Siŵn chi'n g correl这里. Welcome to the 16th meeting in 2016 by the finance and constitution committee. I also welcome Linda Fabiani to the committee this morning, who is here as an observer statistics but I would specifically like to ask her questions when she gets the opportunity. Use your reminder about mobile phones, please. We'll get straight to the first item of agenda which is to decide whether to take item 3 and private. Are members agreed? Dukuag! The second item of agenda is to take evidence from The HMRC as part of our scrutiny on the forthcoming budget, which we know will beutions to be published this Thursday. The session will also form part of our ongoing scrutiny of the implementation of the Scotland act, 2016. I know that members have received written copies of material from The HMRC, and copies cases of the memorandum of understanding and a paper from Spice providing some additional information for us. As we are joined for the session this morning with Jim Harra, who is the director general for customer strategy and tax design and Sarah Walker, who is the deputy director for devolution in the GDRC. I welcome you to our session this morning. Jim Harra, do you want to make an opening statement? I'll just make some brief comments. Can you please do it? Thank you, convener. Erfyd, mae'r 1rhyw gwaith yn unigion perthyniadol y guitar prieriol cwmdeithasol fel gyfannol Ffocir Llywodraeth Gwmd, a'r drwg esbyn o'r lawr arall y peth yma.  Felly rydyn ni'n eu gweithio i'r rai oherwydd i'r ddweud oherwydd o mhagorfffyll ac i'r rhaid i ddweud oherwydd o'r ddweud oherwydd o'r drech cymryd o'r cwestiynau iawn. Mae'n ei gweithio i gweithwch yn hawdd ddysgu i ddweud oherwydd i'i cynnig oedd It is a long time since there have been variations in income tax rates or thresholds within the nations of the UK and it is new for us to be identifying Scottish taxpayers. There is no benchmark against that for which we can assess ourselves. We have been working very closely and effectively with the Scottish Government. Last month I met my counterpart Alison Stafford to give her an opportunity to hear about our progress and to challenge us and question us on what we are doing on behalf of the Scottish Government. I can do the same for you today. Just to say where we are on implementing, in particular, the IT to administer the income tax. We have already implemented everything that we need for the Scottish rate of income tax and the new income tax, but there are still some things that we have to do, in particular self-assessment for the new powers that come in later. Obviously, people will not be making their self-assessment returns until sometime down the line, so we have got IT changes still to make for that. We have also still got some IT changes to make so that we can account for Scottish income tax through all our accounting systems. Finally, we are still working on what is quite a significant challenge in relation to relief at source for pension schemes and making sure that Scottish taxpayers get the right rate of relief when they contribute to those schemes. That is all that I want to say. You say that it has been a long time since we have been involved in this type of project, but it is probably no longer than that, because it is the first time in Scottish history that we have ever set an income tax here in Scotland. I am not an expert, so I do not know whether centuries ago there was. I do not think that there was an income tax before 300 years ago, so I am aware of it. I think that there are proper issues, but this is just the historic stuff that you are involved in. As far as the challenges that remain go around self-assessment and the other areas that you outlined around pension, etc. Can you just give us a bit more in-depth description of what those challenges are and what you are doing to make the organisation fit to face those? Yes. Sarah is closer to the details, so I will let Sarah step in in a moment, but we have three projects. We have a project for the Scottish rate of income tax, a project for the additional income tax powers and a project for the relief at source scheme to ensure that pension schemes can get the right relief to their customers. Those are all on track to deliver in good time. We have some interim arrangements in the meantime for the relief at source schemes, which we believe will work until we can get a more efficient scheme in place. We do estimate that the costs of implementing all that IT will be lower than we previously thought, so that is positive. Do you want to add anything? No, I think that those are the main highlights. For self-assessment, what we need to do is to make sure that when somebody gets their tax return, we can get them to tick a box or to indicate in a positive way whether they lived in Scotland during the year in question and, therefore, are liable to tax at Scottish rates. For the pension schemes, the issue will only arise if the basic rate is different between Scotland and the rest of the UK, because relief is automatically given at source at the basic rate for pension contributions, where you pay into a personal pension or a pension that is not run by your employer. In those cases, we are setting up a digital system to exchange information with the pension administrators to allow them to identify who, on their books of their contributors, is a Scottish taxpayer and, therefore, claim relief from us at the appropriate rate. I should add that during the course of this year we have introduced an entirely new digital account for all pay-as-you-own taxpayers, called the personal tax account. There are currently more than 7 million users of that and, from the outset, we have included in that new digital account. People can see that they are a Scottish taxpayer and that Scottish rate of income tax is visible in that new account. The self-assessment—those who have self-assessed in which I think from your paper—was about 14 per cent of the taxpayer base. What progress are you making there? Obviously, the first self-assessment returns that relate to this tax year will take some time to come in, so we have a longer period to put all the IT in place to make sure that the self-assessment system calculates the right rate of tax for the people who we have identified on our database of Scottish taxpayers and that that all flows through to our accounting systems. We are able to do that on a slightly longer timetable than was the case for pay-as-you-own, and that is on track to deliver on time. I understand that. Can you tell us today what the overall cost of the Scottish Government so far has been in the implementation of the Scotland Act and how that is broken down? So far, the cost has been £12 million. That mostly consists of the IT changes that we have made so far and the communications activity that happened last year when we were setting up our list and database of Scottish taxpayers. The overall estimate is between £25 million and £30 million for implementing the Scotland Act 2012 changes. That is the basic Scottish income tax rate and the relief-at-source changes. That consists of roughly £10 million of non-IT expenditure, which includes communications, staff costs, data cleansing activity and marketing. The estimate for IT within that £22.95 million is between £15 million and £20 million. That is partly the IT changes that James already mentioned, plus the remaining relief-at-source system that still has to be implemented. That is obviously in terms of the initial costs, which were originally estimated between £40 million and £45 million. That is a considerable reduction. That is a good thing for Scottish taxpayers, because it is the time that is paying for this at the end of the day. Are there other costs that you can see beginning to emerge that the Scottish Government might have to absorb? There will be an on-going business as usual cost, if you like. The amount of that will depend on whether the rates of tax are the same in Scotland as in the rest of the UK or if they are different. If they are the same as they are in the current year, the costs are going to be fairly low. There will be some cost of dealing with inquiries, complaints and communication around whether somebody has got the correct tax code. There are some costs around compliance activity, which will not have happened