Public Audit Committee

Meeting date: Wednesday, November 21, 2012

Official Report 599KB pdf

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Scotland Act 2012

The first substantive item is our consideration of the audit arrangements for the Scottish rate of income tax arising from the Scotland Act 2012. On the committee’s behalf, I particularly welcome Mr Troup, who is the second permanent secretary at HM Revenue and Customs and who was recently appointed the accountable officer for the Scottish rate of income tax. With him is Sarah Walker, who is deputy director and head of the devolution team at HMRC. Also with us is Mr Morse, who is the Comptroller and Auditor General from the National Audit Office. Welcome to you all.

I give the witnesses the opportunity to make introductory remarks. Who would like to go first?

I shall go first. Thank you for inviting us to the meeting, convener. You have introduced me and Sarah Walker, so I will not go over that. The most important point is that I am here as the additional accounting officer of HMRC and the accounting officer for the Scottish rate of income tax. I am pleased to be here to answer questions.

Our approach to engaging with the Scottish Government and the Scottish Parliament has been one of openness and transparency throughout. This is the beginning of a process. We have quite a long time to get the system right and prepare before 2016. To achieve that, significant changes will be made to the tax systems. As we go through the process, it is important to be able to explain to and share with members the changes.

Good collaborative working has already taken place between HMRC and Scottish Government representatives. I am glad that the committee has had a chance to see the draft memorandum of understanding, which reflects that good collaborative working. The memorandum is a draft, and I understand that you, convener, and your committee are interested in having input to it, which we welcome.

I am sure that members will want to ask me specific questions about how things will work. A general introduction is that implementing the Scottish rate will require us to change our operational, information technology and financial systems, but the largest part of the work to introduce the Scottish rate initially will consist of ensuring that we have the correct information about who is and is not a Scottish taxpayer. That will be the first big activity that residents of Scotland see. We expect to undertake a major publicity campaign and to contact people who appear to be Scottish taxpayers, probably during 2015, ahead of introduction.

There are, as members know, extensive arrangements for joint governance of the project leading up to that from the programme board, which has representatives of the Scottish Government on it, the intergovernmental assurance board and the Joint Exchequer Committee. That means that there will be, quite rightly, strong oversight of our performance, from both Parliaments. Amyas Morse, on behalf of our colleagues in the National Audit Office, will prepare a separate report on NAO’s views on the arrangements, which will be presented to you.

As accounting officer, I am specifically accountable for the collection of the Scottish income tax. I look forward to coming back to the committee at regular intervals over the course of the process, to ensure that I am able directly to answer questions from you about progress up to 2016.

Thank you. Mr Morse now.

I will make a few comments that I hope will be helpful to the committee. First, thank you for inviting me. I am delighted to be here in my home town—it is nice to be here. I very much recognise the importance of the subject. We, too, want to be as supportive and helpful as we can be. Although there is much to be settled, I will try to be reasonably specific and to give the committee as much of a steer as I can.

Although the command paper said that I would be invited to prepare a separate report, that is not provided for as the legislation stands. That is not a bad thing; it gives us a chance to shape the future as we go forward.

It might help if I touch on three areas that I look at in my reporting on HMRC’s accounts. I report, first, on whether HMRC’s statement of revenue represents a true and fair view of the amounts due; secondly, on whether the resource accounts fairly represent the administrative costs; and thirdly, on whether HMRC’s regulations and procedures are an effective check on the proper assessment, collection and allocation of revenue.

I will say a little about those three areas. First, on revenue, the total amount of revenue in the account is £474 billion, of which the income tax element for the United Kingdom is £150 billion. A rough working estimate of what the Scottish share of that might be is £11 billion, which is a big number but a relatively small proportion of the total—roughly 2 per cent of total revenue. For that reason, if the issue were simply dealt with as a note item in the overall HMRC accounts, you probably would not get the focus on it that you might want, therefore you might reasonably look for a separate statement of account on which you could focus more tightly. Of course I cannot speak for committee members, but I cannot see how you would get the assurance that you would want if you were looking simply at a subsection in HMRC accounts.

If the committee chose to pursue the issue, that might be sensible. You might want to ask HMRC to what extent its systems can give you the level of detail that you want to see. For example, you might want to know how much Scottish tax was unpaid, which can be a significant moving number from year to year and which is important to know. You might ask how easily you could get a clearer number in that regard, and over what period. That is worth asking about.

The second area that I mentioned was the costs of administration, on which the story is similar. A rough estimate of the set-up costs is £45 million, followed by annual expenditure on Scottish income tax of £4.2 million. Of course those are important numbers, but they must be set in the context of the £46 billion being spent by HMRC as a whole. Up to now, it has not been necessary to be able to allocate those costs precisely on a geographical basis. That is an argument for working out with HMRC how you would get the clear and accurate costs that you might want to know.

I report on administration of taxes under the Exchequer and Audit Departments Act 1921. I give an annual report on aspects of administration, and I would be happy to give an annual report on Scottish tax. At the moment, within HMRC accounts I use my discretion to decide what areas I will report on. If I am to report on Scottish tax, which is a new development, it would help me for that to be supported by legislation, rather than me simply doing it on an informal basis. That does not mean that I do not want to do it—I am very happy to do it—but there would be a sounder basis on which to proceed if we got that incorporated in the legislation. That is why it is valuable to talk about such things now. I thought that I would give the committee some thoughts from my perspective about the direction that it might care to travel in.

It is up to the committee to decide what it wants to do. We will be happy to work with the committee. We have a very good relationship with Audit Scotland and we would be more than happy to work or combine with Audit Scotland in any appropriate way. I am extremely happy to be here, and I will be happy to answer any questions.

Thank you very much.

I will kick off. Mr Morse has flagged up some of the questions that I wanted to ask Mr Troup. I think that the committee would like to hear a little more about HMRC’s view of the degree of detail that it plans to provide. There are two elements to that, both of which the committee is interested in. The first of those is the procurement and implementation of the information technology system, the estimated cost of which, as Mr Morse said, is around £45 million. That resource will come from the Scottish Government, in line with the statement of funding.

