This article, "HMRC at 20: A taxing journey from merger to milestone," originally appeared on AccountingWeb.com.
Happy birthday, HMRC. This April marks two decades since the Inland Revenue and Customs and Excise merged, marking a significant milestone in the UK tax administration.
HMRC may have reached its 20-year anniversary, but its journey has been far from smooth. From the high-profile scandal involving the loss of child benefit data disks to cultural challenges stemming from the merger of the two organisations, as well as questions about its effectiveness in maintaining tax policy and customer service levels, the organisation has faced significant hurdles along the way.
Some of the key players in the merger reflected on the beginnings of HMRC last week in an Institute of Chartered Accountants in England and Wales (ICAEW) and Chartered Institute of Taxation (CIOT) conference held at Chartered Accountants Hall, London. The star-studded line-up included Lord Nicholas Macpherson, Heather Self, David Gauke and the current HMRC chair and Exchequer Secretary to the Treasury, James Murray.
Merger came at a point of radical change
Former cabinet secretary Lord Gus O’Donnell (pictured below) explained in the opening keynote how the merger came at a very radical time. Tony Blair’s government was riding high with a massive parliamentary majority. Having just created an independent central bank, the government at the time was in the mood for reforming public services.
But merging the Inland Revenue and Customs and Excise was hardly a new idea. It goes back to 1862 when William Gladstone first considered such a move. O’Donnell, who was chair of the review that led to the creation of HMRC, explained how the environment was different over a century after Gladstone first raised the idea.
The government realised that it could improve efficiency – especially around debt management – and “closer working” between the two organisations wasn’t making a difference either. “The two institutions had tried what they call closer working for many, many years, and nothing much had changed,” he said.
What’s more, there was an appetite for radical change with cross-party approval. “You had a prime minister and Chancellor, financial secretary all up for radical change; a big majority; a Conservative party that actually was up for going along with things that makes sense; select committee that was engaged and interested in the subject; and leaders of the organisations who could have been barriers, but weren’t.”
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Private-sector experience
Merging any two organisations will create challenges. “I remember Gordon Brown saying, ‘So how will the private sector be when we announce [the merger]?’ I responded, ‘Chancellor, the private sector is right behind you, and in my experience, that’s exactly where they’ll stay’. That proved to be pretty much true.”
O’Donnell explained that in order to allay the doubts of ministers around the practical issues of bringing the two together, private-sector experience was brought in to ensure a smooth transition. However, he acknowledged that there is tension between private sector leaders and the realities of working in the civil service.
“I’ve worked with a number of private-sector leaders who come into government, and they come to me after a week or a month or two months, and they say, ‘This is mad. This is absolutely mad. I came in with this secretary of state, and he’s gone. I’ve got a new one who knows nothing about the subject’.” O’Donnell could sympathise, remembering how he had nine ministers for pensions in five years.
Bringing HMRC closer to the Treasury
The review recommended tax policy responsibility sat with the Treasury and HMRC remained responsible for policy maintenance. As part of the Treasury’s revolution, 150 people went there to improve its ability to advise ministers on tax policy.
He explained how something as simple as geography made a big difference in the transition stages of merger. Having everyone in close proximity was crucial, especially if he was having a meeting with the Chancellor about tax issues. O’Donnell explained: “You really want all of the people in the room who are going to be responsible for delivering it. Being able to bring everybody together was hugely important.”
However, while O’Donnell believes the merger has been a success – with HMRC now much leaner and focused – one of the problems has been the need for more “interchange between HMRC and the Treasury”.
Tax and HMRC
Naturally with HMRC as the topic, the questions from the audience turned to tax simplification. O’Donnell was asked his views on the tax authority’s role. He acknowledged the complexity of the system and joked: “We’ve all written to the Chancellor and they’ve all said ‘thank you very much but that’s why you’re a civil servant and I’m a politician. We all know what we need to do, but we don’t all know how to get re-elected if we do it.'”
The political tension in tax decisions is undeniable. He used the example of the winter-fuel allowance, which he advised against. “Once you’ve introduced it and then you get rid of it, the winners stay quiet and the losers scream. That’s the same as any policy.”
He encouraged governments to think very carefully before introducing a new system. Pointedly, O’Donnell said what you don’t want to do is rule out your main tax areas in a manifesto ahead of a general election. “Once you’ve done things like that, you constrain yourself so dramatically that it makes it much harder.”
He was also asked about HMRC being subsequently involved in areas beyond the tax system, like child benefit. “Whenever you come up with a new requirement there’s a question of where you’re going to put it – and there’s obviously a degree of faith in HMRC. I remember VAT coming up and thinking it obviously had to go to Inland Revenue but it went to Customs.”
As for the culture change in bringing two organisations together, he accepted that it was hard. But he realised he wasn’t going to solve all the issues at the inception stage. “I didn’t spend a lot of time going on those issues because I knew that it was a distraction, and I knew that there was unfinished business.”