yet, because it happens after the end of the year, but we are already planning for compliance for checking and assurance activity to make sure that we have correctly identified Scottish taxpayers. The figure that we gave for the estimate was between £1.5 million and £2 million a year in the year when the rates were not different. In the year when the rates are different, it will clearly depend on the nature of the difference and on how many people that affects, but we do expect significantly more inquiries, more code changes and more active compliance activity in a year in which there is a differential between the Scottish rate and the UK rates. We have said that that is around about £5 million in a year. Those are estimates. We are still working to refine the activity, particularly what we would be doing in terms of compliance, so we will revise those figures once we know more. It was interesting in the terms of the memorandum of understanding that if there was a dispute over costs, there was quite a clear mechanism to deal with IT issues, in particular, going to an independent source to resolve any of that. It did not seem to be as clear on the administration side of things about—it did not mention any independent process and the administration costs if there were different views about what those were and how that would be resolved. Is there something in the service-level agreement that we have yet to see that covers that? In the area of IT, there may be circumstances where you want to get in an external expert to say whether the solution that we propose to implement is a correct solution. That is something that you might well want an expert to look at. In terms of the non-IT costs, there are things like do you do advertising, do you write letters to people, how much compliance activity do you do? That is not really the sort of thing that is amenable to having an external expert to come in and ask. The way that it is determined is, first of all, by discussion in our project and programme boards where the Scottish Government is represented. They are part of that process of deciding what to do. If there is a dispute, there is a process to escalate that, which can ultimately go to ministers to decide. Obviously, we hope that that would never happen. I would be effective if that would end with the GMC if it required, but it is unlikely to happen. It is the JEC, the Joint Executive Committee. I am curious. Do any other jurisdictions or, indeed, the Treasury have a service-level agreement with the HMRC in where the Treasury pay for any changes that are implemented at the budget process? The Treasury pay for everything that we do ultimately, but we are one of the chancellor's departments and we have an annual remit letter from the chancellor setting out what it is that he expects us to achieve in the coming year and the funding that he is giving the department to do that. On his behalf, Treasury officials do monitor that. We do not call it an MOU or a service-level agreement called the remit letter, but it is, in effect, my permanent secretary's performance agreement for the year that the chancellor sets him to achieve the key priorities. Are there any other jurisdictions that you work on on behalf of? We do certainly have memorandum of understanding and service-level agreements with other government departments for whom we provide services or who provide services to us. For example, in relation to customs activity at the border is carried out by the border force, but I am responsible for UK customs, so I have a memorandum of understanding and a service-level agreement with the border force, both for what they do for me and for the data and other support that I give them to enable them to do their job. There is also the collection of student loan repayments, which we do on behalf of whichever department it is now, but we do have formal agreements for the activity that we do on behalf of another department to collect those payments. I will get that overall picture. Thank you very much. That deals with some of the cost issues, but I think that we want to get into resource issues now. Marie, you wanted to begin on that. I do. Thank you very much, convener. HMRC are closing 18 offices in Scotland with a loss of about 2,000 jobs, which, as you can imagine, is causing a great deal of concern, including in my own constituency in Burness. I represent the Highlands and Islands and Burness is set to be one of the first offices to close. The majority of HMRC workers believe that the UK Government plans will negatively affect the staff and their ability to collect tax and to enforce tax compliance. I added to that that your clients have not made quite the switch to digital that you hoped for, so the number of calls to your helplines have remained the same. The waiting time has gone longer. Mark Soroska, General Secretary of the PCS Union, said that the HMRC collects the taxes that pay for all the public services that we rely on. The very fabric of our society depends on it being properly resourced and well run. I would like to ask you what you can tell us today that will restore our confidence in HMRC's ability to correctly collect the tax that we need to run the country. In last year's budget and spending review, the department was given investment of £2.1 billion. We are tasked with using that investment so that, at the end of the spending review period, we have achieved £700 million a year cost efficiencies in the department. We have also brought in, over the course of that time, an additional £8 billion in revenues over and above what we were previously expected to bring in and that we contribute to compliance cost reductions for businesses as well. There is investment to go with the change that we need to make so that it is not simply cuts. In the case of customer services, you are right to keep part of our transformation programme is digital, replacing more traditional forms of contact and processing within our offices. In our large proportion of that £700 million efficiency savings, we would expect to come from the introduction of those digital services. We are certainly not behind in implementing them. On the contrary, the new personal tax account that I mentioned, which was introduced in January this year, we had a target that, by the end of March, we would have 7 million users of that account. In fact, we have already exceeded 7 million users and the satisfaction readings on that account are very good. That account can enable a taxpayer to do about 60 per cent of the things that they want to do online, where previously they had to ring us or write to us to carry out a simple transaction. It is both helping us in terms of making us more efficient but it fits with the way that taxpayers want to run their lives. It is an ambitious transformation programme and we have to take care that as we make the changes, first of all, we make them the way that we plan to do so and that they have the benefits that we need so that there is no reduction in customer service. In terms of our call handling at the moment, for about the last 13 months we have been handling between 85 and 90 per cent of all the calls that we receive. Our average call waiting time is below five minutes, which is not where we want to be but it is a lot better than it was a couple of years ago. We have a plan to reduce that down to below three minutes. It is something that we need to take care of as we make our transformation that we understand the service impacts and that we are managing that effectively. The aim of using this investment is that, at the end of this spending review period, we will have a modernised digital tax authority that is actually delivering better service and better revenues for Government as well. Patrick Harvie and Linda Fabiani are once and in the series as well. Thank you very much, convener. Good morning. For transparency, convener, can I just let the committee know that I am a member of the PCS parliamentary group, which is not a group of MSPs who are members of PCS but were MSPs who regularly meet with PCS to discuss issues of importance to the union and its members, so I just wanted to make that clear. However, that being said, you will be aware that PCS have expressed serious concerns about the impact of the changes that are happening, not just