However, again in my experience, I know that once that suspicion is overcome, they can be extraordinarily productive.
I know from briefings and the debates in the other place that an early obstacle arises from the projected staff savings from the merger and the Government's general efficiency drive under Gershon. I will probably surprise the noble Lord, Lord Barnett, with this point. While the figures might look daunting, in the light of my experience as a former general-secretary of the Inland Revenue Staff Federation and later as joint general-secretary of the union that represented both Revenue and Customs staff before the present Public and Commercial Services Union—PCS—was founded, I have to say that the changes proposed, while still worrying, are less fierce than those that confronted us during the 1990s.
602 In that decade, more than 20,000 staff were taken out of both the Revenue and Customs, and against a backcloth of 3 million unemployed in the economy generally. Let us contrast that with the situation today. Not only are the figures lower, but, if we look at the background economic position, we find that unemployment is now down to 1 million and still falling. There are skill shortages in many places where people can be accommodated. There are thousands of unfilled jobs, especially in the public sector and particularly in London and the south-east.
Perhaps most importantly—and here I will be political; it is important that someone stands up and speaks for the Government—we have a Labour Government: an employer who are pro-public service, who are investing at the highest levels for years and who are prepared to retrain and redeploy staff into frontline public service jobs. I hope that everyone will join in putting that message to understandably worried Revenue and Customs staff.
I would not, of course, expect noble Lords opposite to do that. But what I would welcome from them is a statement on how many staff they would take out of the new department as its contribution towards £35 million public expenditure savings if they were elected. I have not been able to find that in the Commons Hansard reports, which I have gone through carefully. So elucidation on that point would help us considerably in dealing with our relationships with staff and encouraging them to participate in the integration process.
Incidentally, I thought that the other place, contrary to what many noble Lords often believe, has given the legislation a reasonably good detailed scrutiny in the first instance. As a result, I do not think that our task here will be quite as onerous in addressing the general issues of integration, although I suspect we may spend more time dealing with the legal side. I, too, welcome the presence of the Attorney-General for our consideration of the Bill. I am glad to see that he is handling it. That will ensure that we have a most detailed examination of the aspects relating 10 the proposed new Revenue and Customs Prosecutions Office.
Returning to the different cultures between the two departments, I have a question for the Attorney-General. The Inland Revenue has always been seen as having a somewhat lighter touch than Customs. I wonder whether that will continue or whether there will be a harmonisation of approaches. If so, which culture is likely to prevail? As the Attorney-General has given further information on the point, I now understand that there will be further consultations on the merger, and I gather that that will be primarily on the issue of powers.
When will there be an opportunity for debate on the broader issues of the merger rather than simply on the powers? As previous speakers have very pointedly expressed, this is a major change. It will not be effective in a short timescale but will probably run for a decade. I think that it is important that people at all points have an opportunity to express views on where they see the integrated department going in the future. 603 A bit like the noble Lord, Lord Sheldon, I believe that a fundamental aspect of the matter is the steps that need to be taken to address the growing tax gap: the difference between tax assessed, and what is finally paid and when it is paid. I have noted in the Inland Revenue's performance report for 2004, published only in December, that the department is sponsoring research to understand the payment and filing behaviour of new taxpayers. Statistically, they are less liable to be compliant than are the older-fashioned and existing taxpayers. I believe that that is an issue of concern to all of us. I suspect that it may have something to do with the changing morality and social responsibility that we see in society, and that we increasingly find ourselves tackling in Home Office legislation. However, I have no firm evidence of that. I should be interested to know what transpires in the research work that is undertaken and whether we will have opportunities to spend time debating that.
