Tax Credits, Stamp Duty Land Tax and Deleted Tax Cases (HC 269-i) Public Accounts Committee 31 Jan 2005

Evidence given by Mr David Varney, Executive Chairman; Mr Paul Gray CB, Deputy Chairman, and Mr David Anthony Hartnett CB, Director General (Policy and Technical), Inland Revenue.

Q61 Mr. Gerry Steinberg (City of Durham): How do the Inland Revenue collect taxes, and how did the Benefit Agency pay benefits before IT was introduced?

Mr Varney: Through lots of local offices, I suspect.

Q62 Mr. Gerry Steinberg (City of Durham): Was it more successful?

Mr Varney: I doubt that we know what the error rates were.

Q63 Mr. Gerry Steinberg (City of Durham): Certainly they would not write off a million cases, would they? Somebody would notice, I suspect.

Mr Varney: I suspect that is right but I think you can have different sorts of errors and different sorts of problems.

Q64 Mr. Gerry Steinberg (City of Durham): How does the Department continually justify these incompetent IT firms such as EDS and Capita? Why do they keep getting contracts? Do they have a monopoly?

Mr Varney: No, but I think - and I do not want to say anything that is going to be no longer in the Department's interests should we go to court - these are hugely complex systems in terms of challenges. We thought we had a contractor which had experience of managing big projects and I think, as my predecessor said, we were clearly disappointed that the system did not deliver.

Q65 Mr. Gerry Steinberg (City of Durham): But it never delivers, does it?

Mr Varney: I think in private industry the success of big systems is about 25%, systems that deliver outcomes as prescribed, or that is what the American evidence is, so these big systems are really major issues about getting proper control systems --

Q66 Mr. Gerry Steinberg (City of Durham): If that is the case, that it is 25% in the private sector and clearly not much better in the public sector, why do you not write in the contracts severe penalty clauses? Why do you have to tell us that it will take possibly a number of years to come to some sort of settlement through the courts? If you had some decent solicitors or barristers or lawyers working for you, presumably they would write into the contracts "If anything goes wrong you pay for it"?

Mr Varney: There is a more severe penalty regime in the new contract we have done --

Q67 Mr. Gerry Steinberg (City of Durham): But why was it not in the old contract? I have sat here now since 1999, I suspect, and I have heard exactly the same excuse every time, "Ah, but this time we have made it much more difficult for them."

Mr Varney: I was going on to say that there are penalties in the EDS contract, they are defined in terms of event and quantum and ability, so there is some financial penalty, but in the commercial world it is true that if you put extensive penalties in you end up in some way paying for it in the binning system. There is not a group of people out there willing to offer you a payment of damages and not price it into their contract. So it will get priced into the contract, and I think what we have tried to do --

Q68 Mr. Gerry Steinberg (City of Durham): But they are desperate for the work, are they not? They have a monopoly. There are so few of them that they are cutting each other's throats for the work, are they not? It amazes me that Capita seem to crop up virtually every time that we have a meeting, and EDS crops up every other time, and Siemens are another one, and I am at a loss to think of everybody else. There only seem to be the three of them, and they all fail.

Mr Varney: There are a small number of companies, that is correct. I think the response of the public sector is the right one which is to have a gateway process, try and share experience and knowledge, and really there is not much more I can do than what I am doing at the moment which is to pursue EDS to a solution.

Q69 Mr. Gerry Steinberg (City of Durham): Who is the new company? Capgemini. What confidence have you got in them to deliver?

Mr Varney: We went through a process which people said could not be done of swapping out our IT provider, and this is a large complex change and it addresses one of the issues you have raised in that we have switched from one of these companies to another, we ran a tender, we looked at the --

Q70 Mr. Gerry Steinberg (City of Durham): And what guarantees have you got from Capgemini?

Mr Varney: We have penalties within the contract.

Q71 Mr. Gerry Steinberg (City of Durham): This time.

Mr Varney: This time.

Q72 Mr. Gerry Steinberg (City of Durham): Do you expect anything to go wrong?

Mr Varney: I am always expecting something to go wrong.

Q73 Mr. Gerry Steinberg (City of Durham): So you are expecting something to go wrong?

Mr Varney: It is not just coming before this Committee but anybody who has 100,000 people dealing with 13 million --

Q74 Mr. Gerry Steinberg (City of Durham): What could go wrong?

Mr Varney: Lots of things.

Q75 Mr. Gerry Steinberg (City of Durham): Tell us, because they will be listening and then they will make sure it does not when you tell us what you expect to go wrong.

Mr Varney: That is one of the reasons we have a management process for managing IT and risk, which I think lies at the heart of how we are trying to manage this.

Q76 Mr. Gerry Steinberg (City of Durham): EDS are going to pay compensation, we are told, and you say it is going to take a while before the court decides, and obviously it is not right for me to press you any further on that. I was going to but when I listened to you giving answers to Mr Sheridan I thought it was better not to, but in the report I read somewhere that compensation could be expected of something like £34 on average per person who is going to be compensated. That does not seem very much to me, £34 per person?

Mr Varney: First of all, I am grateful for you not pursuing the EDS issue, but I think the compensation you are talking about is in terms of appeals.

Q77 Mr. Gerry Steinberg (City of Durham): Yes.

Mr Varney: On the appeals in the first year that we dealt with them that was, indeed, the average that came out, £34. In the year to date we are roughly agreeing compensation at about the same percentage of cases, which is I think around 20%.

Q78 Mr. Gerry Steinberg (City of Durham): So you are as tight-fisted as EDS, then?

Mr Varney: Hang on, I am trying not to make EDS tight-fisted but the level of compensation has almost doubled, which reflects the fact that many of the cases we are now dealing with have had longer periods of time where there has been worry and stress.