the scale of job losses but the impact of, for example, sites moving from place to place and people being unable or unwilling to move with those changes of location. That itself is not just potentially unfair to individuals. It could have a serious impact on HMRC's ability to retain skills that it needs, even just in business, as usual, but not least at a time when, as we have acknowledged, you are undertaking extremely complex and historic new structures in terms of administering tax very differently in Scotland. Can you give us any sense of how you have engaged with those concerns, how you have responded to those concerns and whether we can have any confidence that those changes are compatible with this extraordinary new challenge that has been taken on? Yes. First of all, just to set the challenge in context, the department is, I think, still left with a legacy of the way we did business in the past, which is a network of sometimes very small offices, about 170 of them, which date from a time when the local tax office served the local population. That is not the way that tax services in this country or, indeed, most other countries work now. The purpose of this transformation programme is to move to having 13 large regional centres around the country, plus a small number of specialist sites and some transitional sites, because we recognise that we have to take time to make this transition, both to ensure that we retain the skills that we need as we make the change, but also to help our people with the impact. That is the strategic challenge. You are quite right. There are clearly impacts on our people as we do that. We believe that the vast majority of our people will be able to make the transition with us, but, unfortunately, it is the case that some will not. We definitely want to treat everyone fairly, no matter what their circumstances. What we have done to date is, for the whole of the programme, we have modelled what we think the impact is going to be on our people. As we get closer to implementing a change in any office, we move from that modelling to having a one-to-one discussion with every individual affected to make sure that we gather actual information about the impacts on people. For example, in Scotland, our modelling indicates that more than 90 per cent of our staff are within reasonable daily travelling of the new sites where we intend to have regional centres. The selection of where we have regional centres is a number of criteria that are relevant, but our key aim, obviously, is to have a centre in which we can really develop and exploit our people's skills and give them good careers, but also that we can recruit and retain really good new skills. Scotland came out quite well in that, so it is the only part of the country where we are having two regional centres, if all other regions have one. That reflects the calibre of the staff that we believe that we can recruit and retain here and also the quality of the infrastructure that we will be able to use. If you look at our programme, it is phased over a period of time. As we make the changes, we are retaining some large transitional sites for quite a long period, and that is a recognition of the fact that we must not move too fast on this and that we must not lose skills that we need as we make the transition. For example, here in Scotland, the intention is to keep East Kilbride as a transitional site for about another nine years. As we make the move to Glasgow and Edinburgh. You have placed a lot of emphasis on retaining skilled staff and experienced staff. Can you tell us with any confidence whether, at the end of the process of change, the cumulative amount of experience in person years will be the same or lower? If lower, how much lower? I think that we are going to experience change in that even if we don't make this transformation because our workforce, about 48 per cent of our workforce, is over 50. Therefore, we have quite a challenge in refreshing our workforce over this period anyway, even if we stayed in our existing locations. We are very active recruiters. For example, we bring in about 250 graduate-entrant recruits on to tax programmes, which makes us one of the largest graduate employers. That is in recognition of the fact that we have constantly refreshed our workforce. We face a challenge over the next few years, regardless of what we do on a state, in making sure that we maintain our skill levels and experience and that we pass on knowledge from people who are leaving the organisation to new people who are joining. That is one last point on this time, convener. The whole economy is aware that there is the potential for a new wave of unemployment coming from sophisticated automation, the application of AI and so on. Is that something that you anticipate happening within HMRC in the coming years ahead? Is that something that you have discussed with your workforce representatives? I am aware of AI, but digital technology enables taxpayers to self-serve in the tax system and do things themselves. Previously, they had to contact a member of staff to intermediate between them in the tax system. That is definitely happening. That is almost a parallel, if you like, with online banking, where banks now give you access to the banking system as opposed to using a cashier to intermediate between you and the system. The same is happening in tax. Technology is definitely having that effect. We are certainly harnessing automated data analytics to help us with our risk assessment, where previously you would have used manual methods. Technology makes us more efficient. Whether you take those efficiencies as cost savings or reinvest those efficiencies in seeking more revenues and closing the tax gap even more is something that we have discussions with ministers about all the time. We have got quite a good track record of securing reinvestment of savings from ministers in each fiscal event. Thank you, convener. Thank you, Patrick. Linda Fabiani. Two very quick questions, convener, with straight answers. Mr Hara, first of all, you mentioned about East Kilbride, which I represent, and you said about the lease being for another nine years, which I presume is the one in Queens Bay House. Can you tell me whether, in fact, that lease, which is with a private company, has a break clause that you would consider using before that nine years, or if that is an absolutely firm commitment to nine years, should you decide, in fact, not to stay in East Kilbride? It is our intention to remain—you are right—that it is Queens Bay House in East Kilbride. We have currently got two buildings there, Plaza Tarr and Queens Bay House. It is our intention to close Plaza Tarr but to keep Queens Bay House open until 2526. Obviously, staff would move into that building. That is dependent on us securing good terms from the landlord for that. It is our intention to do it, but I cannot tell you firmly that that is definitely going to happen because it depends on negotiation with the landlord on the terms of that. That means that there is a break clause then that you could leave earlier if you chose? I am not an expert on the lease in that building, but I assume that it must be, otherwise I am not sure what leverage we have to get terms from our landlord. I know that we are actively engaged in doing that because it is our wish to keep that building open until 2526. That is one of our longer transitional sites, but I cannot firmly commit that that is going to happen because it is dependent on negotiation. As we know, the rationalisation plans for the HMRC have been around and on the table for many, many years now. Prior to the agreements that have come through the Scotland Acts for Scotland, I wondered what additional conversations had taken place around devolution and the additional work and expertise that is required to set up the new Scottish rate of income tax and everything else that goes along with that. Did the plans change? The answer to that is that they iterate all the time. The plan that we have for regional centres is a pan-UK structure for the department. However, the workforce plans for how many people we want in different locations and what different types of jobs and different types of skills we need in each location iterate all the time and get adjusted all the time. There