Mr Troup, what will be the process whereby we in the Scottish Parliament are kept informed of the development and progress of the project? To give you a bit of context, the committee has just finished looking at a report by the Auditor General for Scotland on a number of public sector information and communication technology projects that went fairly badly wrong, cost significantly more than they had originally been expected to cost and proved to be less than fit for purpose. Therefore, the context is one in which there is a little anxiety around such projects. How do you see progress updates being provided to the Scottish Parliament, as opposed to the Scottish Government?

I will address that in two parts. First, I will talk about the costs, then I will say a little about our performance in this space. That is not to suggest that your concerns are not absolutely legitimate; it is just to provide you with some context.

The £45 million is a total cost, of which IT costs represent £10 million. The cost of changes to our operational and finance systems represent the balance. Indeed, the greater part of the initial set-up cost is for the operational process of identifying Scottish taxpayers and ensuring that appropriate codes are issued to employers of Scottish taxpayers. Although that is a very big operation, it is not a particularly complex one. A lot of operational activity and a significant number of people are required to do it, but it does not involve doing anything particularly new. I can provide a degree of reassurance on the proportion of the £40 million to £45 million that relates to IT and on the nature of the operations that those costs will go towards allowing to be undertaken.

09:45

Secondly, although you are absolutely right to say that IT projects generally have a bit of a bad name, HMRC—while not completely perfect—has an extraordinarily good record compared with that of the private sector, where, I understand, only around 60 per cent of IT projects get delivered on time. Over the past five or six years, more than 90 per cent of our IT projects have been delivered on time. This year, we are at 94 per cent, and 98 per cent of those have been delivered without defects.

None of that is to say that there is no valid need for you to have oversight of the project; I mean only to assure you that, despite what one hears, we have a good record. I would never describe an IT project as straightforward, but this project is not at the groundbreaking end of IT work.

The Government is participating throughout the process. It has a place on the programme board and on the two committees above that. On oversight by the Parliament, I am not sure that we have worked out exactly how to transmit from that process to your committee. Sarah Walker, who has been doing the legwork on the memorandum of understanding, might have something to say about that. My starting point is that I am here today to take those questions away and think about what we can do to give you the necessary degree of reassurance that the process is working, whether that involves appearing before the committee or providing periodic reports or notes on the progress. I will not say that we have a plan, unless Sarah Walker is able to tell me that the process has been worked out in more detail already.

It is true that our appearances before this committee, the Finance Committee and any other committee are part of it. I also point out the requirement under the Scotland Act 2012 for the Secretary of State for Scotland to publish annual reports on the implementation of the act. The first one of those is due within a year of the passage of the act, so it should come out in the spring. We would expect to put in that quite a substantial level of information about the progress that we are making on implementation. Because we have a fairly extended period to work in—between now and April 2016—the IT implementation is unlikely to take place until the start of the 2014-15 financial year, which means that it will be about 18 months before we start spending serious money on IT. However, between now and then, we will be planning, particularly with the process of contacting people and checking whether they are Scottish taxpayers. There will be some quite significant progress to report in those annual reports to both Parliaments.

That is helpful because, once the Scottish rate of income tax is in place, there will be the annual audit arrangements, which we will go on to discuss. In the meantime, there is no formal process by which we will be able to monitor progress. If we get to 2015 and it transpires that there is a problem with the process or that it will be much more expensive than had been planned, that could cause problems for implementation.

It was helpful of Mr Troup to point out that the figure of £45 million is not wholly concerned with the IT projects and involves other systems. On that, looking beyond implementation to the year-by-year running of the Scottish rate of income tax, what are the consequences for HMRC staffing in Scotland? Do you envisage having additional staff in Scotland to pursue, for example, compliance year on year?

Although we talk, rightly, about a Scottish rate of income tax, it will never be payable except in circumstances where some United Kingdom income tax is payable as well. We have just as much continuing interest in a Scottish taxpayer who pays Scottish income tax as we do in a UK taxpayer, it is just that we have slightly less tax due to us from that taxpayer. Our interest in compliance activities remains the same, and we certainly do not say, for example, “That taxpayer owes £10 and that taxpayer owes £20, so we will have a completely different regime for each of them.” The compliance regime is designed to ensure that all tax that is due is paid. As far as changes to the compliance regime as a result of the Scottish rate of income tax are concerned, it is difficult to see what we would have any incentive to change.

I might be able to dig out some details about how many staff we have in Scotland at present. Staff involved in compliance activities will continue as part of the overall compliance staffing of HMRC, without any particular regard for the location of the taxpayers—or any more than there is at present.

Is it fair to expect that the figure will be on a downward trend, given the Government’s desire to reduce numbers and make savings?

I am told that at present we have 9,364 staff in Scotland, but of course they will not all be dealing just with Scottish taxpayers, because we operate national systems and compliance is operated on a national basis. We have not published detailed headcount forecasts for staff numbers over the period and certainly not a breakdown by region. The overarching point is that there is no incentive or reason for us to make any differential choices about staffing levels in Scotland compared with those in other parts of the UK simply because of the Scottish rate of income tax, because Scottish taxpayers will remain UK taxpayers. We will be accounting to you for only 10p—or such rate as you fix—of their overall tax.

We will have to set up a process to deal with the specific identification of Scottish taxpayers. That will involve dealing with inquiries about whether someone is a Scottish taxpayer; dealing with issues when people move house into or out of Scotland; and dealing with appeals. So within the £45 million, there is potentially some extra staff cost. We are at the early stages—in the planning process—so we certainly have not decided exactly what the jobs are, who the people are and where they will be. Obviously, that is an issue for discussion.

Just to ensure that the committee understands the costing basis, I point out that the Scottish Government is responsible only for identifiable additional costs as a result of the Scottish rate of income tax, so the existing costs that HMRC incurs in relation to compliance activity for taxpayers in Scotland and in the rest of the UK will not be shared out between the Scottish Government and the UK Government. Those costs will continue to be part of the costs of running HMRC. As I say, the Scottish Government will be responsible for identifiable additional costs, which, as Sarah Walker says, will include the costs of any additional people who are needed to identify Scottish taxpayers and to deal with specific problems that arise from that identification. That will include additional IT costs, but not any part of the base costs or any costs of basic changes to the basic systems that HMRC runs.

