As a country Britain has spent billions of pounds on modernizing its public services, but often with very poor results. Patrick Dunleavy looks at the current debacle at Her Majesty’s Revenue and Customs over massive amounts of uncollected tax. Examining a single case in detail, he shows how the crisis of service delivery was entirely of the department’s own making, reflecting long-run problems of organizational culture and management.
Recently Her Majesty’s Revenue and Customs (HMRC) wrote to 1.4 million customers, seeking payment of substantial income tax amounts from each, which should have been collected in 2008-9 and 2009-10 but (it turns out) were not. The academic name for such an event is a ‘service delivery disaster’, and the UK has one of the greatest track records of any OECD country in this specialized field, especially but not exclusively where government IT projects are involved.
Monday night’s Panorama programme did a great job of showing what the human costs of the HMRC decision have been, by focusing on a handful of cases. Yet a bottom up view can also tell us a great deal about the government organization involved handled cases – how the managers and staff there work, what their organizational culture is, why the problem has occurred in the first place.
So let me take the case of Mrs Smith (not her real name), who is a widow of 85, living in her own house still and the recipient of one of the now notorious HMRC letters. A bright and alert person, with a quick wit and a sharp intelligence, Mrs Smith lives very modestly and proudly independent still, relying on the proceeds of three small pensions, one of her own from many years of teaching, a widow’s pension from her husband’s pension scheme, and the basic state pension.
In the old days, when her husband was alive, he would painstakingly fill in the old Inland Revenue’s massive paper tax form, even though it was largely pointless for the Smiths’ situation, with its acres of arcane questions about carrying forward previously deferred tax on stock purchases they never made and overseas incomes they never had. Shortly after her husband passed away, the Revenue saw belated sense and moved swathes of pensioners like Mrs Smith onto a full PAYE (‘pay as you earn’) system, where they no longer needed to fill in a tax form at all.
Instead HMRC calculated the amount of tax needed to meet Mrs Smith’s tax liability for the year, taking account of all her three sources of income. They then directly notified her two occupational pension providers to deduct the right amount of money from what they pay her each month in order to meet the full year’s tax bill. No tax is ever deducted from the state pension component – because that would be far too difficult for another arm of government, the Department for Work and Pensions (DWP), to manage to do. Instead the DWP amounts are allowed for in the deductions made from the private pensions. For some years things went well – tax had become just another payment like a direct debit, something that Mrs Smith no longer had to worry about.
What went wrong in 2008-9, and then the next year too, was that somehow HMRC lost contact with the fact that Mrs Smith at ages 83 and 84 in the two years, was still receiving a state pension from another arm of government, namely DWP. Of course, the Revenue did notify her in a fashion of its brand new and self-created misconceptions, in one of the 75 million paper routine ‘notices of coding’ that it issues each year. Phrased in the usual HMRC incomprehensible garbage-speak, these missives arrived once or twice a year through Mrs Smith’s letter box, sometimes the same, sometimes different, printed in micro-font that she sadly cannot now read because of a worsening eye disorder.
To notice the difference, she anyway had only one chance in early 2008 – when she would have had to get out last year’s notice of coding, compare it with the new one, make allowances for shifts in all the monetary values because of inflation across the two years, get out her calculator (she does not have one) and find out in the small print that HMRC had downsized her income by roughly £6,000 a year. Then according to the HMRC view of the world, she was supposed to ring them up (many times probably, since two in every five calls to HMRC are never picked up) and point out this inexplicable anomaly to them forcefully and in enough detail for someone at their end to take some notice.
But Mrs Smith is a compliant and uncomplaining tax payer. She did not do the complicated operations set out above, but instead loyally assumed that HMRC knew what they were doing. As in previous years, she understood that she did not need to do anything about the tax codings, except file them carefully away. Now, however, with her silence bespeaking consent to their wholly erroneous maths, HMRC told her occupational pension providers to deduct far too little PAYE tax from her payments, because knowledge of her state pension payments (some £6,000 a year) had just gone absent from their tax computer systems.
Yet, still, you must be thinking, we live in an age of joined-up government? A decade earlier the famous 1999 Blair government White Paper on Modernizing Government promised that pointless administrative silos would be brought to an end. And across the 2000s two rounds of five year ‘transformational government’ programmes focused on improving government IT systems, at vast expense within HMRC. So surely HMRC was notified by DWP of the pension payments being made to Mrs Smith?
And indeed they were. Every month huge batch files of all DWP payments are sent to HMRC, complete with the names, addresses, National Insurance numbers, and bank accounts of all the people to whom monies are paid. These are supposed to be regularly ‘data-mined’ to uncover benefit fraudsters and tax dodgers, and (one might have hoped) any other data consistencies. So HMRC had more than 24 monthly opportunities to find that it had made a mistake and correct it – all of them, as it turned out, missed completely.