is a change control process in our location programme that enables any part of the department that needs to change its workforce plan to do that and for estates to evaluate how they can meet that requirement. There will undoubtedly be changes such as legislative changes throughout this period that will require adjustment to what it is that we are doing. I mentioned that we have a good track record of getting reinvestment. If we have additional resources during this period, we would have to iterate the plans to accommodate that. From the devolution department point of view, were they fully included in further discussion? The Scottish income tax is being introduced as part of our existing PAYE system. It is not a big separate exercise and it will not require a lot of separate people to operate it. It is just another aspect of PAYE self-assessment income tax that is the job that is being done across the whole country. The additional costs of doing that are being met by the Scottish Government, so there is not an issue of us squeezing the resources for the Scottish rate because of problems elsewhere, because they are kept separate. I would like to go back to something that the convener touched on earlier, which is the question of identification of the Scottish taxpayer, which is an issue that should become increasingly important as we go forward, particularly if we get differential tax rates between Scotland and the rest of the UK. In your submission, you said that there was an issue with the issue of notification letters. How confident are you now about the accuracy of your data on the identification of Scottish taxpayers? I think that it is an on-going process and it will never end. We are proactive in making sure that we get better and better at identifying them. There was an issue with that initial scan, which meant that notification letters were not sent to a group of Scottish taxpayers. If we had not picked up and corrected that problem, that would have, in due course, fed through to them not getting the right tax as well, but that has been resolved. There is still on-going work to refine the database. For example, we have identified about 50,000 people on our database who have incomplete addresses, but there is some aspect of the incomplete address data that we hold that indicates that they may be Scottish taxpayers. We have an on-going piece of work to improve the address data using a third-party data. We are constantly proactively refining that data. Our initial estimate was about 2.5 to 2.6 million Scottish taxpayers. The outcome looks like it is about 2.6 million, so that is in line with the original forecast. That gives me some assurance that we are getting to the bottom of it. In percentage terms, could you put a figure on how close to accuracy you are? Are you at 95 per cent or 99 per cent or where do you think you are? That is what I mentioned earlier. We do not have a benchmark of who these people are against what we can measure. When it comes to our original estimate of how many we thought there would be, we are within that, but at the top end of that. Just to add that, when we did the scan last year, we were able to say that we were confident that 98 per cent of the addresses that we had on our database for which appeared to be Scottish could be corroborated from another source. That does not mean that we are 98 per cent accurate because there could have been missing addresses, but of the ones that we had, we could get separate evidence to justify the fact that 98 per cent of them were in Scotland. We then did some extra work to pick up addresses from other sources, where other sources thought there were people living in Scotland who were not on our books. We went and wrote letters to some of those people. The outcome of that, again, made us believe that our records were probably more up-to-date than the other sources that we were looking at. However, as Jim says, this is a constant, moving target. If there was a gold standard of a list of people who lived in Scotland, we would use that anyway, so we had nothing to judge it against. Okay. One more question, if I may, convener. Have you had people challenging their Scottish status or, indeed, their non-Scottish status as yet, or is it too early in the process for that to emerge? I don't think that we've got people ringing up and asking questions, but if they can say, you've given me a code that says that I live in Scotland but I don't, then we will just change that. I don't think that we keep a record of that, so long as they've got some evidence to prove that it's different. They'll just tell us, I moved six months ago and we'll update our records, but we don't have challenges as such. I think that when we get to self-assessment and the later compliance activity that may emerge. I'm certainly aware of one person who's been in touch with us expressing disappointment that we haven't identified them as a Scottish taxpayer, but when we looked into it, they don't qualify as a Scottish taxpayer, so they may voluntarily make a contribution. Thank you. I wish we could just set you a target to find this half a million more, that would help us all in these circumstances. Ash Denham, I think that you've got a supplementary and so has Willie in this area. Thank you. Good morning. My question covers some of the same ground as Murdo Fraser. So just to talk a little bit more around the failure to identify some of the Scottish taxpayers, because clearly it's the most important part of it. You've got to know who the Scottish taxpayers are in order to tax everybody appropriately. You said that you had an error in your parameters, but basically what that was was people had a Scottish address and you failed to count them as Scottish taxpayers. I suppose my question is, if you're missing, you missed out 420,000 taxpayers, that's not insubstantial because obviously Scotland is part of the UK as a smaller part. How can Scottish taxpayers have confidence that you will maintain accuracy over this and also transparency for the Scottish Government in order for them to have confidence that their data is accurate? You are absolutely right. Those were people who had addresses on our database that should have enabled us to identify them as Scottish taxpayers and it was an error in the scan parameters, which meant that they were not initially picked up. That is very regrettable. We have been completely transparent with the Scottish Government and with yourselves about that problem. One thing that I think was quite reassuring is that, because of the communications work that we had done to raise awareness of that, we were very quickly alerted to the fact that there were people who had not received a letter who you would have expected to receive one. That communications campaign backed up helping us to get that right. In the past, people's addresses have not been particularly relevant to their tax liability and therefore, in the past, we have applied the kind of data quality standards to that that were good enough for what we needed that data for before. I think that that is a manifestation of that, because their addresses were held in a format that was a non-standard format on which the scan did not pick it up. Going forward, we can show that we are already cleansing our address database in response to the fact that Scottish addresses, in particular, are now much more relevant to tax liability than they were in the past. Therefore, the quality of our database will be better, but it is about constantly revealing what it is that we are doing to improve and constantly testing our other people who would expect to get an S code, for example, actually getting one. We have done testing against the Scottish Government's own payroll and have identified that, in 100 per cent of cases where we hold a Scottish address, there is indeed an S code on their payroll, so that gives us—we are doing similar validation with a couple of other large employers as well. Clearly, that is an on-going process because people will obviously get to the point where they are starting work. There might be people who leave Scotland and go and live somewhere else and work somewhere else, so it will need to be an on-going process. What sort of resources have you committed to maintaining the database's accuracy going forward? Also, if