I have one last question, after which I will give other members a chance to ask questions.

Mr Morse, you said that you have a good working relationship with Audit Scotland. The committee also has a good—although appropriate—working relationship with Audit Scotland. During our deliberations, we will want to explore Audit Scotland’s role in the audit framework for the Scottish rate. From the papers that we have seen, there does not seem to be much of a role. What do you see as Audit Scotland’s role in working with you?

As things stand, Audit Scotland does not have access rights to HMRC. It is therefore inevitable, unless there is a much bigger change, that we will be doing that part of the work for the foreseeable future. Nonetheless, as time goes by, if the Scottish Parliament would like to get its assurance directly from Audit Scotland, I would have no objection to providing Audit Scotland with assurance and it then reporting overall. I do not mind that. I am more than happy to go in whatever direction works for the Scottish Parliament.

We conferred with Audit Scotland before the meeting, and I have seen how we would bring together the element of locally administered taxes. If there is any need to talk about that, I expect that we will do so continuously. We are very open to doing that.

As UK colleagues in performing our audit functions, we already discuss matters of mutual interest and keep in touch with each other, so I do not see any difficulty. It is true that the balance right now probably lies with the National Audit Office, but if, in time, it is thought to be appropriate for the fronting to shift over, we are more than happy to go along with that.

Perhaps I can pursue the issue of the Scottish taxpayer, which I think you have all mentioned. I have to say that I am struggling slightly with that. I have a copy of the HMRC technical note that was published in May. My understanding is that a UK taxpayer must live in the UK for 183 days a year, and that a Scottish taxpayer must have one place of residence in the UK, which must be in Scotland.

I am thinking about the many thousands of highly paid oil workers, many of whom are not domiciled in Scotland. I was beginning to think that I understood the situation until I came to paragraph 13 in the technical note, which states:

“Individuals who cannot identify a main place of residence will need to count the days they spend in Scotland and elsewhere in the UK—if they spend more days in Scotland, they will be a Scottish taxpayer.”

As a list MSP for the Highlands and Islands, I know that there are thousands of workers in the North Sea, a large percentage of whom—I have the figures from Oil & Gas UK—are not domiciled in Scotland. Perhaps you can bring some clarity to the issue. For example, would someone who lives in Newcastle and works on a rig two weeks on, two weeks off be a Scottish or an English taxpayer? Would the many people who come from other parts of Europe and the world to work offshore in the North Sea fulfil any of the criteria?

Sarah Walker will set me right and give some technical details, but first I will make an overarching point. The first thing that one must ask of any taxpayer is whether they are resident in the UK for tax purposes under existing rules. That will continue to be the test after the Scottish rate is introduced.

To pick up on the last part of Mary Scanlon’s question, I understand that if someone comes from elsewhere in Europe and works in the North Sea—as I said, Sarah will put me right—they are not, under existing rules, resident in the UK, and nothing that is happening here will change that in any way. One must get over the first hurdle, which is whether the individual is currently resident in the UK under existing rules, and those rules will continue to apply. One then starts to apply the residence test, and—if necessary—the day counting test.

I know that there are special rules for offshore workers, and I do not claim to be an expert on them, so I ask Sarah Walker whether she wants to add anything. If she does not, we will take that question away and come back to the committee.

I would add only that, with regard to Mary Scanlon’s example, if someone lives in Newcastle and that is their main residence, they will not be a Scottish taxpayer. As Edward Troup said, someone must first be within the UK tax net, and we will then look at where their main residence is. If a person’s home is in Newcastle, they will not—regardless of how many days they spend on either side of the border—be a Scottish taxpayer.

We only start counting the days if we genuinely cannot identify a main home in the UK. For instance, if someone comes from abroad and spends enough time in the UK to qualify as a UK taxpayer, but they do not have an obvious home here, we might have to count days and say, “If you spend more days of the year in Scotland, you will be a Scottish taxpayer.” However, for most people it would be pretty straightforward, as we would ask, “Where’s your home? Where do you live?” That is what we base the liability on.

So, basically, those who have a Scottish postcode and are resident in Scotland will pay the Scottish rate. If someone comes into Scotland to work, whether on oil rigs or elsewhere—I will stick to oil workers as an example of the many workers who travel to work—but lives elsewhere in the United Kingdom, they will not pay the Scottish rate of income tax.

Broadly speaking, yes—that is right. [Interruption.]

I apologise for our little discussion—Willie Coffey suggested that MPs would perhaps not pay tax, but it appears from the Scottish Parliament information centre briefing that they would.

10:00

There is a specific rule that says that all MPs and MEPs who represent a Scottish constituency—as well as all MSPs—will be Scottish taxpayers.

Yes. I apologise for that discussion. I just wanted to demonstrate the point to Mr Coffey as I think that he has other questions on the issue.

Can I have some more clarity on what will be reported to the Scottish Parliament and, indeed, to this committee? I appreciate that the annual running figure is £4.2 million, but in the early days the Scottish rate of income tax will be the same—10p—as that of the United Kingdom. If the rate changed upwards or downwards in future, would that bring significant additional costs, or will having variation in Scotland be built into the system?

If there was a different rate, people’s pay-as-you-earn code would change because to a large extent that code is determined by the rate of tax that someone pays. If the rate changed, we would probably expect more PAYE codes to be issued, and if that was a direct result of a change in the Scottish rate, there would be an additional charge. The £4.2 million is a broad estimate at this stage, because we have not done the work to design the processes and we do not know how much our costs will change, given that it will all happen some time in the future.

But you envisage an increase in costs should the Scottish rate of income tax be different from the UK rate.

Yes, we would expect that to be the case.

A change is likely to create a cost, as all changes do. It is hard to say whether the steady-state costs would be any different if the rate was set at, say, 12p or 8p. The important point, as Sarah Walker said, is that the figures are very much estimates at this stage.

I think that Amyas Morse wants to say something about that.