I hear from a fairly large number of people after their first dealings with the Inland Revenue and indeed with other government departments, that they feel that central government are failing to keep abreast with modern payment methods, notably the use of credit cards. It is much easier now dealing with local authorities in many respects. One can pay parking fines, congestion charges and a whole host of other issues that arise with local authorities simply by using credit cards. However, when it comes to central government or their agencies or indeed the BBC, this is entirely a no-go area. Charges associated with credit cards create problems and there are other complications too. The Revenue has looked at this matter in the past and has decided not to proceed with introducing these changes. However, as we start to look for a reformed department this kind of issue should be revisited, possibly on an experimental basis. I wonder whether it will be opened up for wider consultation.
I also believe that—I make a plea here as an unpaid ambassador for the Yorkshire Regional Development Agency—the merger should provide a chance to take a fresh strategic look at the devolution of HMRC's functions. I was particularly pleased to see that the Revenue and Customs Prosecutions Office will not all be located in London. It is good to see that part of it will be located in Manchester. However, I must confess that having stopped working closely with the Revenue nearly a decade ago I find it perplexing that most of its back office functions, with more than 1,000 staff, are still located on the south coast in impoverished Worthing. There is a massive site there that would be ideal for meeting some of the Deputy Prime Minister's search for land for new housing in the south-east. I also hear that even more work is to be transferred to the south coast in the case of Customs back office work in Southend. If that is to happen, it is amazing. As regards back office functions and human relations staffing, fairly substantial savings in staff could be made in the not too distant future that are broadly in line with the figures which have been quoted, and without causing too much disruption to staff.
604 Given the good example that the Attorney-General set with the RCPO in Manchester, will my noble and learned friend bring all the influence he can to bear to ensure that we get proper devolution in other parts of this new department and the opportunity to have wider debates on where the department is going in the future?
§ 6.42 p.m.
§ Lord Newby
My Lords, as my noble friend Lord Thomas of Gresford has already said, we on these Benches broadly welcome this Bill. We also welcome the decision to have two bites at the legislative cherry and to have a period of consultation on many of the issues that will need to be resolved as the new department is established, not least the question of powers.
In theory it clearly makes sense to have one body collecting all the taxes. If you were starting with a blank sheet of paper, that is what you would do. That is why in virtually every other country in the world that is what already happens. However, the question that we have to address, and which noble Lords have addressed this afternoon, is whether it will be successful in practice in this country. We need to be clear from the start what the merger is seeking to achieve. It seems to me that you would expect a successful merger to achieve three things: first, it should achieve greater efficiency; secondly, it should be more effective in getting in the revenue and closing the tax gap; and, thirdly, it should—to quote the noble and learned Lord the Attorney-General—lead to improved customer focus, or, to use the wonderful phrase used in debates in another place, improving taxpayer experience.
A number of arguments have been put forward in another place regarding which of those three broad priorities should be the most important. However, it seems to me that unless the merged department is more efficient and more effective in collecting the revenue, and makes it easier for taxpayers to relate to it, it will fail.
I should like to consider briefly some of the issues that the merger raises in achieving those three priorities. First, as regards improving efficiency, a number of noble Lords, notably the noble Lord, Lord Sheldon, talked about the different cultures that exist in the two departments. Certainly the two types of taxes that they have traditionally collected have led to a very different mindset. Dealing with income tax returns or corporation tax as a tax official looking retrospectively at what taxpayers have put in is very different from being on a coast and dealing with smugglers who are literally in front of you.
My own experience as a Customs and Excise officer for seven years is that the historic background and memory of dealing with 17th, or rather 18th and 19th-century, smugglers enthused Customs, so much so that when VAT was introduced and new members of staff had to be recruited from the Revenue and from what were dismissively known as OGDs, other government departments, the traditional Customs and Excise 605 officer looked down on those lesser mortals with a very considerable degree of scorn. There was a tremendous esprit de corps in Customs, which may or may not have been desirable in every last respect as regards an ebullient way of dealing with taxpayers, but it certainly existed and was certainly a different culture from that which obtained in the Revenue. Putting those two cultures together will not immediately lead to efficiency savings. In my view there will be a period of tension as that is done.