Flip forward two years and HMRC suddenly sent Mrs Smith another very hard to understand form letter. It flatly informs her that she must immediately find £2,500, around an eighth of her annual income, in order to clear a backlog of taxes created entirely by their own administrative incompetence. It’s worth looking at how quickly this disastrous sum was created for Mrs Smith through one simple lapse. My table below shows the essence of what HMRC said.
|Mrs Smith's situation||2008-9||2009-10|
|PAYE income (i.e. sums received from occupational pension schemes)||15,300||16,000|
|State pension from DWP||6,100||6,450|
|Total gross income before tax||21,400||22,450|
|gives Taxable income||12,220||12,810|
|Tax due (@ 20% of taxable income)||2,440||2,560|
|Tax actually paid levied on occupational schemes alone and ignoring DWP pension||1,230||1,270|
Note: These numbers are modelled and simplified. They are not the income details of any real person to protect confidentiality.
It goes almost without saying that nothing in the HMRC form letter demanding payment suggests for one moment that anything that has gone wrong was their mistake. The letters are clearly written in the same spirit adopted by Dave Hartnett the head of HMRC himself, when initially quizzed by media interviewees. The department, he proudly said, had nothing to apologize for, before later reconsidering. Equally, of course, the HMRC letter demanded that Mrs Smith wipe out her small savings by paying the uncollected tax in one lump sum, and offers no such thing as ‘easy payment’ terms.
What recourse does Mrs Smith have against this summary demand? The HMRC form letter is obscure and written in weasel prose, with many clearly deliberately distractor paragraphs about minor palliatives on gift aid payments and such like. A gleam of hope remains, however, for those with a PhD in decoding admin-speak, in a paragraph that admits (ungrammatically): ‘If you think that we should have already collected the tax due in your P800 Tax Calculation [i.e the demand we have sent you] because the information had already been provided to us either by yourself or a third party, and we have failed or delayed to use this information, then in some limited circumstances we may agree not to collect it’ [i.e. the tax allegedly overdue, not, as you might think, ‘the information’ last referred to].
Mrs Smith will have to trust that one arm of the British government (the DWP) telling another arm (the tax agency) about her pension every month for two years counts under this heading with HMRC. But I would not risk a bet that staff in the department will see it that way, rather than claiming that she should have spotted a drop in their knowledge of her income, buried in a single annual tax coding back in March 2008.
All this assumes that somehow Mrs Smith manages to get the attention of any live person at the HMRC end. The department has cut its staff numbers radically, from 95,000 five years ago to 69,000 now. The Comprehensive Spending Review promises a further reduction of 13,000 staff. Meanwhile the proportion of the people in HMRC staff surveys who have confidence in their senior managers over the last two years has varied from one in eight in a bad month to one in five if things are looking a bit better. With many other symptoms of severe organizational stress now becoming evident – such as huge delays in registering new businesses for VAT and in responding to notices from the Student Loan Company that students have paid off their debts – the department’s future performance prospects looks bleak.
But perhaps the most chilling thing about this case is that the simplest aspects of the HMRC letters demonstrate how extraordinarily little they know about their customers (as is true of Whitehall generally). Writing to an 85 year old widow, who has lived in the same house for five decades now, both the form letters begin brusquely ‘Dear SMITH’. Apparently the department cannot even determine the gender and marital status of the people they are writing to (despite decades of contact). Alternatively, perhaps they cannot be bothered to get right such unimportant details as writing to citizens in a basically polite fashion. After all, the top managers have so many other ‘transformational’ and ‘tell us once’ things to be getting on with.
See also: Nick Huber, ‘Red Alert over HMRC’, in Accountancy, November 2010, pp. 24-5.
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Thanks for all these comments, which raise really interesting issues.
1. Andrew, David and nickj all raise different aspects of the complexity of understanding how a problem like this can arise, and then in either attributing blame or knowing where to look to ensure such problems do not recur. I partly agree with Andrew that it is no use blaming the policitians, since they live at several tiers above the level at which this kind of organizational process gets decided.
Yet the politicians have set up or at least approved a very complex architecture in which responsibility is shared across the different elements of the civil service (the policy level folk and the operational divisions) and private sector IT contractors. In this case the IT problem is key in problems first coming about. But it is completely unclear to me how that could have been the key problem after the first couple of months of non-collection of taxes. How could the top of the organization, its analysts and the politicians have remained unaware for so long (apparently 30 months) that they were not collecting taxes on any DWP pensions where people were also getting occupational pensions? Politicians and senior officials are paid and given their positions of responsibility so that such problems are spotted after a month or so, not allowed to run on and on.