In many ways, this is driven by the decision to have a model that is driven by the actual marginal cost rather than an estimate. For example, in the Isle of Man the arrangement is that HMRC charges a flat-rate estimate that is agreed in advance. That is what the cost of administering Isle of Man tax will be, and there will be no debate about it. However, by having an actual cost, you can win on one side and lose on the other, depending on what the costs do—although that requires quality of information about them.

If we are going to look at costs that go up and down, that will place a certain amount of pressure on HMRC’s ability to identify the costs. We will need to be quite careful about that, particularly if you pick up the idea of having a separate account. The question will be whether we can be really comfortable that we have auditable information that is sufficiently clear and separate. Having to separate it out will be new, and we need to give ourselves a reasonable run-up to be able to do that securely. It would be a real pity to produce an account on which I could not give a clean opinion on the first go-round. We need to work on that. If that is what we are going to need to do, the sooner that we get that into people’s minds and think about how we will do it practically, the more chance there will be that we will get it done accurately and will not have any upsets.

That is interesting.

The purpose of my final question is just to broaden the discussion. I do not think that we simply want to know the estimate and the actual figure; I think that there is an appetite to see what is happening behind the figures. You perhaps have not gone as far down the line as looking at taking out the Scottish information and analysing it, but I think that we in Scotland would want to understand it better.

This may be an obvious question, but in relation to the accounts, do you intend to reassure the Parliament that you are delivering value for money? In your visits and regular updates to our committee, will you tell us the costs of setting up the system, including the costs of the IT system? Will your updates include tax compliance levels in Scotland and whether they vary from those in the rest of the UK? Will they include your customer service performance in responding to Scottish taxpayer queries and your actual performance in collecting Scottish tax—as opposed to UK tax? A controversial issue this week is tax write-offs. Will you be able to update the committee on whether Scottish taxpayer levels of error or fraud vary from those in the rest of the UK? Will we get that level of detail, so that we can analyse economic behaviour behind the figures?

To the extent that we can provide information, we will. The process should be open and transparent, and to the extent that our systems are capable of producing such information there is no reason why I should not come to talk to the committee or, through the NAO, make sure that there is proper scrutiny.

We do not hold some of the information that you asked about, because we do not disaggregate across the UK. You asked about quite a lot of things and I cannot say which of them our systems could currently tell you about. As the programme develops, there will clearly be a question as to whether you would like that additional information and what the cost of building that into our system would be. In a sense, this is a partnership. While you would have to approve any costs, we would have to decide whether we could prioritise the resource and opportunity costs of the people who would have to do the work if we were to say, “Yes, we will do that for you.”

We are approaching this in the spirit of wanting to give you as much information as we can, as is sensible. To the extent that it will incur marginal costs, which you will bear, that is consistent with our wider responsibilities for the whole of the UK’s taxes and the £460 billion that Amyas Morse referred to.

I will make a point that I have not made yet and which is worth making. You rightly talked about levels of compliance activities, which is where we put a lot of effort and resource. However, when you look at the numbers—the actual tax that comes through the door in the UK—you will see that something like 98 per cent of receipts comes in without any compliance intervention at all. Those receipts come in because employers complete their PAYE returns, businesses pay their VAT and corporations pay their corporation tax—people pay whatever tax it is. The vast bulk of money comes in because we have systems that people can engage with that allow them to pay their tax. At an aggregate level, the intensity of compliance activity maintains the integrity of the tax system and ensures that everybody is confident that we are collecting tax, but most tax actually comes in because we run good, cross-UK IT and operational systems. Therefore, although we will focus on compliance, what is really important is that the systems that bring in the 98 per cent are there, because people just pay their taxes. It is important to keep that in mind, because arithmetically you are much more interested in the 98 per cent than the 2 per cent.

I asked about those things because we want to understand economic behaviour in Scotland. Would it be fair to say that the more specifically Scottish information we ask for—for example, the list that I gave—the higher the cost?

That must follow. To the extent that it does not just come off a system that exists at the moment, it will cost more to get more information.

Thank you.

If I may presume to say something at this point—because we will have a role in this—as this goes forward, you will be able to have an adult conversation and ask how difficult it would be to get the information that you want. The more frank that one can be about that, the better—for example, how accurate would the information really be, and what would the costs be? You might judge that some bits of information would not be worth having for the price. To have such conversations on a repeating basis would be a good idea.

Good morning to you all. When I phone up the income tax office on behalf of a constituent, I can get information within five minutes. I hope that that will continue—I am sure that it will in the partnership that you have just described.

Let me take a couple of steps back, to get things clear in my mind. Mr Troup talked about set-up costs of £45 million, of which £10 million will go on IT. What will you do with the other £35 million? You said that you will not employ more staff—there will continue to be 9,364 staff. Can you dig down and tell us what the £35 million will be used for?

I will ask Sarah Walker to give a bit of detail. I should say that the number that we have given is £40 million to £45 million, not £45 million. We have been quite open about the fact that that is an estimate. It is not like a quantity surveyor’s spec for a building. There is not a complete breakdown of all the costs; there is an estimate based on our experience of having to deliver policy change and systems change year on year. We have engaged experts in the department who have had to make similar changes, and they have used a high level of judgment and experience in coming up with that number.

The number is an estimate. Although I hope that Sarah Walker can add a bit to the breakdown, there is a point beyond which we are not currently capable of drilling down. However, as the project develops the information will get more and more detailed and precise and ultimately we will get to a point at which the NAO can say something about it in some detail.

As we said, the big part of setting-up will be the identification of Scottish taxpayers. To do that, we will probably have to do several mailings to people. I am talking about letters, postage and so on and then dealing with a lot of phone calls and inquiries. There will potentially be investigations. There will be publicity, to help people to understand what is going on and what to expect. We will have to deal with employers and help them to set up their systems.

That is the kind of activity that will go on. It is not just about redesigning a computer system; what tends to cost money is the interaction with customers, to ensure that they understand what is going on and that we have the right information, so that we can help them to pay the right tax.

You are saying that an estimated £30 million to £35 million will be used for letters, postage, advertising, mailmerges and so on. I am sure that all members are familiar with such activity, because we constantly do mailmerges for constituents, so that we can send out newsletters and things like that.

