Can tired Revenue win IT systems battle?

A committee of MPs has depicted HM Revenue and Customs as a fatigued institution, fighting successive crises and regularly announcing plans to improve the technology and administration while the service to the public gets worse.

A committee of MPs has depicted HM Revenue and Customs as a fatigued institution, fighting successive crises and regularly announcing plans to improve the technology and administration while the service to the public gets worse.

The latest report from the House of Commons Public Accounts Committee, published last week, looks at HMRC's tax credits system and the accidental deletion of nearly one million taxpayer records.

It raises questions about whether the department is coping with collecting tax and paying out the right amount in tax credits and warns that failures with the tax credits system are undermining public confidence in HMRC as an organisation.

The basic statistics, published just after the June election, are damning: 5.7 million families received new tax credits in 2003/04 but nearly two million were overpaid a total of £1.9bn. Although ministers have repeatedly blamed the debacle on IT systems, the PAC report makes it clear this is not the whole truth.

"Software errors in the new tax credit system have resulted in overpayments of £174m to 540,000 of the overall 1.8 million claimants overpaid," the report said.

Much of the crisis arises from deep-rooted project appraisal and programme management issues at HMRC, including the inherent complexity of the scheme, according to the MPs.

Edward Leigh, chairman of the all-party committee, said, "The department has a lot of work to do to get the tax credits system operating fairly and effectively. There must be a question-mark over its ability to do this, especially given that staff must also tackle the backlog of everyday tax collection work which has built up as a result of their being diverted to firefight tax credits problems."

The government landed the tax credits programme on the Revenue as the department was recovering from an unprecedented backlog of work after the delayed introduction of a national insurance recording system.

It was built by EDS and introduced in 2003 but has been run for the past year by Capgemini. A major upgrade to the system was made last spring, although this was around the time Capgemini was taking over the Revenue's IT systems from EDS.

The PAC found the tax credits system to be overly complex and ambitious - difficult for HMRC to implement and hard for claimants to understand. Leigh said, "There is a general lesson here: that an ambitious scheme might be fatally undermined by its intrinsic complexity."

This complexity arose in part because the tax credits scheme was designed to pay people on the basis of their salary during the previous tax year. When HMRC finds that it is overpaying people because their salaries have usually risen after making a claim for tax credits, it routinely makes demands for claimants to hand back overpayments, or it reduces their future tax credit awards.

The committee found that the tax credits IT system could not stop the recovery of overpayments even when staff were considering waiving overpayments in cases of special hardship. This was a feature specified in the requirements.

Despite the built-in complexity of the tax credits system, no one stopped the project at the feasibility stage, and there is no way of knowing whether the independent Gateway reviews highlighted the risks because they have not been published.

The PAC report echoes the concerns expressed by MPs over the failed introduction of a system for dealing with child support payments.

MPs were told the child support system would be cheaper, simpler and quicker to administer than the existing arrangements. In fact, MPs found that the systems and required changes in administration made the switch to simpler payments more complex to administer than the old arrangements.

Leigh said, "The new tax credits system was supposed to be simpler to administer and simpler for claimants to understand. What we were given was a frustratingly arcane system that routinely overpays large numbers of claimants - some 1.8 million in respect of 2003/04.

"This is no kindness to people in desperate financial circumstances, for many have subsequently to cope with repayment demands by the departmentÉ Permanent secretaries [heads of departments] should flag up the risks with ministers before such unduly complex schemes are implemented."

The department's target for the accuracy of processing and calculating tax credit awards was 90% in 2003/04. In fact, it managed only 78.6%. "The results are worse than under the previous scheme," said the committee.

HMRC had predicted in December 2003 that tax credits would halve the error rates attributable to claimant error and fraud. But the report said the department has been unable to show that this has happened.

Leigh said, "The introduction and operation of the Inland Revenue's new tax credits system has been a nightmare. The Revenue has yet to produce reliable evidence that the flood of public money being wasted under the previous tax credits scheme through fraud and error has been stemmed to any degree."

The report's findings also raise questions about whether ministers rushed the implementation of tax credits. It said, "[The department] does not have sufficient information about the claimant population to enable it to provide good service to the public and avoid disruption to its main business of tax administration."

It added, "[HMRC should] develop as a matter of urgency the operational information needed to manage the department's relationship with claimants and the effects on them."

The report vindicates the comments of Steve Lamey, HMRC's chief information officer, who spoke at a public conference in May about the department's poor-quality data, inefficient business processes, and lack of "killer KPIs" - key performance indicators.

How much difference the committee's report will make in the long term is unclear. By tradition the PAC and other select committees avoid directly criticising individuals and there are no parliamentary processes in place to ensure that the committee's recommendations are carried out.

Meanwhile, the department faces radically improving the way HMRC performs, changing the public perception of a tax department which cannot cope, merging two huge departments - the Revenue and Customs - while making large cost cuts in line with the government's promised efficiency savings.

It is said that difficulty is the nurse of greatness, but HMRC has yet to respond to treatment.

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