Secondly, I refer to the problem of the different IT systems. As noble Lords have pointed out, 250 major IT systems are in operation across the two departments at the moment, many of which stand alone. While it is great to talk about integration, in reality integration between taxes means integration of IT systems in large measure. Unless a lot of investment is made in those IT systems, I fear that the integration which everyone hopes will occur will prove rather elusive. There is considerable vagueness about the short-term costs and the longer term benefits of putting the two departments together. On the one hand we are told that there will be savings of 3,200 staff—a £100 million saving by 2007–08—but on the other that there will be at least £75 million worth of costs. I absolutely agree with the noble Lord, Lord Sheldon—I believe that the noble Lord, Lord Barnett, also made this point—that in the short term you are more likely to be dealing with problems and costs than immediate short-term efficiency savings.
I refer to the wider question that staffing levels raise in these departments of the trade-off between the tax raised and the number of staff collecting it. Of course, any Customs Officer or Inland Revenue inspector will say, "If only there were more of us, we would collect many more times our income in taxes". Obviously, there comes a point where if you took that principle to its logical conclusion, virtually everyone in the country would be a tax inspector, and no one is suggesting that. However, I absolutely agree with the new chairman of the merged department, David Varney, who wrote in the O'Donnell report:It will be a challenge to keep a long-term focus on the effectiveness prizes and not fall prey to the temptation to substitute short-term cost reduction objectives".I heartily agree with that.
A further question that arises on the efficiency front and moves into the effectiveness front is the parallel decision, which has not been discussed at all today, regarding giving the Treasury greater responsibility for setting tax policy. It used to be the case that the staff in the Treasury dealing with tax policy were very small in number and traditionally far too grand to get involved in the details of the tax changes they expected people like myself when I worked there, and my equivalents in the Revenue, to deal with. I can see considerable advantage in forcing Treasury officials to look at the detailed consequences of what is proposed rather than having a grand sweep and making the poor people in the Revenue departments implement it. It will be interesting to see how having to grapple with 606 those details might lead to fewer ineffective tax changes, although I fear that the main motor for those changes has been Ministers rather than officials.
Will what is proposed be more successful in getting in the revenue? We have been told about the tax gap of some £30 billion to £40 billion. How will the merger affect our ability to reduce that? As my noble friend Lord Thomas said, if the new prosecutions office is more effective in its work than its predecessors, that will make a difference. It will affect the climate in which people look at tax paying. More generally in getting in the revenue, it will be effective only if there is a really integrated department. While the suggestion of one inspector and one inspection per firm is tremendous, there will be difficulties in making that effective.
My experience of understanding taxes was limited to a week on a training course on VAT in Southend. I rapidly discovered that once you got below the surface of a tax, it became very complicated. The hope that is widely expressed—that a single inspector will be able to go into a small firm and advise with authority on national insurance, Inland Revenue, VAT and all the other taxes—is an interesting prospect that at the very least will require significantly more training of large numbers of tax inspectors than is currently the case. While it may liberate staff, as the noble Lord, Lord Brooke, said—in one sense you can see how it might, bearing in mind that you are dealing with a work force not all of whom are in the first flush of youth—you may find that the prospect of having to learn a lot of detail about a significant number of new taxes to be able to realise this Utopia will be daunting. That will be a challenge to management. It is equally difficult to see how all this improvement can be achieved during a process and period of significant staff cuts. It will be possible to have effective single inspectors only if they are dealing with a significantly simpler tax system.
That brings me to the final area, which is improving the taxpayer experience. The vision of having a single inspector is tremendous. The idea for small firms of filling in a single form sounds tremendous, but in circumstances where you fill in a monthly forrn for some taxes, a quarterly form for other taxes, and an annual form for yet other taxes, I am not absolutely sure how a single form will be devised without spatchcock-ing together a number of others, or how effective it will be. It is a noble aspiration, but it will take quite a time to evolve. I wonder whether the merging departments have yet contemplated what the timetable for introducing such a form might be.