Q79 Mr. Gerry Steinberg (City of Durham): Just going back to EDS, and I will not pursue the case any more, will they be considered for further contracts?

Mr Varney: I am sure they will be competing, and this will be part of their track record.

Q80 Mr. Gerry Steinberg (City of Durham): Are other permanent secretaries aware of their track record?

Mr Varney: We have shared with OGC our experience but, as you said, there are a small number of companies and each of them has the distinguished past of at least one glorious problem.

Q81 Mr. Gerry Steinberg (City of Durham): Were checks ever made on EDS at the time?

Mr Varney: Yes.

Q82 Mr. Gerry Steinberg (City of Durham): So why were the problems not found out?

Mr Varney: I think that is the issue about which we are clearly right in the centre of the court case.

Q83 Mr. Gerry Steinberg (City of Durham): Because I would have thought that there would have been tests taken and errors found which could have been put right at the time. It seems strange to me that this continuously went on and mistakes were being made and made and nobody seemed to pick them up, but you are saying they were picked up. If they were, why were they not put right?

Mr Varney: I think we had quite an extensive discussion last year with --

Q84 Mr. Gerry Steinberg (City of Durham): What I am saying is there was £94 million worth of errors and my view is that if £94 million worth were being made 30 years ago somebody would have said "Wait a minute, I think there is £94 million worth of errors being made here", and nobody seems to be doing that.

Mr Varney: As I say, we are pursuing them in the courts.

Mr. Gerry Steinberg (City of Durham): I have a load of questions here on EDS so I will have to miss them out.

Q85 Chairman: So you are not prepared to say any more on EDS?

Mr Varney: I do not think it would be helpful.

Q86 Mr. Gerry Steinberg (City of Durham): Does the new partner, Capgemini, expect to be able to recover overpayments? Will it be doing that?

Mr Varney: No. The systems they are running will be used by us to pursue the overpayments, and we think some of them will be recovered. Some of them are being.

Q87 Mr. Gerry Steinberg (City of Durham): How much?

Mr Varney: Too early to say, really.

Q88 Mr. Gerry Steinberg (City of Durham): So what do you reckon the loss to the taxpayer is going to be as a whole, or is it "too early to say"?

Mr Varney: Yes, but I will be back.

Q89 Mr. Gerry Steinberg (City of Durham): A number of members have mentioned, I think the Chairman did and I think Angela mentioned it as well, that basically the people who receive tax credits to begin with are also those who are the least fortunate in society and are usually the poorest anyway, and Angela asked whether she should tell her constituents to bank some of the money just in case it was going to be overpaid. I do not think that would be a good idea because the very fact they are getting tax credit is basically because they desperately need to spend that money so when they receive a Giro or cheque for it they are hardly going to consider banking some of it because they need to spend it. So how do you expect the poorest people in society to pay back money that is overpaid? The system is inherently wrong, is it not?

Mr Varney: The code of practice lays out what we will do in terms of the recovery rate, but the reason there is an overpayment is because circumstances have changed. One of the reasons is that people's economic circumstances are much better than we anticipated when we did the award.

Q90 Mr. Gerry Steinberg (City of Durham): Yes, but they do not change that much, do they? A few quid here or there puts them under benefit or not under benefit

Mr Varney: By more than £2,500 because that is the dead zone that Parliament has discussed, but there is clearly a very delicate section of the population which is absolutely captured by this, and we need to handle them appropriately with kid gloves thinking our way through it, but there are also other people who, quite legitimately, have much better economic circumstances and who owe us money.

Q91 Mr. Gerry Steinberg (City of Durham): Very quickly, what do you think, and this is going to be a guestimate obviously, the actual overpayment through errors of fraud is going to be this year?

Mr Varney: I do not know.

Mr Hartnett: We will not know, Mr Steinberg, until we get through to about July, when awards for 2003-4 will have been finalised, we will have carried out investigations, in particular random sum investigations, which will give us an indicative figure for fraud and error.

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Q162 Mr. Gerry Steinberg (City of Durham): Listening to Ian Davidson and the mistakes which are made, if you turn to page 126, figure seven, does this not sum it all up and it is the cause of all the problems, the fact that the New Tax Credits, the Accuracy of Processing and Calculating Awards is 78% correct against a target accuracy of 90%, whereas the old tax credits were in some cases 98% right and at the worst 85% right. Surely that is the solution to the problem or the reason for the problem is the staff are making so many mistakes.

Mr Varney: Clearly it is something we need to improve. I think the Committee will be probably glad to hear that in 2004/05 it is improving and moving up. Clearly it is an issue in the system.

Q163 Mr. Gerry Steinberg (City of Durham): If they are making so many errors no wonder there are so many overpayments.

Mr Varney: There are overpayments in the system in part because of the design of the system. If you focus on the overpayment issue, the overpayment issue comes about in part because there are errors. Another part is the change of economic outlook of individuals, which is much better than we thought it was and, therefore, they are entitled to less credit or there is a change in their family circumstance which means they have got a lesser entitlement.

Mr. Gerry Steinberg (City of Durham): Finally, the point Mr Davidson made, for goodness sake do not take any notice of him as far as hotlines are concerned because when I have somebody screaming at my secretary that it is her fault they are not getting the tax credits - and that happens our secretaries and our staff tend to get the blame: "You have not paid me my correct tax credits" - at least they have the advantage of being able to go home and sort it out over the hotline. If the hotline was not there, in many cases sometimes you would have to call the police, to be quite honest, to get them out of the office. Do not get rid of the hotline for goodness sake.

This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee. Neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.