 Good morning and welcome to the 16th Meeting of the Public Order and Post Legislative Scruciary Committee in 2017. Could everybody switch off their electronic devices or at least switch them to silent mode so that it doesn't interfere with the committee's work? Before I move to today's business, I should of course mention that our former colleague Ross Thompson has resigned from the committee following his election as an MP. I would like to place on record our thanks to Ross for his contribution to the committee and wish him well for the future. Item 1 on the agenda invites us to take items 4 and 5 in private. Is that agreed? Great. Thank you very much. Item 2, and we now move to further consideration of the report by the national audit office entitled administration of the Scottish income rate of income tax 2015-16, and in March we heard from the national audit office and the auditor general for Scotland on this report and agreed to take evidence from HMRC. I very much welcome to the meeting Jim Harra and Sarah Walker both from HMRC. As is no opening statement, I will move us straight to questions and ask Colin Beattie to start off. In previous sessions I've asked pretty much the same question. It's about identification of the Scottish taxpayers. I believe that there's no definitive record or data set of Scottish residents against which to test your success in identifying Scottish taxpayers. In previous evidence sessions we've been advised—we've tried to pin down—is there an error margin of 5 per cent, 10 per cent and nobody's able to give us that? What sort of reassurance can you give us that you've actually managed to identify all the taxpayers? I think that we've got three tasks, really. First of all, we have to make sure that everyone who's got a Scottish address on our databases is properly flagged as a Scottish taxpayer, then we've got to check the accuracy of our database and make it as accurate and up to date as we possibly can, and then we've got an on-going job of maintaining that and continuously improving on it all the time. We've taken a number of steps to check our database against other third-party databases. We have looked at where there is a difference between those to see if there's anything that we can learn about our database management. In the case of Scottish addresses on our database, we have run corroboration exercises with a number of third-party databases—the electoral roll, credit reference agencies, major retailers, for example. We've been able to corroborate between 98 per cent and 99 per cent of those addresses that we hold that they are corroborated. For the difference, the remaining 1 per cent to 2 per cent does not mean that they're wrong, it just means that they're not corroborated by anyone else. We've also been able to take some reassurance that our processes for keeping our database up to date mean that it actually stands up to scrutiny compared to those others. In fact, where we saw discrepancies between ours and the electoral roll in the majority of cases ours was the more up-to-date and accurate record. You're right, it's a question of continuously improving, but there is no definitive benchmark against which we can judge whether we're at 100 per cent or 99 per cent completeness of our database. It seems that mostly you're relying on postcodes. How accurate is that? We have a set of parameters that identify Scottish addresses on our database. We did initially rely too much on postcodes and what we call the PAF, the postcode authentication field, but we have since extended that scan and we pick up addresses in lots of different formats. We've also carried out an exercise to identify addresses on our database that are incomplete. For example, don't contain a full postcode and we've done a cleansing exercise to bring that up-to-date. There are also a small number of postcodes that straddle the English-Scottish border, and therefore you cannot rely on the postcode alone to determine who is a Scottish taxpayer. In those cases, we've taken further steps to identify which addresses within the postcode need to be flagged as Scottish addresses. You mentioned checking against third-party databases and you mentioned the electoral register for one. Can you just remind me what the other databases are that you're checking against? Let's Sarah give you some details. We used a commercial firm who specialises in this sort of thing. They have a number of address lists. They have commercial credit agencies, places where you are registered to have deliveries for mail order companies, mobile phone and other commercial providers where you have to provide an address. They make their address lists available to these commercial companies. They are then available to compare with our lists. If you can identify somebody by name and address and then you can see if the same name and address appears on other lists. So every time we order something on mail order, you guys are checking on that? I don't think that's smart. That's not what I say. These are commercially available companies. We don't get all that information ourselves. We ask somebody else to do it. You are right. Your footprint with retailers, mobile phone companies and utilities is building a record in databases, which commercial organisations all share. We use that to verify and validate our database. We don't just take addresses from those because where our record does not corroborate with that, it doesn't mean that theirs is more accurate than ours, but it does mean that that's something for us to investigate. Obviously, that's an on-going process. How often do you go through it or is it one big exercise every year or is it an on-going thing? We're talking to the Scottish Government now about exactly how regularly we should do that comparison. I think we're expecting it to be every year. It is quite a major exercise and costs money and it takes time to do, so I don't think that we would do it more often than that. I was just about to come to the cost. Is that included in what you're already charging the Scottish Government? Yes. So it's not an additional cost? No, it's not an additional cost. I understand that 80,000 employers had problems with tax codes and that it's now fixed. How was it fixed and what was the real problem? As well as identifying people of Scottish taxpayers, we then have to require employers to deduct the correct amount of tax from them. This year, 2017-18, for the first time, that is a different amount of tax than in the rest of the UK. We send a coding notice to both the employer and the employee telling them what code to apply to make sure the correct amount of tax is deducted. We then have a programme of employer compliance checks to make sure that employers are complying with their pay-as-you-are obligations and are applying those codes correctly in their payrolls and deducting the correct amount of tax. What we find when we go out on employer compliance visits is that there is actually a very high level of compliance. It's the lowest tax gap really out of all the taxes that we administer, but there are problems. Sometimes employers make errors. In the case of the Scottish code, we have found that in some cases the software programmes that they are using have not been updated to take account of what we call the Scottish taxpayer codes. We have taken action both with the employers where we find that they are making errors and with the software providers to make sure that they have the correct specification and update their products for their customers. It has been very small in percentage terms, but it is there. If I can just explain what the impact of it would be, we then run a reconciliation exercise at the end of the year for each employee. At that point, we would pick up if there has been an under