there were to be any issues arising from that, let's say that the Scottish Government perhaps identified some people who should be paying Scottish rate of income tax, but were not. Who would have final oversight over a dispute like that? On your second point, if there was a disagreement between us, there are rules in the legislation that determine whether you are a Scottish taxpayer or not. They depend on where your main place of residence is for the majority of the year. It is unlikely that we would have a generic dispute with the Scottish Government about that, given that it is a fairly objective rule. There might be objections in individual cases, and those will be dealt with in the normal way, but I do not think that it would be resolved between us and the Scottish Government. Your other question was about resources. What resources do we have for keeping the data up to date? Most of that activity will happen through our business as usual activities. We have on-going conversations with employers and checking on employers' payroll activities. We will do more of the comparison scans that we did last year, so comparing our database with external third-party databases of people who live in Scotland to make sure that that is up to date. We will use our personal tax accounts and digital communications with people to make sure that they get the opportunity to update their addresses. We will take any opportunities that we have, not always through paid-for advertising but through other types of communication activity to remind people that it is important to keep their address data up to date. We recognise that that is an on-going process and that it is part of the activity that we will be agreeing with the Scottish Government through the service level agreement. I want to continue the point that Ash Dunham has raised. An error in the scan parameter sounds like fancy language for a bug in the software to me. Would that be the accurate mean of how could you initially do a run to £2.5 million or so Scottish addresses that were actually 420,000 people short? How could you not notice that initially that you were that amount of people short? Those addresses had originally been entered on to our database in a non-standard way, so they did not use the post offices postcode address field. When we ran the scan, I think that it is not so much a software error as it was an incomplete understanding of how Scottish addresses had originally got on to the database. When the scan was run on the assumption that they had all been entered in one format, that picked up all of those but failed to pick up those that had originally been entered in a different format. That goes back to the fact that, historically, we will have had a certain level of concern about data quality and data standards in relation to address inputting, which we now need to tighten up. It was not so much a bug in the software, but it was just a lack of sufficient understanding of the different formats that could manifest in the database, all of which we needed to pick up. However, there was a backstop, if you like, in terms of identifying the error because the level of awareness that we had raised meant that people could see that some people who should have received something had not, and that was an alert, if you like. It was £400,000, though it is hard not to notice a number like that. Who raised the alarm about that missing £420,000? Where did it come from? My point is that that should surely have gone through some kind of data validation process in the outset, so that he would be pretty sure that the letters that you were issuing were going to the right quantity of people. 400,000 are substantial. Coincidentally, the volume of letters going out, which was just over £2.4 million, looked like the level that we expected to go out. There was not an immediate identification of that this is not a sufficient number of letters, but it was alerts from people like tax professionals in Scotland who said, because I am aware from my dealings with you or employers in Scotland that people should be receiving notification letters, I have seen some people who have not. I did not raise the alarm then, but you would still be not in the wiser, would you? There must be a risk that, if there are very small numbers, you would not be alerted in that way. All that we can do is, on an on-going basis, to keep refining that and to keep it proactively on top of it and getting better at it. We had some questions and advice and support as well. Can we deal with those questions later? Dean Scott wanted to come on the issue of identification issues in that area as well. We have discussed the position where taxpayers spend some time in the rest of the UK and in Scotland. Can I explore the position where someone spends some time overseas and some time in Scotland? Will the residency test for those individuals be the same as the UK residency test in terms of a number of day count ties to the country and accommodation, or will there be a different test for international taxpayers who spend some time in Scotland? First of all, we have to determine whether there is a UK taxpayer, so all the international residence rules will apply in order to decide whether they are liable to tax in the UK at all. Once they have decided that they are a UK taxpayer, the same rule applies for other Scottish taxpayers, which is where your main place of residence was for the majority of the year. Obviously, if it is part of the year, it would depend on where it was for that part of the year. If it is really impossible to determine, it can come down to counting the days. If there is no obvious main place of residence because they were only temporarily in the country, then we would revert to counting how many days they spent in England or Scotland or Wales. We have tried to keep the number of cases that depend on that to the minimum, because it is a burden on people to do that, but there will be cases where that needs to be done. The first test to be applied will be the existing UK test. That takes you to the UK test to determine where you are. I can ask a slightly separate question. Where will the challenges arise in terms of difficult areas in terms of taxpayers who have a property say that a lot of people work in London and have a property in London, but they also have a property in Edinburgh? Where do you think that the difficulties will lie in determining where the main residence is? If there is differential tax between Scotland and the rest of the UK, how will you determine where the main residence is? Is it a question of number of days spent in the residence? No, it is determining which is the main place of residence. It will depend on a number of things where their family lives, where they are registered with a doctor, where their kids go to school, that kind of thing. There are a lot of factual things that determine where most people have two residences. It is pretty clear to know which is their main home and which is where we can place or where they just go for work. Clearly, there will be some cases where it is not clear. If it is genuinely not clear, as I say, we can look at counting days, but we do think that in the vast majority of cases it will be pretty obvious and easy for people to determine. Ivan, I think that you are really around data transfer issues, links into the application that you are going to deal with. The thing that I wanted to ask about initially was the availability of information from HMRC back to the Scottish Government to enable it to calculate what is happening. I suppose that it was roundabout tracking. Clearly, we will put a forecast out, but the out-term data for that will be some significant period of time away, a year and a half, potentially, after the end of the tax year, before we know the full final scores on that, which creates difficulty because of the complexity of the Scottish budget and process going forward. It was just to be clear that reading through the notes that you have put in will be in a position where every month, effectively, for the paise earn taxpayers, that information should be made available to the Scottish Government to track where we are in terms of the forecast. Is that correct? Yes, that is correct. Paise earn receipts will represent about 87 per cent, probably, of