This improved taxpayer experience will be possible only when the IT is working in an integrated fashion across the departments, when the tax system is simpler, and when the tax inspectors have broader training. It is a big task to reach the goals that the Government have set for the merger, certainly in the short-to-medium term. How then might they best achieve it? There are a myriad of things to be done, and I will mention a couple of them. First, the recruitment of a chief information officer and giving higher priority to IT are hugely important. As I have already said, making taxes work in a simplified way and in an 607 integrated manner depends crucially on the IT. Having a cadre of really experienced and high-quality IT professionals in the new department will be crucial.
Secondly, the idea of using the merger to reduce compliance costs to taxpayers will happen only if some people are charged specifically with that task and it is not left as a vague aspiration. I understand that in Holland there is a unit in the finance ministry whose goal is specifically to reduce the compliance costs to taxpayers against targets over a set period. That is something to which we should give consideration as part of this merger.
I hope that the Treasury Committee in another place will also keep a regular review of the way in which the merger takes place. I am not sure whether our own Select Committee on Economic Affairs is quite the body to keep such a regular review, but a lot of vague things are currently being said about the way in which this will bring benefits. Unless there is a clear reporting system, and unless the department is probed by Parliament on a regular basis, there is a real danger that the aspirations of the merger will either not be realised at all, or will be realised much more slowly than we would hope. There are big challenges for this new department.
I wish to make a final plea. Treasury Ministers need to be thoughtful about the effect of making this change in terms of their responsibilities as changers of the tax system on an annual basis. The noble Lord, Lord Sheldon, talked about the relative thickness of Bills, but if there is to be an integration of the departments in the way that we hope, on a timetable that makes sense, senior management need to be able to focus largely on it, rather than having to concern themselves each year with a huge volume of new tax legislation. A period of relative calm on the legislative front is a major prerequisite of this merger taking place quickly and effectively.
It is the nature of these debates that one raises queries and worries, rather than spend all one's time gazing at the sunlit uplands. Subject to all those caveats, we look forward to seeing the Bill through all its stages here and to a successful new department.
§ 6.56 p.m.
§ Baroness Noakes
My Lords, I thank the noble and learned Lord the Attorney General for introducing the Bill, and like the noble Lord, Lord Barnett, I welcome him to the relatively small band that is accustomed to debating Treasury matters.
When I heard that the noble and learned Lord was to handle this Bill, I feared that the Bill would be full of tricky legal points, particularly concerning the new Revenue and Customs Prosecutions Office, which will be part of the noble and learned Lord's empire. To that end, my noble friend Lord Kingsland will assist me in the remaining stages of the Bill. It may help the noble and learned Lord if I say that we support the proposals to create the new Revenue and Customs Prosecutions Office. We also support the new role of Her Majesty's 608 Inspectors of Constabulary and the Independent Police Complaints Commission in relation to Revenue and Customs investigations.
There is an issue in relation to the coercive investigatory powers of the new Revenue and Customs Prosecutions Office, which are, in fact, contained in the Serious Organised Crime and Police Bill. Some, including the Law Society, consider that the range of offences to which the coercive investigative powers will apply is too broad. For example, Clause 55 of that Bill would allow coercive investigation of an offence of fraudulent evasion of duty or VAT, whatever the value of the alleged offence. There should be a threshold value below which the powers will not apply, so that the use of such a draconian power is proportionate and limited to offences involving serious organised crime only. I hope that the noble and learned Lord will say something about the interaction between the two Bills when he replies.
We shall not oppose this Bill, and as far as I am aware, we shall not be making many party political points. We support the principle of integrating the Inland Revenue and HM Customs and Excise, because a joint operation has the capacity to be more efficient and to provide a better service to what are euphemistically called "customers". Importantly, it also has the potential to produce a more effective organisation for tackling the tax gap, which may be worth as much as £50 billion a year. I agree with the noble Lords, Lord Sheldon and Lord Brooke, that that is an important area to tackle.