What came next?
The panel after O’Donnell’s keynote (pictured below) picked things up from there. Lord Macpherson, the Permanent Secretary to the Treasury from 2005 to 2016, agreed with O’Donnell that “you wouldn’t create Customs and Excise and the Inland Revenue if you were starting from scratch”. So he saw the strong case for the merger. Having inherited the merged tax administration, he witnessed both benefits and challenges.
“I do think that, with the passage of time, a unified HMRC became considerably more effective at delivering. It also became more efficient,” said Macpherson.
Self, who was a director of group taxation at Scottish Power at the time of the merger, was in favour of “working together” but since that wasn’t going to deliver the efficiencies required, she wondered whether another option could have worked instead.
Speaking on the panel, she said: “Did anybody ever think about having a structure that would have been broadly a holding company and two subsidiaries? I wonder whether you could achieve a lot of efficiency savings, such as debt collection, without having to bang together two very large and very different departments. Because it’s very difficult to get that many people aligned.”
She went on to highlight issues around the disparity in experience and pay of those working in Inland Revenue versus Customs and Excise, the difficulties post-merger in training new recruits and customer service issues. She said the merger was a “net positive on compliance” but a “net negative on customer service”.
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A knocked confidence
Former minister Gauke was also on the panel. When he was elected as an MP in 2005, he admitted that he wasn’t a tax person and the merger wasn’t a contentious point. His early dealings with the Revenue were mainly consigned to constituency surgeries over tax credits.
He became shadow minister in 2007 and then from 2010 a minister in the government and at that point he concluded that HMRC was an “organisation under a lot of strain”. He didn’t think this was necessarily due to the merger, but recognised that going into 2010 tax credits had become a “significant burden” for HMRC, since they were not about “handing out money”.
Up against scandals like the loss of the child benefit data disks, Gauke said HMRC was just holding it together and “keeping the show on the road rather than being terribly visionary”.
Gauke reflected that these pressures “to some extent, knocked the confidence of the organisation”.
The numbers of staff fell significantly. Gauke was at the helm as a minister when staff levels were cut a further 10%. He acknowledged that it would be cavalier to dismiss the impacts when staff levels are reduced but he reasoned that two organisations had merged – with a huge number of clerks – and there was still a lot of reliance on paper despite technology advancements. “If you’re not able to reduce the workforce in those circumstances, when can you?”
Macpherson noted that in the subsequent years the reduction in staff has hit the effectiveness of the organisation. “Clearly in the second 10 years, the number of staff at HMRC has actually decreased, which may be something to do with Brexit, but I think it’s also something to do with the civil service more generally. I just wonder whether the missionary zeal of driving efficiency has gone awry in recent years.”
Confidence returns
That said, Macpherson noted that following the Covid pandemic HMRC is a more “self-confident organisation, which can deliver quite challenging programmes”. But where HMRC falters is still in its relationship with the Treasury.
Gauke also hailed HMRC’s Covid response, particularly the furlough scheme. “One of the most useful things I did as a minister was by accident,” joked Gauke, who introduced the Real Time Information (RTI), which laid the foundations for the coronavirus job retention scheme.
Look to the future
Now, 20 years on, HMRC continues to evolve. In one of HMRC’s latest developments, minister James Murray has taken on the role of chair of the organisation. The role was traditionally held by a non-executive from the private sector.
Macpherson said he was “troubled” a little bit by Murray’s appointment: “The basic principle of the Revenue is that they are arm’s length from ministers.” Gauke, too, wasn’t that “excited about it” either. He saw his role as fulfilling much of the same tasks but he never saw the need to formalise the role and he found it helpful to have a non-exec chairing HMRC who brought with them private-sector experience in chairing boards.
As for whether Murray’s position brings him closer to the Revenue, Gauke said: “Lin Homer [former chief executive of HMRC] moved her office as close to mine as possible” – joking that he couldn’t escape her.
Final reflections
Reflecting on how HMRC has changed, Gauke highlighted how since Brexit a lot of opportunity was lost and while its response to Covid was a success, they have struggled to keep that stride. He has one regret, though. “I regret they haven’t made faster progress with MTD…” Looking out to the audience, he joked, “I recognise I am on dangerous territory here.”
As for Macpherson, he would have liked HMRC to have more influence around table post-merger. “Looking back on it, the genuine interchange between HMRC and the Treasury proved difficult. Many people who became effectively Treasury officials didn’t go back [to HMRC].”
He added: “I don’t think there has been enough interchange. What [O’Donnell] referred to as policy maintenance has proven harder work precisely because of [HMRC’s] split from strategic policy. I sometimes worry that pre-merger it was far more likely that somebody from HMRC would be in the room when the political tax policy was discussed.”
But 20 years on, according to Macpherson, the work of the merger is still not over. “It’s like a marriage – you have to work at it because the work is never done.”