Can you say definitively when the figure will be able to be broken down?

We will refine the estimates as we go along. The first phase of the joint work that we are starting with the Scottish Government is to work out the process for identifying Scottish taxpayers. We will have to consider whether to write to people, how many letters to send, when to send them, how to deal with responses and so on.

By the time the secretary of state’s first annual report is due, which is towards the end of spring next year, we hope to have a slightly better estimate and breakdown of the costs. However, because the planning process will stretch over three years, it will be some time before we have a full breakdown and accurate figures.

We do not really know the cost yet. It could go down or up.

HMRC has an established process for any item of expenditure. There must be a business case approval process, and these arrangements will be subject to exactly that process, as any others would be. There will be a degree of rigour, which is something in which Amyas Morse and the NAO are always interested, and which will apply to the expenditure that we are talking about, just as it would apply to any other expenditure of public money.

Thank you for your explanation.

Mr Morse, I think that you said that Audit Scotland does not have a remit to report to the Scottish Parliament—

10:15

No, sorry—let me be very clear. I am not suggesting anything about Audit Scotland. What I am saying is that we have access rights to HMRC, and therefore if anyone is to carry out an examination of what is happening in HMRC and how it is preparing the Scottish numbers, we will inevitably be involved.

At the moment, it would not be feasible for Audit Scotland to do that and, to be quite honest, I think that it would be quite a big duplication, because we already audit HMRC’s systems. I simply wanted to signal to the committee that, although that is true, if at some time in the future—without wishing to predict what may happen in the future—the Scottish Parliament wanted to get assurance primarily from Audit Scotland, I would have no problem with providing my assurance to Audit Scotland and putting it in a position to provide assurance to the Scottish Parliament. I do not see that as an obstruction; I think that we could manage that perfectly well. I do not see there being any great difficulty with that. That was all that I was trying to say.

Thank you very much for that clarification.

In relation to your reporting role, you mentioned new legislation.

If I am to report directly to the Scottish Parliament each year on how Scottish income tax is being administered, which I would probably need to be in a position to do and which has been suggested in the command paper, there would need to be a legislative basis on which I could do that. In the medium term, I would certainly not be comfortable about doing something different from what I do now without having a clear statutory basis on which to do it. I am not saying that we could not make some transitional arrangements but, to be honest, if we were to prepare such a report without being clear about the basis on which we were doing it, that would put us in a very funny position. I do not think that that is too much to expect or that it would be too difficult to do.

Thank you very much.

I have a couple of questions about points that Mary Scanlon raised. My first is about the costs of collection and how they would vary according to changes that might or might not be made to tax rates. I presume that when the Chancellor of the Exchequer changes the tax rate—which he might do at any stage—you do not charge him more just because he has done so.

It costs us money to change the tax rate because, as Sarah Walker said, it requires codings to be changed. We have provision within HMRC’s budget for changes in each year’s budget. As it happens, I am responsible for the portfolio of changes, which this year is costing us something north of £30 million. That is part of our normal provisioning for changes year on year as a result of budget and legislative changes.

If the Scottish rate were to be changed, that would incur a cost. The arrangements are quite clear. All that we are saying is that any additional cost that is expressly attributable to the Scottish rate should be for the Scottish Government to bear. We do not send a bill to the chancellor when he announces a change of rate.

I have a general point to make, rather than one that is attributable to any specific policy change. If any ministers make a major policy change that goes well beyond what we have planned for by way of costs, we will go back to the Treasury and say, “That is all very well. You want to announce that in the budget, but it will cost us £X million more to implement. We need a higher spending allocation to do that, because we do not have provision for it.” We have done that in the past with identifiable policy changes.

We carry a general provision for change. If the chancellor goes over that, a negotiation takes place with the Treasury. Sometimes we get money; otherwise, we have to scrape around and sacrifice something else. The arrangements that we are discussing for Scotland are slightly more formal, in that we have the ability to recover the marginal cost from you.

I understand that. The point that I am driving at is that, post the new mechanisms coming into place, when the Scottish finance secretary of the day in a future Scottish Government varies tax, it would be the equivalent of the UK chancellor varying tax at a UK level. Would you cover that in the same way? Would you use the mechanism that you have just described? Would you hold the same kind of discussions?

We will carry no reserve for changes to the Scottish rate. We would come back explicitly and say, “You have made a change that will cost us £X million. That is to be reimbursed under the memorandum of understanding and the terms of the agreement.”

Will the costs of a change be detailed? What I am driving at is how Parliament will keep an eye on them.

As I said, they will be identifiable additional costs. As with all the on-going costs that we will incur when the Scottish rate is up and running, they will be part of the invoicing and oversight process, which we have touched on.

The principle would be the same as that for the UK.

The principle would be the same.

I appreciate your point about costs, but Mary Scanlon also raised the interesting issue of the ability of the committee and Parliament to ask HMRC to give us numbers on economic aspects. For example, if Parliament wanted to assess the benefits of giving Amazon a chunk of money to relocate a base in Scotland and wanted to understand how much tax Amazon was avoiding, which is a matter of some public disquiet, could we ask you to provide information on the basis of its operations in Scotland and could you tell us that it would cost X to extrapolate the Amazon tax take—or not, as the case may be—in Scotland?

As you know, I and my fellow commissioners are bound by taxpayer confidentiality under the Commissioners for Revenue and Customs Act 2005.

So we could not ask about Amazon.

That principle is very important. When the act was passed in 2005, there was almost complete parliamentary agreement that such confidentiality should be preserved. That confidentiality extends to ministers, so we do not and cannot give ministers in the UK any information on individual taxpayers’ affairs. If ministers say that they would like to give a particular industry a tax break, we can indicate the potential impact on tax revenues and we might even be able to indicate, through our economic analysis, the potential impact on employment, but we cannot say anything about any individual taxpayer to ministers in the UK—and that extends to ministers in Scotland.

Of course.

