NAO reports on HMRC's estate plan

HMRC London
Donald-Drysdale By Donald Drysdale for ICAS

16 January 2017

Donald Drysdale looks at the National Audit Office report on plans to redesign and significantly reduce HMRC’s network of offices.

The plan 

You probably know that HMRC have embarked on their third major change programme since the merger of the Inland Revenue and HM Customs & Excise in 2005.

In place of their current estate of 170 HMRC offices, they plan to move to 13 large regional centres, supplemented by four specialist sites and a headquarters in central London.  By doing so they hope to reduce their running costs and modernise their ways of working.

HMRC are undertaking this massive project alongside no less than 14 other major programmes designed to transform the way the tax system is administered.  These include matters of the utmost concern to taxpayers and their advisers – not least of which is the provocative plan for Making Tax Digital.

What is not so widely recognised is that HMRC do not yet have an agreed strategic outline case for their ambitious new estate strategy.  Some of the inherent difficulties and risks of the strategy are addressed in a report of 10 January 2017 on Managing the HMRC estate from the National Audit Office (NAO).

Thinking again

According to this report, HMRC’s proposals for consolidating their estate are already proving unrealistic.  Their plans to close most of their existing offices will take longer, cost more, and save less than expected.

Between the detailed announcement of the project in November 2015 and its reassessment in September 2016, only 10 months later, the estimated cost of the new estate over 10 years (including investment and running costs) has risen by almost £600m – an increase of 22%. Cumulative efficiency savings by 2025/26 are now estimated at £212m, reduced from an estimate of £499m at November 2015.

While the NAO states that HMRC are reconsidering the scope and timing of the programme, HMRC are reportedly planning to press ahead.  The NAO cautions that any changes will need to be carefully managed to avoid diminishing the long-term value of the strategy.

Some history

HMRC are no strangers to controversy in relation to their office arrangements.  In 2001 the Inland Revenue and HM Customs & Excise (here referred to collectively as HMRC) signed a 20-year private finance initiative (PFI) contract with Mapeley STEPS Contractor Limited.  This was contentious at the time, not least because the Mapeley Group was based offshore.

Under the deal, HMRC sold 132 freehold properties to Mapeley and leased them back. Mapeley then managed these and 459 other properties which HMRC leased from third parties, and provided facilities management and maintenance services in return for fixed monthly payments.

In 2004 the NAO concluded that HMRC had secured a competitive deal from Mapeley, but it saw significant risks involved that required careful management.  In 2009 the NAO reported again, noting that by then HMRC had paid Mapeley £312m more than originally forecast. Nevertheless, HMRC’s estate costs were seen as competitive, partly because of their high presence in regions where accommodation costs were lower.

The 2009 NAO report criticised HMRC for their failure to commit appropriate commercial and legal skills to managing the Mapeley contract strategically, and for their practice of reacting to risks and issues as they arose.  It noted that significant savings might have been made had HMRC vacated some of the properties, but they had been constrained in this lest Mapeley should find itself in financial difficulties.

It is encouraging to read in the latest NAO report that HMRC have now improved their management of the Mapeley contract, achieving cumulative savings of £354m since 2011. However, these benefits seem to have emerged late in the day – arising only in the second half of the 20-year contract – and the NAO believes that significant risks remain.

Rationale for the new project

HMRC claim that changes in their estate are now necessary to support the wider transformation of their business, and they see regional centres as offering the right infrastructure and working environment to enable new digital ways of working.  They also consider that much of their existing estate is in poor condition, reducing staff morale and productivity and creating adverse operational issues.

Astonishingly, the NAO reveals that HMRC have not yet defined fully how regional centres will support better service and more efficient and effective compliance activities. Nonetheless, HMRC already face a demanding timetable to occupy their new site in Croydon – the first of their regional centres – before the end of this year.

Surprisingly, HMRC have not negotiated any break points in the 25-year leases signed so far for regional centres in Croydon and Bristol. Instead they aim to provide flexibility through a mix of lease terms across the estate, maintaining the ability to sub-let to other departments, and working with the Government Property Unit to provide for future flexibility in the design of cross-government hubs.

Extent of the upheaval

The extent of potential disruption as a result of the project should not be under-estimated. As a result of HMRC’s plan to close 137 existing offices by 2021, some 38,000 of their 62,000 employees will need to relocate to regional centres or leave HMRC.  There is no doubt that consequent uncertainties must be causing sleepless nights for many of the staff.

The relocation of 61% of employees could prove to be a monumental undertaking for any organisation – even one with high staff morale.  Surveys have consistently shown staff morale to be exceptionally low at HMRC.  It remains to be seen whether this will impede the transformation and interfere with the administration of taxes, or whether the project will raise morale and thus prove a turning point for the organisation.

Caution advised

The NAO report recommends that HMRC should plan in detail how the proposed infrastructure through regional centres will support the ways of working they aspire to, and identify what features of the new estate will be most important to support working practices that will deliver the outcomes they seek.

It calls on HMRC to exercise tight controls over the costs of their new regional centres, and to guard against undue optimism.  Given inherent uncertainties in the property market, HMRC should plan for a worst-case rather than best-case outcome.  They should also have an adequate contingency for the programme of regional centres as a whole to make it resilient to emerging cost increases.

Conclusion

HMRC’s history of managing its office estate has provided opportunities to learn from past mistakes.  It remains to be seen whether lessons have been learnt well enough to protect the Exchequer, HMRC’s employees and the nation’s taxpayers and their advisers from any potential downside of the costly changes that are about to take place.

Article supplied by Taxing Words Ltd

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  • Tax

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