all receipts, the balance being self-assessment. The self-assessment receipts you will not know to much further down the track. The paise earn receipts are the most reliable data that we can give for forecasting purposes. In recent years, we have introduced new rules for the reporting and payment of paise earn in-year by employers, which have really tightened up on the accuracy of the data that we get from them in-year. Employers now have to send us a detailed return and payment for every pay period, which is usually weekly or monthly. Therefore, we have much greater confidence today than we would have had, say, five years ago in the accuracy of that in-year data. That is, broadly speaking, the data that the UK Government and the Office of Budget Responsibility have access to in-year. That is what we intend to give to the Scottish Government. The reconciliation, after the end of the year, would take about 15 months. First of all, we have to operate an end-of-year reconciliation on paise earn taxpayers themselves, but we also have to wait for the self-assessment returns. Okay, but we would have, month by month, a pretty good steer on whether we are falling off a cliff or the thing that was holding up. Yes, and over time, we will be able to build up more confidence in what is the variability in that, but we think that that should be relatively stable data. Moving on just on the data side then, in my understanding at the moment, I think that our research people had been in touch with the HMRC in the past to try and get information roundabout Scottish taxpayers broken down by band, so we can understand how many and what the revenue there is, etc. I think that there were some issues around about taxpayer confidentiality, which meant that a lot of this information could not be provided. Is that the case? Are you aware of that, or do you see that as a problem, or is there no reason why we should not be able to see that full set of data? I mean generally speaking, we won't be able to disclose information that could identify an individual, so in particular for some of the very high income bands, we may have to aggregate to a level that you can't identify individuals, but apart from that, we should be able to provide that kind of data. Yes, I'll provide that. I mean, even at the top end, you should still be breaking it down into groups of a few hundred or something like that. There's no danger there of identifying an individual. So, at the very top end, it's just possible that we will have to aggregate more at a Scottish level than we would at a UK level, but that's simply to protect people's identities, otherwise we can give the breakdown. But those bands at the moment are quite narrow, I think, in terms of what you're going to break it down to already. Yes, and I think probably at that top end, that may be the issue that you're referring to, that at the top end, we have had to aggregate some of the back. Right, so there's no reason that information shouldn't be available, just now, okay, thanks. Moving on, I'm talking about VAT, which we haven't touched on yet. What is the, how you envisage in the process for the assignment of VAT? I know that in our GERS data, there's a mechanism in there, but clearly those are just kind of rough numbers and where we need to be with VAT for the assignment needs to be a bit more accurate than that. That's right, that's right, that's right, correct me. But that is not something that HMRC will be doing as part of our administration of VAT. It's an exercise that the Treasury will carry out based on VAT receipts and statistics that they have about consumption in the economy, but we won't be administering a Scottish rate of VAT in the way that we are, I think, at times. No, it is a calculation. There are discussions going on between our analysts and Scottish Government analysts to agree a methodology for apportioning VAT receipts between Scotland and the rest of the UK. It's not straightforward because of the way that VAT works, whether there are different stages in the production of things and you have to attribute it, and there's also zero rated and things. So it's not a straightforward process, but there is a joint methodology being developed involving HMRC analysts, Treasury and Scottish Government to get to a stage where we've got a model that everybody's happy with. But that should be invisible to VAT pairs. Absolutely, yes, yes. But clearly it makes a difference in terms of... It may involve collecting some more evidence. I think that there's an idea of having surveys of particular types of expenditure in Scotland to fill in gaps in the information that we've got at the moment, so if we need to do that, then that will happen. So the mechanism for that is still work in progress? Yes. Okay. And if I know what I just wanted to touch on, you talk about your high-level compliance approach, analysis of risks and lately behaviour of different categories of taxpayers. I don't know if you want to talk a wee bit more about what exactly your thinking is there. I think that the Scottish Government and Scottish Parliament, I guess, have got two interests in our compliance work. First of all, if and when there is a divergence in rates and thresholds, our management of the compliance risks that that gives rise to in terms of identification of Scottish taxpayers and the behaviours that that might generate, and then our more general compliance work to close the income tax gap, some of which should benefit Scottish Government. The first of those, obviously, is paid for by Scottish Government and we'll be agreeing with them what it is that we will do year on year. The cost of that and what we do will depend on the compliance risks that the differences throw up. On the general compliance management, I think that there are limitations on the extent to which we can disaggregate the effect on Scotland and also there are limitations, timing limitations, in the extent to which that data is available when we do the reckoning 15 months after the end of the financial year. If you like, the extra contribution that the Scottish Government will get from H1C's general compliance efforts will just come from a share of our UK-wide compliance shield. James Kelly had some questions in this area as well. It's just around this area of how you build up the forecast that Ivan McKee had asked about. On the figure of 87 per cent of tax receipts, is that 87 per cent of the number of taxpayers, roughly £2.5 million, or 87 per cent of the monetary volume? It's the revenue. It's 87 per cent of the revenue. It's 87 per cent of the revenue. When you run the first month forecast, you've got, if you're collecting it all correctly, you've got 87 per cent in and the PA, the self-assessment element of it represents 13 per cent.  Obviously, you will want to monitor over time that it stays at 86 or 87 per cent because changes in the economy can cause changes in employment patterns and proportions of self-employed versus employed. It's not a static picture, but based on 2013-14 data, that was the proportion. Obviously, there's a delay in relation to people making self-assessment returns, which can be 10 months beyond the financial year, and there's a further delay before they are making those payments. How do you update your forecast as more information becomes available on the self-assessment? The intention is that we will publish an initial estimate in our accounts in the summer after the end of the year. In summer 2017, we will publish an initial estimate of the liabilities for 2016-17, which is the amount that the Scottish Government will get. That will be based on PAYE revenues, which we will have had by then, but, as Jim said, there still will be self-assessment money and the final end-of-year reconciliation for PAYE to do. A year after that, we should have had all the self-assessment returns in by then, so we should have a much better idea of what's coming in through self-assessment and we'll have finished the reconciliation through PAYE. The idea is that we should have had, I think, over 99 per cent of the revenue in by the 15-month point, and there will be an estimate made of that final small amount, which would still be to be recovered through compliance activity beyond the 15 months. On that process, how is that split between self-assessment