If the aim was to give a tax break with a particular business in mind, and if the Scottish Parliament could do that—in fact, the legislation does not allow you to do anything other than vary the rate of income tax—we could answer only a generic question about the impact. The issue is hypothetical, because what you described goes far beyond the tax-varying powers in the 2012 act.

However, I am sure that you are well aware that the public are pretty concerned about such things. We want the system in Scotland to be robust, and at the moment it is definitely not robust in some senses—although I could not possibly expect you to comment on that.

The interesting issue of parliamentary oversight has been raised. One of our briefing notes tells me that the National Audit Office provided four reports in 2012 and three reports in 2011 on particular aspects of HMRC. Mr Morse, were they in addition to reports on the three areas that you outlined in your opening remarks?

Yes. We do a series of reports on HMRC every year. The subject matter of those reports is at my discretion, and I exercise my discretion informedly, if I can put it that way. I try to ensure that I look at serious amounts of money and that we do not leave major areas unexamined. I listen to public concerns and particularly parliamentary concerns. In some cases, HMRC might well like us to examine something. We always do such work completely independently. You will appreciate that we are funded by Parliament and not through the Government.

I would not want to inhibit that general discretionary principle in order to report annually on the operation of the Scottish tax system. I do not want to say that I would always bind myself to exercise my discretion to do that, as that would put me in the position of giving preference to one bit of tax over another. That is why it would help me for there to be an explicit provision for me to provide such a report. In that case, I would report to you on my opinion on the value for money of the costs and on how the system is being run. I would provide a frank and independent report on that—my reports are frank.

The point that I am driving at is that if Audit Scotland brought issues to our attention—as it often does—we could encourage your office to look at those issues.

I am always open to representations about what we should look at.

That is fine.

I come to my last question. I appreciate that the process that we will all go through in the next few years will be a new experience, but how does HMRC envisage matters being brought to the attention of our committee and the Parliament? I am thinking about what happened with the variable rate in Scotland in 2010, when the mechanism for it was dropped but the change was not brought to Parliament’s attention. I do not know whether Mr Troup was personally involved in or aware of that, but what will be the mechanism to ensure that the Parliament, not the Government, properly understands significant changes? How do you envisage that that will operate under the new regime?

The easy answer for me is that that is a matter for you to take up with your ministers and the Government here. In a sense, our relationship is with them. As Sarah Walker said, the Secretary of State for Scotland will lay section 33 reports, which will cover everything. As I said at the beginning, I am happy to talk to the committee, but I think that you are asking whether there could be a more direct relationship whereby we report changes directly to you. That slightly goes outside the relationship that is envisaged. As I say, I suspect that the issue is for you to take up with your ministers.

Sarah Walker might have some thoughts.

The process that we are describing is slightly different from the Scottish variable rate process. With the Scottish variable rate, there was a choice to be made about whether to fund changes that would allow a change in the rate to be delivered and it was possible for the Government to say that it did not want to do that, but the Scottish rate of income tax will have to be in place whether or not the Scottish Parliament wants to set a different rate. Therefore, we will be in a much more straightforward delivery process, which will be as transparent as we can make it. Our reports will represent the choices that we have made about how we are going to deliver, how the process has been funded and what the costs will be.

My point about the Scottish variable rate is that Parliament was not told about the changes and we found out only afterwards. I was contemplating whether you might be able to give me an example from Westminster of a major change to the administration of tax not being brought to Parliament’s attention. Would it always be a matter for ministers, as Mr Troup said, to bring that to Parliament’s attention through the convention of select committees and so on?

I certainly cannot think of any example in which we have not done so, although I suspect that there might be instances in which ministers have taken decisions, or have been involved in or aware of decisions, and Parliament might have felt that it was not informed as soon as it would have liked. I return to the point that the issue is about you holding your ministers to account for their relationship with us.

To return to my opening point, I do not want to hold anything back from the committee. I want to share with you information on what is happening on a real-time—if not overly frequent—basis. However, I am not in a position to say that we can prepare reports and give you information outside our formal relationship with your Government.

Just to clear something up, Mr Troup, is it not the case that, in your role as accountable officer, you are accountable to Parliament?

I am.

That accountability is not to ministers.

That is correct; that is the accountability. The Public Accounts Committee can call accounting officers to account, and it does so regularly. As I say, I do not think that this committee has any formal power to call me up here, but I hope that that is an academic point. I hope that—unless you ask me up here every week, which would be difficult—if you ask me, I will try to come.

I want to continue on the point about accountable officers, just to be sure that I am clear in my mind. Am I correct that the HMRC Scottish accounting officer is not comparable to the accountable officer as we know it here in Scotland?

I am sorry, but I am not aware of the responsibilities of an accountable officer here. I thought that the responsibilities were broadly the same. All that I can tell you is that, as set out in the appendix to the memorandum of understanding, I have

“responsibility for all matters of governance, decision making and financial management in relation to SRIT. This includes promoting and safeguarding”—

those are important words—

“regularity, propriety, affordability, sustainability, risk, and value for money for SRIT; and accounting accurately, and transparently for all matters relating to it. The AAO will provide an SRIT extract from the audited HMRC accounts to the Scottish Parliament”.

That is the extent of the responsibilities that are set out for me, as additional accounting officer, in the memorandum of understanding.

10:30

Your position is not, in fact, a statutory one.

No. I think that I am right in saying that accounting officers have a statutory basis but what they do is set out under Treasury guidance. Amyas Morse is the expert on that.

That is right; the role is set out under Treasury guidance, and it covers everything about appropriate use of the resources of the department rather than policy issues. Other committees might ask accounting officers to comment on policy issues, but the Public Accounts Committee is explicitly not supposed to consider policy matters. It is supposed to be looking at value for money, efficiency, effectiveness, and probity.

On another issue, when HMRC gave evidence to the Finance Committee in May this year, it seemed to indicate that, if the Scottish Government did something radical with something like stamp duty, it might decline to implement it. Would that also be the case with the SRIT? I cannot imagine that it might be, but if the Scottish Government wanted to bring in some sort of radical change, might you decline to carry it out?