However, that does not mean that we have an uncritical acceptance of the Bill or of the processes that led to it. In particular, we have concerns that the practical aspects of the integration of the two departments have not been properly worked through and that there is no proper provision for scrutiny of the progress of the integration. Perhaps more fundamentally, we are concerned that the Bill rushes ahead to create the new organisation without pausing to establish what its powers should be. In saying that, I echo what a number of noble Lords have said this evening.
The integration of the Inland Revenue and Customs and Excise might seem to have a modernising, new Labour ring to it, but the idea has been around a very long time. It was first rejected in 1862 and has been on and off the agenda many times subsequently, most recently in 2000, when the Treasury Committee of another place continued doggedly to pursue the matter. In rejecting that committee's recommendations at the time, the Government said that their solution of "closer working" gave the benefits of merger,without the risks. upfront and opportunity costs and structural upheaval which merger would inevitably entail".Somewhere between 2000 and last year, Mr Gus O'Donnell, the Permanent Secretary to the Treasury, found himself on the road to Damascus and ended up recommending the integration of the two departments. We all know that Mr O'Donnell is a pretty clever man, and his conclusions will be worth close inspection. His report states, at paragraph 1.17, that:The case for organisational change rests on potential improvements in customer service, effectiveness and efficiency".609 It also notes, at paragraphs 1.22 and 1.23, that there would be upfront costs and risks in implementation—so far, so unremarkable.
The concerning aspect of the policy development is the almost complete absence of quantification of the benefits or costs in the report. The figure for savings in jobs related to the merger is around 3,200, as we have heard. If we compare that with the combined work force of around 106,000, we are talking about merger savings of only 3 per cent. As has been said, that could be worth aroun£100 million a year, which is welcome in any Chancellor's budgetary arithmetic, but that is not a level of saving that would excite anyone in the mergers world in the private sector. I should explain that, in the private sector, we still call them mergers; we have not yet caught up with the new term, "integration".
The full costs of completing the integration have not been spelled out; nor have the implementation risks. We believe that the implementation risks are high because, as has been pointed out, it involves two organisations of very different cultures, with different IT platforms and different though partially overlapping customer bases.
When Mr Varney was challenged on the lack of specificity about costs and savings in the O'Donnell report, he responded to the Treasury Committee that the matter was very complex. He was challenged several months after the O'Donnell report, and even then had no clearer idea of the costs and benefits. It was still a case of, "Complexity rules". Perhaps even more surprisingly, last month, when the Bill was considered in another place, Treasury Ministers were unable to give any better account of the costs and benefits. By then, a new excuse had been invented— that of not being able to progress integration plans in advance of the legal cover of a Second Reading. That probably stretches that excuse about as far as it could ever be stretched.
What is missing from the analysis in particular is any information about what the Government believe to be the real potential benefits in increasing yield and diminishing the tax gap. It is not the £100 million of cost savings that should drive the integration, but the ability to increase yield. We find it astonishing that the Government have said nothing concrete about that. Would the Treasury ever let another government department get away with such a lightweight analysis?
This is a murky area. As I said before, we agree with the principle of integration, but we believe that it is incumbent on the Government to explain their case clearly and comprehensively. In the absence of a fully worked-up business case available for proper scrutiny—in Parliament and by the public—before the integration goes ahead, there is an absolute requirement for clear and comprehensive reporting to Parliament on the progress of the integration. We shall table amendments to ensure that proper scrutiny takes place.
The rush with which the Government are pursuing the integration means that they have not sat down to contemplate in any detail what the powers of the new 610 organisation should be. We know that, in general, the powers of Customs and Excise are more draconian than those of the Inland Revenue. For example, it has powers of entry into premises that the Inland Revenue simply does not have.
