Advantages and Disadvantages of Merger Between Inland Revenue and Customs

In theory and practice, the key to a successful merger is bringing together similar and compatible cultures. The two industries are different in style: Inland Revenue is seen to have more of a human face, whereas Customs is not seen as favourable in the eyes of most business people and accountants.

With the case for the merger and organisational change, the O’Donnell (Sir Gus O’Donnell, Treasury Cabinet Secretary) report rests on “potential improvements in customer service, effectiveness and efficiency.” The report goes further to add that:

• international experience, which has shown that the current separation of direct and indirect taxes in the UK, as opposed to organising around functions and customers, is behind best practice
• the functions of the revenue departments, which shows that there are benefits from bringing them together
• the experience of closer working between the departments since 1994, which has produced promising but limited results
• the success of the creation of the Department for Work and Pensions, with the formation of several customer-oriented agencies, including the integration of benefits and employment advice in Jobcentre Plus, which has helped more people into work, and provided a better service for customers.”

This current merger is not a novel idea. The Merger of Inland Revenue and Customs was first considered in 1862 by a committee selected to inquire whether this merger would be practical and advantageous. However, even at this stage there was difficulty. Some believed that consolidation had been carried out as far as possible, and could not go any further without placing a great disservice to the public.

More recently, it was proposed by the Treasury Committee in May of 1999, that the Government commission a study to assess the feasibility and strategy for merging the two bodies together. The Government responded by noting that the merger of the two bodies has not been ruled out, but they did not see fit to produce the feasibility study.

However there was a change in heart from the Government. Mr O’Donnell was asked what made the Government change its mind following the previous propositions of the Treasury Committee, and he stated that:

The experience of having closer working, particularly things like Joint Shadow Economy Teams where they produced good benefits but they were in very limited areas. The closer working was because we were taking people from Revenue and Customs and getting them involved in joint projects. That was fine but the departments still had their own priorities and their own objectives. In order to make this bigger across the board it was quite clear to all of us in Treasury, Revenue and Customs that closer working whilst producing good results was not going to produce the really big benefits which you could get from a more radical change. At the same time we were having other machinery of Government changes, like DWP coming into existence, which taught us about a lot about merging organisations in the public sector. In general with the increasing strategic focus on delivery and efficiency that has led us to a situation where we have thought again.

The Treasury Committee concluded in April 2000 that, “the merger of the Inland Revenue and Customs and Excise would improve compliance with taxation, reduce businesses’ compliance costs and reduce the Government’s revenue collection costs” . The Government has now accepted this recommendation.

A Cost – Benefit Analysis can help to display the pros and cons, rather the advantages and disadvantages of such a merger. The O’Donnell Review began by outlining options for change, and concluded that with the merger of the two bodies, there will be greater improvements to:

• customer service and compliance costs
• effectiveness, through alignment of strategies, a coherent approach to information, new approaches to compliance, and flexible resource allocation
• efficiency, through economies of scale and the impetus of transformational change, particularly in transactional processes

Those listed above are just a few potential benefits, which were recognised by most professionals in the tax field. However, there was still a diverse range of views offered by witnesses on the intrinsic worth of merging the two departments. Some argued that there were problems within Customs and Excise that relate to the Culture of the department and the consistency of the approach of VAT officers, which could only be solved by a merger. Whereas the Chartered Institute of Taxation said that it could only support a merger which was properly “planned, financed and implemented.” (Most opinions reiterated that any merger must be carefully planned in order to minimise the impacts on those affected (i.e. Tax payers, other departments).

The Review from the Treasury however noted that;

“risks are potentially more significant than direct financial costs. They could include risks to ‘business as usual’ (including tax collection) and the disruption of projects already planned. However, strong management can mitigate the potential risks, with a focus on priority areas (much of the business would not be directly affected by the creation of a new department), and with a clear focus on delivery as the core business of the department, to ensure existing priorities are met and areas for change are identified. The review concluded that overall, the risks are outweighed by the potential long-term benefits of integration.”

One huge downfall can be seen in the vast reduction in employees as a result of the merger which planned for a gross reduction of 14, 000 staff members. This included 8,000 staff from the Inland Revenue and 3,000 from Customs and Excise; additionally 3,000 staff across both departments. With this great loss of employees comes insecurity, and most do not believe that the business will not be greatly affected by the creation of the new department. In the interim of creating this new department, some questioned the possibility that valuable projects will be abandoned.