I do not think so. There is a distinction between what we might be asked to do on stamp duty and our obligation to administer the SRIT. As I understand it, the responsibility for raising stamp duty and tax on property transactions now lies with the Scottish Parliament. You may ask us to administer any new tax that you introduce; as it is, you are setting up revenue Scotland. I do not think that we have any legal responsibility to administer any new tax that the Scottish Parliament sets up, such as stamp duty. The distinction is that we have an obligation to administer the SRIT, and the terms under which we would do that are set out in the memorandum of understanding. I do not therefore think that we are free to say that we will not do something in relation to it.

Having said that, if ultimately there was disagreement about what we were or were not prepared to do, I am not sure that we could either say yes or no. The question would go up to the Joint Exchequer Committee, which would make a decision. Sarah Walker will put me right if I am wrong, but I believe that its decision would be binding on the HMRC. We would have to do whatever it required. Have I got that right, Sarah?

Yes. The only power that the Scottish Parliament has is to vary the rate of the Scottish income tax. We are setting ourselves up to implement that regardless of the rate that is set. There is no other legal power to make any other changes to income tax so it is difficult to imagine the sort of policy changes that the Scottish Parliament might ask for that we would not be able to make.

I just want to be 100 per cent sure about this: mention was made of a publicity campaign in 2015, and I assume that that cost is already included in the £45 million figure.

Yes.

So it is not an additional cost.

I have listened to everything that has been said and it is still a bit unclear to me. Perhaps everyone is still feeling their way forward. I am wondering how on-going performance measurement will be reported to the Scottish Parliament Public Audit Committee. Does HMRC have any thoughts about how that might happen?

We measure our performance in a number of ways. Compliance activity includes ensuring that those people who would not otherwise pay do pay, and making sure that due debt is paid. Performance measurement also covers our customer service, the length of time people have to wait on the phone for an answer, and the time that we take to respond to correspondence. We measure all those things and they are reported on.

As was discussed in relation to Mrs Scanlon’s questions, we have identified how much information we can break down for Scotland under our existing systems, and the discussion on whether it would be sensible and value for money to incur additional expense to break the information down for Scotland in the future is very much part of the process.

We will look at the issue as we design the IT systems. We will want to hear about the information that you would like, and we will discuss with the Scottish Government the cost of including different reporting features. We will also discuss that with the NAO so that it feels that it has adequate information in order to produce the report to which Amyas Morse referred.

Would it be right to assume that the estimated on-going costs, which I think are £4.2 million, include the costs of on-going performance measurement, reporting and so forth?

Our priority will be to report on the elements of performance that are paid for specifically by the Scottish Government. As Edward Troup explained, we will continue with our existing customer service and compliance activity in both Scotland and the rest of the UK. The additional activity will involve maintaining the indicators of Scottish taxpayer status, dealing with enquiries about that status, and dealing with changes in the Scottish rate of income tax. We would expect to have a clear agreement with the Scottish Government on how we will represent and demonstrate value for money in what it is paying for.

Beyond that, we would have to think about breaking down information on the effectiveness of our general activity and looking at how it applies to Scottish customers differently from other customers. We would have to talk to you about the costs and the additional burden that it would represent. As Edward Troup said, we are very open to talking about that.

The £4.2 million is an estimate. It could perhaps be reduced if we do not do some things, it will go up if we do some other things, and it may change anyway. It is all part of the discussion in the next three years to ensure that the costs, and what the Scottish Government gets for its money, are clearly understood and that we deliver in the most efficient and value-for-money way.

At present, is there within that £4.2 million an element that covers the costs of reporting and performance measurement?

As I said, it is estimated by people who are professionals at estimating the costs of tax changes, based on some very broad assumptions about what would be covered. It is clear that it will include management information—as all tax changes do—so there will be a broad view.

I do not know for certain, but I am pretty sure that if I went to whoever generated that figure and said, “Did you expect to be reporting on this or that?” and “What management information do you expect?” he or she would say, “That is the best estimate of what it will cost—I cannot tell you exactly what it will cover, but that will be part of the on-going development of the project”.

We want to share information with you, but we have come here at a very early stage before we have done the work. It is useful to hear about your appetite to build in information reporting systems. We will certainly see what we can do about that, and we will ensure that, if we can do it for you, it will be done in the most cost-effective way.

I have two colleagues who want to come in. As a courtesy to our witnesses—I was going to say “guests”, but perhaps that is not right; they are our guest witnesses—we should not run over time for too much longer, because they have to travel. James Dornan will go first, followed by Willie Coffey.

I have a brief question on cost responsibility; many of the questions that I had have already been asked. We have discussed the rough estimates of £40 million to £45 million in set-up costs and £4.2 million in annual costs. Is there a limit to that? Who has the final say on what the cost would be? I accept that a lot of that will be done by negotiation and conversation but, at the end of the day, whose responsibility is it to say, “These are the costs that you have incurred, and this is what you owe us”?

All that has to be approved through the programme board and up to the committees if there are any differences.

We are not giving a capped quote and saying that it will not cost more than that, but we are very intent—as we are in everything that we do—on keeping the cost at a minimum and ensuring that there are no surprises, either for our ministers in the changes to the UK system or for you and your ministers in the changes to the Scottish system. The process, as set out in the memorandum, is a way—as with any other public spending—of managing that cost and keeping an eye on it.

The only difference is that the organisation that is delivering this is not part of the Scottish Government. However, through the memorandum of understanding and the Government’s arrangements, we want the situation to be as close as possible to the sort of arrangements for managing any public spending that your committee would have oversight of in Scotland or the Westminster Public Accounts Committee would have oversight of in England.

I cannot say that the cost will definitely not be more than a certain amount. As you know, we just cannot do that.

The Scottish Government talks about meeting HMRC’s reasonable costs. Who decides what is reasonable? That is the point that I was getting at.

As with any contract or arrangement, the mechanism for dealing with disputes is designed to deal with situations in which one party appears to be being unreasonable or to be incurring unreasonable costs. However, I do not want to incur any unreasonable costs.

I am sure that nobody does.

Mr Morse spoke about the fact that the NAO might let Audit Scotland see his report, and Audit Scotland could bring it to this Parliament—you will correct me if I am wrong, but that is certainly what I took from what was said.