2. I agree with Andrew and nickj that the HMRC linkage with DWP has always been problematic, and nickj is completely correct that the coalition has announced plans (previously being developed under Labour) to radically reorganize the ways in which taxes are deducted from salaries and tax credits are added. The current debacle can be interpreted in two ways recently discussed by Tony Collins the Computer Weekly expert in a recent blog. Incrementalists say that the debacle proves that you should never change more than one piece of the systems at a time. Radicals say, the debacle proves that the current creaking legacy systems just cannot be made effective in line with modern needs, and so we need to start again with a modern architecture and systems.
3. J makes a good point, that Mrs Smith is not by any means badly off, and that other people in Britain on far less money a month often keep a very close eye on how much money they have. So J asks, do HMRC not have a point if they expect (on behalf of the rest of us) that Mrs Smith will notice that she was around £100 a month better off with uncollected taxes coming into her account. This is a good point and it raises interesting fairness issues.
Actually, however, the UK population rather sharply divides in to three large groups on their financial behaviours. There are many people who never dare to open their bank statements or credit card bills and stumble along in semi-ignorance of their finances. A middle group does not like looking, but none the less quickly checks once a month or so that things are not awry. And then there is also a large group of people who know their finances down to the nearest penny. Indeed, in focus groups I have been amazed how many younger and middle-aged people now say that checking their internet banking account is amongst the first things they do when they wake up in the morning!
There are several problems for HMRC with J’s point though. First, the whole idea of a public service is to deliver robust services that work well for the generality of people and cope with different personalities and ways of doing things. If Mrs Smith was in the hyper-vigilant third of people, and was perhaps half a century younger than she is, there is indeed a chance that she might have worked out that she was better off each month and that HMRC’s decisions were causing that. But you cannot build public services on the expectation that ‘perfect citizens’ are out there ready to draw your attention to something going wrong the minute that happens. This would be a quick pathway to the collapse of all public services. Second, of course, Mrs Smith is 85 and has never used the internet in her life, so she does not have the wherewithal to ever be the hyper-vigilant person that J suggests.
The third objection is the most important. By converting Mrs Smith to paying via PAYE, the HMRC took away the whole point of checking her bank statements for a possible tax screw up. It successfully moved her from a position where she needed to do an annual check of her income and taxes by filling in a form, to one where she did not. The key lesson for public service providers here is that you can never go back on service improvements. You cannot ratchet up the level of services you provide, get people accustomed to the new level and then expect that if you fail to maintain that service level then somehow citizens will ride to your rescue.
There’s more to come – the latest from the DWP re the benefits system overhaul:
“The new system will mostly be administered through the internet, with people expected to make claims online and check their payments like they would an online bank account – even though an estimated 1.5 million unemployed people do not currently have internet access, according to government figures. The DWP says a “minority” of cases will still be dealt with face-to-face.”
This (and bad luck if you’re on the dole) is going to be an absolutely glorious grade A service delivery disaster.
Living in a world were it is becoming very difficult, if not impossible, to have trust in any department of government, bank, insurance company, suppliers of public utilities, health services (yes we have had MRSA caught in hospital) transport services or local authorities is very hard for the very old. There are other disasters in train.
Whilst I absolutely agree that this fits the description of a “service delivery disaster” in every respect, and that the performance of HMRC in this instance is (again) woeful, I don’t think it is entirely fair to blame the Revenue – because I don’t think it is entirely reasonable to expect them to operate in isolation.
It is all very well to say that: “tax had become just another payment like a direct debit, something that Mrs Smith no longer had to worry about.” However, I imagine the vast majority of people in this country on a similar income to the fictional Mrs Smith would notice if their income suddenly increased by £100 / month (by virtue of the tax on that income decreasing). They would certainly notice if it fell by the same amount, and a simple investigation would lead them to conclude the obvious: HMRC goofed up.
There has to be some sort of dialogue between tax collector and tax payer, surely?
It is no good blaming the politicians for this.
When a politician asks his civil servants for proposals for modifying the tax system in support of one of his schemes they repond ‘yes we can’. They should respond ‘that’s too difficult for us’. Of course the politician would get cross and throw a mobile phone at them, but it would be the truth.
I had some professional dealings with HMRC while working on a cross-government contract a few years ago.
There are so many problems with where they are now that it is hard to know where to begin. Perhaps the biggest problem is the IT system which can’t be modified or changed without huge cost or complexity and so dictates policy.
But furthermore there are wide-spread cultural problems and a complete lack of understanding of customers as you suggest. They just don’t “get” that these are people who by and large want to pay their tax/receive their benefits with the least possible hassle. Lack of investment in contact technology means that even simple tasks (such as texting people, or even having a phone queue) are beyond them and so contact is very hard.
In my experience, the relationship with DWP at an operational level was very poor.
But politicians are also at fault: years of incremental change and tinkering with tax and benefits have built up layer upon layer of rules and made policies so utterly complex that even HMRC staff find it difficult to calculate or articulate what effect changes will have. When this is combined with a vastly complex, out-dated IT system you have a recipe for disaster.