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NAO offers encouragement to HMRC overhaul, in spite of IT gremlins

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23rd Jul 2008
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HMRC project under the NAO microscopePoor staff morale, funding constraints and changing priorities pose the biggest challenges for HM Revenue & Customs' transformation programme, according to a National Audit Office report issued last week. John Stokdyk presents a summary of the evidence.

Following the recent publication of its qualified audit of HMRC's annual accounts for 2007-08, the NAO has looked through spending and delivery patterns for HMRC's corporate overhaul since HM Customs and the Inland Revenue merged in 2004.

At the time of the merger the government set the new department a target to reduce staff numbers by 12,500 posts, redeploy a further 3,500 staff and make a total annual efficiency saving of £507m by March 2008.

HMRC's transformation programme was bolted on top of the new structure and brought together a number of programmes that were already underway, for example to expand the department's online services and standardise on a single business.gov website. The programme takes in new efforts to reduce the tax gap, to streamline tax administration and reduce the burdens on business. In total, HMRC plans to invest £2.7bn in the transformation programme from 2006-07 to 2010-11 in order to achieve benefits of £11.5bn by 2011.

As it moved towards its halfway point in March 2008, HMRC had spent £851m on the transformation project, against a planned estimate of £893m. The NAO concluded that it achieved benefits worth around £2.4b - largely from programmes which were underway when the transformation programme began. The unverified savings estimate comprised:

  • £1.5bn in additional tax yield
  • £231m in savings from staff reductions
  • £600m in benefits to businesses from Business.Gov
  • £86m from reducing administrative burdens on businesses
  • £14m in non-staff savings.
  • Looking forward, the program is expected to achieve the 2011 savings target of £11.5bn through:

  • An increased tax yeild of £6bn achieved through better targeting and more efficient processes.
  • £600m in staff savings, from a net reduction of 18,000 staff.
  • £4bn in savings from the use of the business.gov website
  • £150m from reducing the administrative burdens on business.
  • £500m from other administrative savings such as reduced property and paper/storage costs.
  • The estimates "carry a high degree of uncertainty", the NAO noted, because HMRC had not assessed the customer benefits for some programmes, nor had it fully validated the £4bn claim for the transaction savings expected from the business.gov website. The figures for tax yield increases and staff reduction savings are also are "potentially more volatile than the net figures suggest", the report added.

    The NAO study states that HMRC cost £4.3bn to run in 2007-08 and employed 86,000 staff. The NAO documented staff reductions of 8,243 full time equivalent posts to back the current claim of £231m in savings, but noted that because the cuts were affecting lower paid positions, the savings per post were less than expected £29,500 (the average HMRC salary).

    Just as AccountingWEB.co.uk's own 2006 progress report on the transformation programme concluded, the NAO identified poor staff morale as a major obstacle for the project. Staff satisfaction might be expected to decline in any change programme, the report noted, but the department should be doing more to demonstrate the benefits of change to staff, and expand its training programme and support them with appropriate technology systems to realise the ultimate goals, the auditors advised.

    Already, however, HMRC has had to trim back its transformation plans. The NAO report details how spending constraints started to bite in early 2007. Its funding level was held steady in 2007-08 and the effects of inflation and lower than expected staff costs savings required a rethink. The deparment concluded that £2.1bn would be available to invest in the transformation programme through to 2011 and the number of projects covered by the programme were cut from 21 to 13.

    The department added a new £155m data security programme to its IT menu for the next three years following the loss of two CDs containing sensitive Child Benefit data in November 2007, plus a £209m workforce change programme. However, in March this year, a further £50m was trimmed off the budget, leaving HMRC a total of £468m to spend on its organisational overhaul in 2008-09.

    Projects were prioritised if they were unavoidable due to legislative and spending review commitments, while potentially desirable but unaffordable initiatives, or projects deemed impractical were left behind. The mothballed projects included some covering compliance & enforcement, enterprise infrastructure, government banking and PAYE.

    Responding to consultation, the department also slowed down the roll-out of IT systems that would not be ready in time, or where more preparation was needed by stakeholders. This was the reason given last week when HMRC announced it was delaying the introduction of its PAYE Service and Work Management System until October 2008. The extended timetables for Lord Carter's programme for online filing of PAYE returns (now planned for 2009), VAT returns (2010) and Corporation Tax (2011) also reflect HMRC's more realistic approach to IT implementation.

    The NAO's assessment of HMRC's transformation programme is a very interesting companion to its audit report on the 2007-08 annual accounts. As Tax Zone's Nichola Ross Martin has reported in some detail since the audit came out, HMRC's plans for new and better IT systems in the years to come are likely to be compromised by some of the problems it needs to sort out with its current data processing machinery. Among the issues that the transformation programme report fails to address are:

  • The inability of the tax credits computer to cope with the new system created by the Tax Credits Act 2002. More than 250,000 cases still need to be checked manually to find out whether claimants are due any repayments - a task that is expected to take up to three years to complete.

  • Staff cuts and computer problems were blamed for a backlog of more than 16m "open" income tax records that need to be manually checked before they can be closed off on HMRC's computer system. HMRC claims that it will be able to stabilise the list within two years. To add to the general air of confusion, several AccountingWEB raised concerns last week about client records getting mixed on their online agent lists.

  • Open records have also plagued the PAYE system, as documented by researcher Matt Boyle. Last year, the department said it was working to reduce the backlog Reducing this backlog will not be helped by the delayed implementation of the new PAYE management system. HMRC has also decided not to try and resolve pension coding problems going back to 1983 and will waive certain amounts of tax due for 2007-08 because it could not give the taxpayers reasonable notice of the tax payable.

  • For months in the run-up to the implementation of the new Construction Industry Scheme, AccountingWEB columnist Rebecca Benneyworth and other commentators warned about the practicality of the new regime and warned of paperwork backlogs and an avalanche of penalties that would engulf subcontractors. Last week, HMRC reported that it had been snowed under by requests from subcontractors for confirmation of the deductions that had been made under the scheme. The department pointed out that its CIS computer had been designed for internal staff use to check payments, not to output long reports for subcontractors and their agents. The department will now only produce CIS records if the request is accompanied by a reasonable excuse to explain why the records to have gone missing

  • HMRC's VAT registration computers have been unable to produce reliable information on the amount of work undertaken due to unreliable data. Staff shortages meant that some applications were not entered promptly on to the registration computer systems, the NAO annual audit reported.
  • In its overall assessment, the NAO was generally upbeat on the likelihood of HMRC's transformation programme achieving its objectives. A progress review based on a scale out of 5 rates the programme to have attained an average completion score of 3.5 compared to expected outcomes of 3.7. The two areas where the programme failed to hit the expected targets were stakeholder management, where consultation with external and internal stakeholders was marked down, and cost and benefit management. The NAO judged that expected outcomes have not been fully clarified with suppliers and that monitoring of the benefits achieved is not as mature as it should be.

    But the auditor has made a fundamental mistake in approaching the project as an isolated exercise. Taken at face value, the NAO report makes little allowance for the risks posed to the transformation programme by the stresses and strains already facing the department's current IT systems and change managers.

    As the department has demonstrated to great effect in recent years, new, improved IT processes frequently add new layers of complexity rather than curing intractable problems. And disgruntled, badly trained HMRC staff have proved they are unlikely to overcome these obstacles to delivering better customer service.

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