This issue concerns Scottish taxpayers and something that the Scottish Parliament is responsible for, even if it did not ask for it. Is there, therefore, some way in which Audit Scotland could report to us on whether it believed that things were going well or that there were failings?

I think that Mr Dornan will find that the Scottish Parliament supported the Scottish rate of income tax.

I think that you will find that we had little option, but that is a different thing entirely.

I am trying to indicate as much responsiveness as possible by saying that if, at some point in the future, the Scottish Parliament says that it wants an opinion from Audit Scotland, I am happy to contribute to that opinion. I would still have to do a lot of the work, but I would be happy to report through Audit Scotland if you thought that that was right. I am not against doing that if that is how the situation develops over time. However, if we are doing an awful lot of it, it is quite a good idea to have the dog see the rabbit, if you know what I mean—you are going to want to talk to the people who have done the work.

I hope that we will work with as high a degree of co-operation as possible. The situation over the next few years is quite moveable and I expect that our relationship with Audit Scotland will move around quite a bit. We are very open to anything that is going to make sense. It is not a question of our having a fixed position. The only fixed position is that we have the access rights to look at HMRC systems. That is what we already do and it does not make sense to sit here and say that we will change that. My remarks are based on that fact. I am trying to indicate responsiveness and flexibility, frankly, not the reverse. I hope that my remarks come across in that way.

To be fair, that was what I took from your remarks. I was just trying to clarify how the relationship between Audit Scotland and the National Audit Office will work in terms of the Scottish Parliament.

Earlier, Mary Scanlon made a point about oil workers, and I made a remark to her about MPs. Are there any circumstances in which it will be possible for a Scottish MP not to be a Scottish income tax payer?

The legislation says that any person who represents a Scottish constituency will automatically be a Scottish taxpayer.

No matter what they do with regard to the designation of their home or their second home?

It does not matter where they live.

Even if they engage in flipping properties or the other processes that we hear about.

We know where they live. [Laughter.]

That is encouraging.

I do not want to get into the issue of the cost of the IT systems. Instead, I want to ask about how the IT requirements will be defined and who will be doing the defining. As the convener said, there have been examples of poor definition of requirements at an early stage, which has an impact on the ultimate cost of the project to—in this case—the Scottish Government. Could you give us more details about how the relationship between HMRC and the Scottish Government or its appointed officers works with regard to defining exactly what is required?

10:45

The process that we have started jointly with the Scottish Government is to identify and define the necessary processes and the IT requirements to identify Scottish taxpayers and operate the Scottish rate. This is about changes to our existing PAYE system and self-assessment system. We have a very good knowledge and understanding of those systems. More or less every year, there is a policy change in the budget that affects those systems and changes need to be made, so we are not doing anything new or unusual. It is something that is relatively predictable for us.

The first thing is to define the process that we need, and we can then identify the necessary changes to the IT system. There will be changes to the way in which we do PAYE codes and, as Edward Troup said, there will be changes to the management information that we need to get out of the system. There will also be changes to the accounting systems to ensure that we can properly track money from Scottish taxpayers to ensure that it is correctly accounted for and allocated to the Scottish Government.

There are a number of aspects to the work, but it will be done through the process that we use for implementing tax changes under the budget in the normal way. It is a well-established process.

I am encouraged by that. I think that you are telling us that there is a two-way relationship with reference to what is required in the system. You will not deliver a system to the Scottish Government without its clear input and agreement about content and delivery.

That is correct. We set up the delivery process through a project and programme structure in which the Scottish Government has representation at every level, so it will see all our documentation. We have already had a useful workshop with people from the Scottish Government and our experts talked them through, for example, what IT changes are likely to be needed. We are working with the Scottish Government and, where there are choices to be made because there are different ways in which things could be implemented, we hope to involve it very much in that.

That is good. At what point do you think that you will be clearer about the cost? You said that there are only rough figures and estimates at present. At what point will we get some clarity about the set-up costs? Several members mentioned a possible cost of £45 million. When will we be clearer about the real cost?

All that I can say is what I have said before. The first work that we will do is the work on processes, which is not so much about the IT design as it is about the process for contacting people and implementing the identification of Scottish taxpayers. I hope that we will have done some of that work by next summer, so there should be some detail by the time we do the report under the Scotland Act 2012.

We do not expect to start the work on the IT change until some time in 2014, so I do not expect to have more detail on the cost of that change until then. We will refine the costs as we go through the planning process and we expect to report regularly on the development of that.

On the timing of the expenditure, we expect about £13 million of it to be incurred during the current spending review period—that is, to the end of March 2015. It will not be the case that some enormous amount appears in six months’ time. This is a long project. The expenses will be managed, and what they are will emerge, over that period.

Thank you.

Ms Walker mentioned 2014. You will be aware that a significant event will take place in Scotland in that year. You may choose to answer this question, or not. Should there be a yes vote in the referendum in 2014, will the process that the UK Government and the Scottish Government are about to engage in still represent a worthwhile investment? Could it be seen as a step towards disaggregating the tax system or would it be a wasted investment, in your view?

Let me pick that up. The change is now committed to in law and it will happen. A change in the law would be required for it not to happen.

I cannot speculate on what would happen if there were a yes vote in the referendum but, if an independent Scotland wanted to run its own income tax system, this feels like a step on the way to that. It would be perfectly open to an independent Scotland, depending on what powers it had obtained, to do away with the system and introduce something completely different but, as far as we are concerned, for both Governments, this is now the law. It is not like the variable rate, which was something that might have been introduced but, in the event, was not. This is something that will be introduced, and we are working to introduce it. As with all Government projects, it will be possible to review it at any point, which will be for the Governments to decide. We are here to do what the Governments have legitimately agreed to do—and this is it.

Thank you very much, Mr Troup, Mr Morse and Ms Walker. I also thank you for your forbearance of our overrun. We are usually quite a disciplined committee, but the novelty of your visit led us to get carried away. I apologise for that.

We will make a virtue of being a bit late, and break until 11.

10:50 Meeting suspended.

10:59 On resuming—