Although imperative, the Treasury found it difficult to quantify the costs and benefits of the Merger. They found that it depended on sequencing and various approaches, in that the risk implications are different when different approaches are used, as they can yield different costs.

With that being said most witnesses supported the merger as a ‘logical development that should in principle provide benefits to both the Government and Taxpayers’. However, management is key this merger in that they must ensure that proper resources and processes are in place, and that they take measured and rational approach to change and delivery of their services. When asked, Mr O’Donnell gave some assurances that the revenue departments could manage the considerable changes involved in a merger without disruption of tax collection and customer service; he stated:

I think everyone is clear both from the direction the Chancellor is giving and from the signals which we will set for the new management. They need to manage this risk of making sure that business as usual carries on in those specific mission critical projects like Tax Credit Renewal and they need that as their primary focus. It matters enormously to us that the revenue keeps coming in and Tax Credits keep being paid out. That is very much a focus. That is precisely why we are not trying to specify in this report a detailed blueprint of what they should do when. I had a personally very important and persuasive conversation with Howard Davies when I talked to him about setting up the FSA when he had the various different independent regulators and putting them into one. He said one of the things which was crucial in making a success of that is that people said to me, ‘these are the strategic objectives go and do it’. They did not say how because I actually wanted the freedom to ensure that regulation could work through that period and do it in a way which minimised the risk of a transformation when you are trying to carry on doing business as usual. That is very important and we will need to learn from successful integrations that have taken place in the public and private sector to make sure we do not let that happen. I agree that it is really important we focus on that.

In all, there are several advantages that can be identified through the merger, and are basically stated as:

• effective tax collection (change in approach)
• Greater improvements to customer service
• Efficiency

These advantages connect in that the new department will be streamlined and have these key tasks to focus on. However, there are some change management issues that arrive with these advantages, and could present a challenge/downfall if not recognised or carried out. The Merger must rationalise and prioritise existing change programs in each department to be sure that they don’t conflict and that they support creation of a new department; they must focus performance on closing the tax gap, as well as not forget about customer service improvements and achieving efficiencies.

The disadvantages may be seen as few but imperative. The reduction in staff has many implications, which could lead to cuts in various projects; it has also been questioned whether or not it is appropriate to transfer the responsibility for Customs and non-revenue matters to Inland Revenue. This poses a number of problems, and ultimately Customs may suffer from the Merger.

There are difficulties whilst dealing with IT issues. However they may not be considered as a threat if management considers them: with regards to their IT Strategy, to what extent will this involve the harmonisations of provisions; they must ensure a concerted approach to resolving issues that arise, as well as giving adequate time to integrate the IT systems. Which in turn can have its own implications in that in doing this, programs that are considered as crucial will take priority, but what about the rest?

There are Legislation matters as well. The merger of the two departments requires primary legislation which should address the following issues:

• organisation and structure of the new department, to provide for its financing, and to define the relationship between the Treasury and the new department
• information sharing within the revenue department, and between the new department and other bodies, subject to the need to preserve taxpayer confidentiality
• powers of the new department to audit and investigate and to deal with non-compliance other synergies, such as an integrated debt collection facility

An overview will be taken of powers and their impact on information, which can be seen by many as an advantage. The Treasury was asked what steps they were taking to reassess the new legal powers for the merger. They stated that they set up a Bill Unit:

to look at all the issues relating to the new legislation that will be needed. It is a unit that will coordinate activity across the three departments to make sure that we come up with legislation that will then be put to parliament in the normal way. They are working very closely with colleagues in Revenue and Customs to look at the existing information legislation and what are the possible implications depending on how far one decides to go on information for the new department. These are all issues that we would just want to stress are being taken very seriously, both in terms of the potential benefits of sharing information and also the importance of preserving taxpayer confidentiality.

It must be stated that whatever changes are made, for the merger to be successful, the differences of the departments must be recognised and outlined, and their relevant strengths should be noted. In short, the merger of Customs & Excise and Inland Revenue to create Her Majesty’s Revenue and Customs, has its disadvantages, but it would appear that these risks are outweighed by the benefits/advantages. This is the case only if management is successful in considering the various implications that are associated with the merger.