The Bill seeks to confine the existing powers to existing uses in Clauses 6 and 7.I am sure that we will discuss those in more detail in Committee. However, the plain fact is that the Government have no plans—or at least no revealed plans—for the way in which the new organisation will operate. In his opening speech, the noble and learned Lord referred to the consultation document promised by the Paymaster General during the passage of the Bill in another place. She promised that it would be out by the end of last month. It did not appear. I hope that the noble and learned Lord is able to say something today about when we will see it.
I will now speak about the rather arcane area of governance. The Bill is silent on several important matters. It does not say anything about the number of commissioners or how they are to be selected for appointment. It makes no provision for the selection or appointment of a chairman, executive or otherwise, even though it seems clear that Mr Varney thinks that he will be the executive chairman of the new organisation. There is nothing in the Bill about non-executive members—they exist in both the Inland Revenue and Customs and Excise and in particular about their employment status and roles and responsibilities. The Bill is silent on the need for an audit committee, which is an absolutely essential element of any modern organisation, whether in the public or the private sector.
We want to explore governance issues fully in Committee. I should say for the record. although it is not a declaration of interest as such, that my noble friend Lady Wilcox and I were the first two non-executives taken on by the Inland Revenue. Indeed, we may have been the first non-executives in the whole of Whitehall, so we have a little experience to offer.
We need to examine some areas of the Bill further in Committee and other later stages. Those include: the need for restrictions on the Treasury's power of direction; parliamentary scrutiny of the transfer of functions out of the Revenue and Customs under Clause 8; the scope of the public interest disclosure provisions of Clause 19; and the specific offences involving Revenue and Customs officers. We want to look at accountability for payments to informants, a subject raised by the noble Lord, Lord Barnett. Last, but not least, we want to consider the name of the organisation. We will table amendments on all those areas. Unfortunately, my noble friend Lord Campbell of Alloway was not able to stay with us this evening when the timing of the debate slipped back. He has signalled to me his interest in a number of areas relating to the disclosure of confidential information and the related human rights considerations. I hope that he will join us in Committee to debate those. 611 I hope that I have conveyed to the noble and learned Lord the fact that we will approach the Bill in a constructive spirit, but that we shall be committed to the full process of scrutiny of the Bill in your Lordships' House.
§ 7.10 p.m.
§ Lord Goldsmith
My Lords, I begin by expressing appreciation to all noble Lords who have spoken for their thoughtful contributions and, generally speaking, for their support of the Bill and its principal elements. The support from my noble friends Lord Sheldon and Lord Barnett was somewhat more cautious, but the fact that noble Lords with so much experience from all sides have spoken—from the staff side, my noble friend Lord Brooke; from the perspective of employment within the organisation, the noble Lord, Lord Newby; from the prosecution and criminal justice side, the noble Lord, Lord Thomas of Gresford; and from particular responsibilities within the Inland Revenue, the noble Baroness, Lady Noakes—has left me somewhat humbled at being invited into this small and select group. I am looking forward to piloting the Bill to the successful conclusion referred to by the noble Lord, Lord Newby. That is my overriding concern.
Before turning to the issues raised, I want to recognise an important point made by my noble friend Lord Sheldon. Both departments have a long and proud history. The new department will not want to lose the best of the culture and tradition. They already have an overlap in culture and tradition and reference was made to their enviable reputation for honesty and integrity. There is a clear determination to build on those important qualities.
By having the incremental approach which the Bill represents—a first stage—and having strong leadership, unified communications and the involvement of staff, to which reference has been made, I and Treasury Ministers believe that this project will prove successful. I want to pay tribute to the staff of the two departments. Throughout their histories, they have delivered services of the highest standard of professionalism, integrity and commitment. We have no doubt that the staff are up to the challenges that integration presents and that they will build on those achievements to create a new, world-class, integrated department.
I turn to the new prosecuting office. I am grateful for the support from the noble Baroness, Lady Noakes, and the noble Lord, Lord Thomas of Gresford, who spoke specifically on it. The noble Lord, Lord Thomas, rightly referred to the report of Mr Justice Butterfield and to some elements of the history of Customs prosecutions. I will not take time today to go into those, but as the noble Lord will know, the Butterfield report contained a number of recommendations both for the investigators and the conduct of prosecutions.