returns and actual payments made in relation to the self-assessment return? The calculation is done based on the actual receipts through PAYE, the actual receipts that have come in through self-assessment, but which are due by 31 January. Then there is an estimate of the amounts that haven't yet been paid that need to be recovered, so that estimate is then added on, but that's a very small proportion. How is that then reconciled once the actual payments are coming in for self-assessment? There's no further reconciliation after the 15-month point, so that is a cut-off, and the adjustment to the block grant is determined at that 15-month point. Beyond that, if there is a risk that the amounts that come in are different from what has been estimated at that point, HMRC bears that risk rather than the Scottish Government. Okay, so just to be clear then, even when we get to the final figures that are used for the block grant adjustment calculation, there is an element of forecast in relation to self-assessment, are you able to put a percentage figure on that? I think that it's one or two per cent of the total, it's a very small amount. Right, it would be useful if we knew the exact value of the percentage because although you're saying one or two per cent is very small, it could be quite sizable in terms of the amount of finance that we're actually dealing with. I just mean if we were able to provide it, I don't mean to provide it right now. Okay, we can give you some more detail about, I think that there is a paper that we've previously issued that gives it some idea of how that's calculated, and I'm very happy to send. And I appreciate that in absolute terms, even a small percentage of this can be large, but I think that a key point is that once there is a small proportion of that final reconciliation at the 15th month period is still an estimate, it is not provisional, that is the final reckoning, if you like. So there's no risk that after the 15th month point will come along and say that estimate needs to be changed. I'm just saying for some sake that the estimate was lower than the actual value, so therefore in terms of the amount of money that is used in the block grant adjustment calculation, if we had the actual figures, that should have been higher. How is there an adjustment made for that? Because there's a potential loss there for the Scottish Government. I think to go back to what Jim said earlier, it's always going to be really difficult to identify amounts recovered, for instance, where an employer goes out of business and hasn't paid us all the PAYE that they owe, and we recover a partial amount when that, in the liquidation of the company, we wouldn't necessarily go back and attribute the amount that we got to between individual employees. There will be circumstances where it's not possible for us to finally identify the revenues that we get in through compliance activity against individual Scottish employees or taxpayers. Similarly, where we collect money in respect of an individual through self-assessment, it won't always be able to separate that between the element of income tax on earned income that is used in the Scottish Government and other tax such as national insurance or capital gains tax, which is payable. There will be all sorts of reasons why, in practice, you'll never get an absolute figure. The idea is that we have a cut-off at the 15-month point. We do an estimate where there's an upside risk and a downside risk on a very small element of that. However, to do the block-ground adjustment, that's the cut-off point. There's a cut-off point at that stage. There's an element of it, an estimate, and it's not something that's revisited in terms of a future reconciliation. Thanks very much. Just to follow up on some of Ivan McKee's earlier questions, can I welcome your response to Ivan on the question about publishing tax revenues broken down by band for Scotland? My understanding is that the Scottish Parliament Information Centre has been unable to access that information so far since an FOI request last year. If that information is going to be published in the future, that's very welcome. It might be useful if you were able to write to the committee afterwards to let us know when that would happen and how frequently. As I understand it, you've also only published illustrative figures for a tax change in relation to a 1P change to the Scottish rate of income tax. I was just wondering if it was possible to ask what the rationale was for only publishing illustrative figures in relation to that relatively simplistic change. Given that new more flexible tax income tax powers are coming in in the future, do you have an intention to produce a wider range of illustrative figures about the kinds of changes that are now possible? I think that you're right that we've published a figure for a long time for a penny on income tax for Scotland. That goes back to the Scottish variable rate, which is even before the 2012 act. We haven't been asked to publish a wider range of illustrative figures. I wonder whether that's more for the Scottish Government to do rather than for us, but there's no reason why we wouldn't be able to do that if it was required. I think that there's always been a statutory requirement for us to publish that 1P figure. It would have to be the Scottish Government that made that request rather than the Scottish Parliament? I think that only because the forecasting of revenues from the Scottish rate is in future going to be for the Scottish Fiscal Commission to do or for the Scottish Government and not necessarily for us to do, that's why I would say it would be for them. I think that Sarah Stewart is right. Under the MOU and the service level agreement, we will be clarifying what data we can give to the Scottish Fiscal Commission and the Scottish Government to help them to do what they need to do, but under the devolution of the additional income tax powers, it really now is for the SFC and the Scottish Government to do the forecasting and to assess the impacts of potential policy changes. I certainly appreciate that. I would merely make the point that, particularly in a period of minority government, it's for the Scottish Parliament to be setting the assumptions under which that work might be carried out rather than merely the Scottish Government. I wanted to pick up a little bit on some of the things that you said in response to Ivan McKee about intergovernmental negotiations around the future of VAT assignment and one of the things that you said in response to Patrick Harvie about the relationship between HMRC's work and obligations with regard to publishing a list of figures and the work of the Scottish Fiscal Commission. A general question first then perhaps we can drill down into some of the specifics. From your perspective, would I be right in understanding that working intergovernmentally is a new venture for HMRC? If I'm right about that, how would you reflect on it so far given your experience of it? We've been working with the Scottish Government since 2012 on the whole devolution—probably before that, on the Scottish variable rate—but certainly in terms of the income tax devolution and the devolution of the land and buildings transaction tax and landfill tax to Scotland. We've got a pretty good relationship with the Scottish Government, which we've developed over that period. In terms of working with the Scottish Government, it's not new. It's a strong relationship. There's quite a lot of trust on both sides. We've delivered the start-off of Revenue Scotland and those taxes. We have got through things like the issue that we had with the 420,000 missing names on the list, where we worked very closely and took the Scottish Government into our confidence at a very early stage and worked with them through a formal process of review points and the governance of the delivery programme. We haven't yet got that same relationship with the Scottish Fiscal Commission, because I think that they're still establishing themselves. They have now asked to come and talk to us about setting up a memorandum of understanding on all the issues that we need to have on the joint work. I don't know because we haven't had that first meeting yet. We had an approach from them a couple of weeks ago. We will have