HM Revenue and Customs has suspended its main board after an external review highlighted leadership failings and loss of public confidence in the wake of its loss of two CDs containing child benefit data on 25 million people.
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An interim panel of advisers from the private sector will help to oversee the department of 85,000 people - working in 600 offices - which keeps computer files on more than 30 million taxpayers.
Chancellor Alistair Darling faced an outcry in November last year when he announced that two unencrypted CDs had gone missing after HMRC officials sent them to the National Audit Office by courier.
The incident raised questions about data security at HMRC and the need across the public and private sector to encrypt personal data on CDs and mobile services.
Since the incident came to light, three non-executive directors of HMRC have stepped down, one director has resigned and another has moved to another job. The acting chairman of HMRC, Paul Gray, was moved to another Whitehall role.
The reorganisation follows a Capability Review which highlighted fundamental weaknesses in leadership at HMRC in December 2007.
The review was carried out by Peter Ellwood, chairman of ICI, Tim Godwin, assistant commissioner of the Metropolitan Police, and others. It pointed to the loss of child benefit data and said, "The most important challenge for HMRC will be rebuilding trust and confidence among its staff, customers, agents and stakeholders. This will be a significant task given the size of the customer base, which includes over 30 million individual customers and four million business customers."
The review criticised "significant gaps" in management information and described HMRC as "information-rich" and "intelligence-poor". It found that the department was "strong" or "well placed" in only two of 10 areas assessed. The biggest weaknesses were in setting direction, igniting passion, basing choices on evidence, and developing clear roles, responsibilities and delivery models.
It said, "The top team lacks the right kind of external support, expertise and challenge to carry out its responsibilities effectively." Only 12% of staff said that HMRC was well managed.
The new advisers will sit on a board called the Executive and Advisers' Committee. The chair of the committee is the existing acting chairman of HMRC, Dave Hartnett. Some members of the old board will also sit on the new committee.
Hartnett said HMRC had decided to "pause the board in its current format and to appoint an interim panel of advisers for six months, allowing a shift in focus and skills".
HMRC is seeking applicants for two new top jobs created by Darling and Cabinet secretary Gus O'Donnell. The new posts are non-executive chair and chief executive.