All of those recommendations have been or are being implemented as a matter of priority: for example, improved procedures for handling human 612 sources of information; heavy investment in training; internal assurance systems reviewed; and in this Bill, proposals for procedures for external validation both in relation to investigations and the prosecution office. That is particularly important in the field for which I normally have responsibility; that is, prosecutions and the creation of the independent prosecutions office. I welcome the support for that.
The noble Lord, Lord Thomas of Gresford, asked specifically whether the existing powers for rights of audience which Customs' investigators have will remain or disappear. They will disappear under Schedule 4 to the Bill. It is right to note that the director will in due course, and once suitable training has been given, be able to designate certain persons under Clause 39 to conduct particular hearings in the magistrates' courts. That mirrors what happens with the Crown Prosecution Service and I am confident that it will be a proper way to proceed.
The noble Lord also referred to the need for resources. I am conscious of the need for all my departments which are involved in criminal justice to be adequately resourced to carry out their heavy responsibilities. That is therefore a matter of importance. However, I also welcome the noble Lord's support for the appointment I announced before Christmas of David Green as director of the new prosecuting office. When the Bill becomes law, it is my intention to appoint him formally to the statutory post of director of RCPO.
A number of noble Lords raised the issue of confidentiality. As the Bill progresses, I hope to be able to reassure noble Lords that the provisions on confidentiality are absolutely adequate and fitting. As I said in my opening speech, there is no intention to water down the importance which is presently given to the confidentiality of taxpayers' affairs. So, for example, the Bill now includes in Clause 3 a declaration to be entered into by new staff. That clause was inserted as a result of the questions raised about the existing oath, to which my noble friend Lord Sheldon referred. No doubt we will return to the issue of confidentiality.
My noble friend Lord Barnett raised a number of questions with which I shall deal before turning to the broader question, raised by a number of noble Lords, on the benefits of integration. In relation to powers, he asked whether, because the Explanatory Notes refer to the risk of inadvertent widening of powers, there was an intention for there to be advertent widening of powers. No, we did not want to make changes to the powers without allowing time for consultation before lessons have been learnt from early integration activity. The provisions therefore transfer the existing powers, but they are to be used in the same way as the existing powers are ring fenced to the particular functions.
My right honourable friend in another place, the Paymaster General, referred to a consultation on that and the noble Baroness, Lady Noakes, asked whether I can say more about the date. I cannot give a firm date at the moment. Treasury Ministers are still considering 613 what form the consultation will take to ensure that the most appropriate approach is adopted. But as soon as a consultation document is published, it will be available on the Revenue and Customs websites and copies will be placed in the Library of the House. Of course, I will ensure that once a firm date is available noble Lords are made aware of it.
The noble Lord, Lord Barnett, also asked about the payment of rewards and he looked hopeful about those. The legislation does not change the existing practice in relation to rewards—it consolidates the existing powers which are available in each department. Publication of too much detailed information about the rewards would not be prudent. It would risk inviting attempts to exploit or defraud the system. However, I can tell my noble friend that in 2003–04, Customs and Excise spent a total of £946,300 on rewards—payments ranging between £50 and £100,000—while the Inland Revenue made only one payment of £100. Annual payments fluctuate of course. My noble friend can see from that where he should be concentrating his efforts.
My noble friend Lord Barnett also asked why we were widening the offence of unauthorised disclosure. That is because in the past criminal sanctions have not applied to information about Customs' non-tax functions. Those will therefore be brought in by the widening that is taking place. He also asked about the management controls, or administrative safeguards, which would inhibit staff access to information. A number of those are in place already: for example, provision to staff of a unique identification number; password to access computers; access to IT systems only where they need access to do their jobs; reminders; disciplinary action; appropriate training; and guidance.