a meeting in the new year. We need to hear from them what they think that agreement should cover. I don't see any problems in us being able to do it, but I can't give an estimate of how long it will take. I'm just trying to understand how HMRC fits into the mosaic of intergovernmental relations and the machinery intergovernmental relations we have. We know that at the top of that mosaic, if mosaics have tops, sits the Joint Ministerial Committee. We also know that HMRC is a non-ministerial department. How does HMRC feed into the JMC and indeed the Joint Exchequer Committee? Are you represented in meetings with the JMC or the Joint Exchequer Committee and, if so, who by? We are represented at the Joint Exchequer Committee officials, the official level committee that services the Joint Exchequer Committee. Of course, we report to Treasury Ministers and so Treasury Ministers will represent our interests in the same way as they do the Treasury. I think that it's worth elaborating a bit on our status as a non-ministerial department because, in some ways, it strengthens our ability to work with Scottish Government. What that means is that, in practice, Ministers don't get involved into the day-to-day running of HMRC or the day-to-day administration of the tax system. That is something that we stand apart from Ministers on under statute. In that sense, we probably already have a slightly client relationship with Westminster ministers, which we can replicate in Scotland. However, we act under the general direction of Treasury ministers—the Chancellor or a junior Treasury minister that the Chancellor appoints—in setting our budgets, setting our targets, etc. That means that, at ministerial level, we can have representation in cabinet committees or whatever it may be. Being non-ministerial simply means that, under statute, it's myself and the other commissioners of revenue and customs who are responsible for administering the tax system. It means that we have a slightly client relationship with whoever it is that we are working for, whether it be the Scottish Government or Westminster Government. The final question for me is about this. Is most of your experience of inter-governmental relations bilateral between the UK and Scotland, or is some of it quadrilateral? As I understand it, under the Wales Act, there is now a Welsh rate of income tax that mirrors the Scottish rate of income tax that we had under our common powers. What is the relationship between the bilateralism and the quadrilateralism of the way in which it is working? There are devolved tax powers for Wales and for Northern Ireland. Like the Scottish devolved powers, some of them will do their own administration, some of them will do the administration for the devolved government. Those are all quite different devolved powers, and therefore they need to be managed individually, so we would have bilateral relations with the Government. The settlements are not the same. There are differences between the devolution settlement with Northern Ireland and with Wales and with Scotland, and we have separate relationships with each other. I think that Willie Coffey wanted to pick up on some advice and support issues. The advice, support, inquiries, complaints, appeals is the side of the process. You mentioned that there is an estimate of £5 million for that support service, as I think he said, but I picked up wrong, he could explain it. Is that part of the overall cost estimate for the whole project? Where is that support service provided for? I think that you mentioned that you will be developing the online side of the process. Do you see that cost diminishing as the online system kicks in? In terms of support services, while there is no variation in rates or thresholds, we have estimated that to be quite small, between £1.5 million and £2 million a year, in an ongoing basis. That is because we do not expect Scottish taxpayers to raise many inquiries with us or to challenge their Scottish taxpayer status or non Scottish taxpayer status, or for us to have to do much to manage compliance risks around identification of Scottish taxpayers. Once there is some variation, the costs will increase because we would expect there to be more contact from taxpayers checking their status or querying it or challenging it, and more compliance risks that we would have to manage. That is reflected in that £5.5 million to £6 million cost instead. What the actual costs will be will depend on what the differential is and what the operational risks in terms of contact and compliance risks turn out to be. That is a bit that you just have to wait and see. You are absolutely right that under our transformation programme, we are trying to drive down our overall departmental costs of administering the tax system, particularly more routine matters such as handling contact, where we believe that taxpayers can do more to self-serve. If you like, I would expect that some of that dividend would be reflected in what it costs to administer Scotland's tax in the future. In terms of where, what service will be provided from, where will it be? Will it be Escobride? There will be a range of services. There will be phone calls that come in through our contact centres, which could be routed to anywhere in the country. There is no individual contact centre system. There will be letters, again, which could be dealt with anywhere in the country. Most of our activity is centralised, so there will not be a dedicated office anywhere to deal with that contact. It will be managed throughout the HMRC system. That goes back to a point that I made earlier about our locations transformation, which is that we are a national business and, increasingly, we do not use local offices to service a local population. There are still, obviously, some aspects of our work that require local activity, so whether that be we have a needs-enhanced support service that goes out to vulnerable customers who need face-to-face contact in their home or site near where they live, we have staff who go out and collect debts, and we also have staff who visit people as part of compliance monitoring. Beyond that, a lot of the work that we do is done nationally and can be done in any location. Therefore, we locate our work where we can get the best workforce and the best estate and the best infrastructure. In the case of Scotland, currently about 12 per cent of our workforce is based in Scotland, which is higher than the population proportions in the UK, also higher than the taxpayer population. That reflects the fact that people, for example, in East Kilbride, are answering phone calls from all over the UK. Under our transformation plans, we would not expect that to change at all. One other slightly tangential question. I was reading an article in the Financial Times a couple of weeks ago about the increase in the number of incorporations that existed, seem to have gone up by about 25 per cent, was the claim, certainly. In terms of HMRC's database and the information that you have available, is there a profile that you could share with the Scottish Parliament, this committee, about what if there is that increase, what it looks like? Obviously, the potential there of impact on our income tax take could be significant in the longer term, depending on behaviour changes of individual taxpayers. Have you got any information on that area at all? I will certainly look at what we can give you. You are right that there are incentives in the tax system, as well as other reasons why people may choose to incorporate, and that does shift income out of income tax into corporation tax. Depending on what policy decisions were taken in Scotland, that could have an impact in Scotland, which might be different from the rest of the UK. There is no doubt that there has been a trend of increasing incorporation of businesses. People do it for a variety of reasons, but tax is definitely an incentive to incorporation. We look at what we can provide you with. Thank you for indicating any other questions. I thank both Jim Harra and Sarah Walker for coming and giving us evidence today. They explain clearly the challenges that you faced in a very transparent way, so we are very grateful for your coming along today. I now close this particular part of the meeting and we move into private.