A number of noble Lords have expressed scepticism about the benefits. We have no doubt at all about the benefits of this proposed integration. Of course, such changes must be based on evidence, but that is why the O'Donnell review was commissioned. It examined in detail all the possibilities for the organisation of the revenue departments, including doing nothing, to see how it would be possible to improve service delivery to taxpayers, effective tax collection, coherent and efficient use of resources. That picks up some of the points raised by the noble Lord, Lord Newby.
The review found clear reasons of principle, supported by evidence, to consider an integrated department, in particular, the fact that well over 1.5 million businesses are customers of both departments. There is strong international evidence in favour of administering direct and indirect taxes together. The conclusion was supported by independent leading figures from business, whose views can be found as annexes to the O'Donnell review.
Of course, it is right to recognise that there are risks in major changes, as the noble Lord, Lord Sheldon, said. Therefore, we recognise the importance of proceeding on an incremental basis and of considering carefully the changes that need to be made. I hope that noble Lords will see that our approach recognises precisely that.
614 On the costs and benefits that will occur, the management designate of HMRC is committed to assessing those costs and benefits as the necessary changes are developed. As noble Lords have said, work has already commenced and today has produced the current known costs of integration, to which reference has been made, and the reduction of staff detailed in the efficiency technical note.
Let me dispel one suggestion: nothing in what I have said has indicated anything different from the timetable that my right honourable friend the Paymaster General indicated in another place. We have both recognised that integration is a huge challenge and that it will take time to deliver. It is right that integration will develop over time; it will be incremental; and some of the changes such as the formation of a single large business service can be made from the inception of HMRC, but others will take longer. Both the Paymaster General and I are convinced that this incremental approach is the right one and we are in full agreement that the momentum must be maintained throughout the process. Staff savings from the integration will be realised by April 2008 and other changes will be realised as the incremental process continues.
The noble Lord, Lord Barnett, asked when integration will start. The creation of HMRC will start realising some benefits from the outset. I have already referred, for example, to the creation of a large business service, so there will be immediate benefits for such customers as the new organisation begins taking a more joined-up approach to their affairs. However, more will need to be done and work to consider changes needed to deliver further integration is under way.
I shall deal with one or two other points that were raised. I hope that my noble friend Lord Brooke will find helpful what I have said about transfers and about consultations on the effects on staff. He asked about the impact of proposals for moving jobs out of London. I am grateful for what he said about the Manchester office of the Customs and Excise Prosecutions Service, which I have visited several times. We have committed to moving 1,950 posts out by April 2008 and a further 2,300 posts by April 2010, but it is too early to say more about the specific locations. Work is under way. The noble Lord also raised other interesting questions, such as the payment of tax liabilities by credit cards, which is one matter that the new department will no doubt be able to consider in due course.
The noble Lord, Lord Newby, welcomed the decision to transfer tax policy to HM Treasury and I welcome what he said in that regard. He was concerned about staff suddenly having to learn about a number of different taxes with which they were unfamiliar. I can assure him that there will not be a sudden move to train all VAT officers, for example, in PAYE and because of the differences in powers for the different regimes, HMRC is likely to be quite cautious in transferring sets of powers to any individual officer. 615 After the consultation, when we rationalise the powers, it may be easier for a single team to deal with different functions.
I was also asked about the extension of the powers that the Serious Organised Crime and Police Bill will provide for the revenue and Customs prosecuting officers. Those will not be exercised for tax offences, pending the outcome of the wider review of HMRC powers. That was announced during the passage of the Bill in another place. In addition, the use of those powers will be subject to guidance which I shall issue to ensure that they are used only where necessary and proportionate.
The noble Baroness, Lady Noakes, has indicated that there are a number of areas that may be the subject of further discussion during subsequent stages of the Bill. I look forward to debating those and I look forward to the passage of the Bill through this House.
On Question, Bill read a second time, and committed to a Grand Committee.