deduction of tax, and we would correct it at that point. There would be no impact on the Scottish Government's finances, but it would be undesirable from the taxpayer's point of view because they would find at the end of the tax year that they have an underpayment when ideally that would have been taken out of their salary as they went through the year. Despite the fact that we have that failsafe reconciliation at the end of the year, the ideal is that this is operated correctly during the year, but we have very high compliance rates and we are continuously improving on that. I think that the key is to make sure that software providers keep their products up-to-date and that employers use the latest version of those software products. Thanks, convener. I am interested in the situation whereby 420,000 taxpayers did not receive information that 2.45 million taxpayers did receive. To take you back to the comments that were made by the Comptroller and Auditor General in his report, he said that it may have created a less informed group of taxpayers. Is that a concern that you recognise and do you think that that is well founded? I think that that is a possible concern. First of all, the 420,000 Scottish taxpayers who were not picked up in the initial scan did receive a written communication, but they did receive a different communication from the other 2.4 million people. We sent out letters to 2.4 million people in December 2015. The other 420,000 received a Peugeot encoding notice in early 2016-17, which specified on it that you have been identified as a Scottish taxpayer, and that is our standard means of communicating with people in Peugeot and about the code that we are applying. Everyone did receive a communication, but it was a different communication for the two population sets. We have not seen any evidence that it has a practical impact on the taxpayers, but they did receive a different communication. I am interested in what your wider communication strategy is and what the cost of that is. We think that good communications are key to maintaining the accuracy of our address database and continuously improving it on that. We are continuously reminding taxpayers, employers and tax agents of the need to notify us of changes in address. That is the key compliance activity that we think will make a difference. There was an initial communication exercise that involved some unpaid and paid communication, and that continues. For example, we use our regular contacts with taxpayers and employers to remind them of the need to update their addresses. We used Twitter just two days ago. We tweeted all our followers on Twitter of the need to keep their addresses up-to-date. Sometimes that is specific about Scottish addresses, but sometimes it is a general message to all taxpayers. The administration of the Scottish Government tax benefits from that, but all administration benefits from it. There is lots of communication that we can do that does not involve additional cost and is effective. A question is how much money would the Scottish Government wish to spend on paid communication, and what advice could we give them about what additional benefit they might get from that? Most of the paid communication that we used in the early stages was targeted at specific groups of Scottish taxpayers that we thought we needed to reach to make sure that they heard the message about keeping addresses up-to-date. For example, people who lived in border areas may not be good value for money to do it much more widespread than that. You mentioned Twitter, which can be a very cost effective way of getting your message out. I wonder how many followers HMRC has on Twitter and are you using Facebook and other social media channels? I think we have 28,000 followers on Twitter. Many of those are professional associations and tax agents who then spread the message more widely. We do also use other social media. What assessment has been undertaken to ensure that the communication strategy and the cost incurred are providing value for money? We conducted an evaluation of the publicity at the time of the launch of the Scottish rate, the time that it was sending out the letters. It suggested that there was a significant proportion of targeted groups, such as people who have recently moved, people who live in the borders and students, who were aware of the campaign. Around 30% to 40% of that target population were aware of the campaign that we conducted. There was an increase in the number of people who were going to our website and updating their address details on our website. We think that that campaign was effective at the time. What we are doing now is continuing to use unpaid, cost-free methods such as Twitter and like our contacts with employers and agents. We are also talking now with the Scottish Government about whether we should be doing more targeted communications to pick up people who move house. If we have a fairly good confidence of the static population that we are at when we started, we need to make sure that we are getting the changes—the people who move in and out of Scotland. We are thinking of looking at things like using the data that we get from stamp duty and land registry work, where people are registering the purchase of a property to prompt people to say that if you have just moved into Scotland or just moved out of Scotland, remember that you have to tell HMRC and estate agents and people like that. We are looking at what is the most cost-effective way of picking that up. We are also using our own digital services, the personal tax account, where we are conducting publicity to encourage people to sign up for a personal tax account online, where they can manage all their tax affairs. That includes making sure that they are aware of what address we hold for them and making it easy for them to update it. I am sure that our witnesses are already following our committee on Twitter, but our colleagues here will endeavour to follow you back by the end of the session. Thanks, convener. I do not think that I have ever knowingly wanted to follow any of that, so I will forgive you for that. Willie Coffey. Thanks very much, convener. Good morning to you. Is not it a wee bit disconcerting for the public to hear that HMRC is relying to some degree on mail-order companies and mobile phone companies to compile a definitive list of tax payers? I think that that is not what we are doing, and I am glad that I have got an opportunity to clarify that. We regard ourselves as holding the database of who is paying tax, but it is important that we check the accuracy of what we have against all other available sources and maintain its quality and learn and take action if any corroborative evidence tells us that we have got a problem. It is just a source of information that helps us to check what we have got, but we are not reliant on it to maintain the database. I should say that in no case have we taken an address from that sort of a database and replaced our own address with that address. The addresses that we hold, which we get primarily from the taxpayer themselves and sometimes from employers, are always our primary source. The comparison with the commercial databases is simply to raise a query, if they have got a different address. We can then assess whether we need to query that and whether we want to be making more inquiries, but we would not take the commercial address in preference to the address that we hold. Indeed, one of the outcomes of the exercise that we have done is that we have not found a database that we would wish to overwrite ours because, in many cases, ours proves in the majority of cases to be more accurate and more up-to-date than the databases that we are comparing with. So there are no cases where data that you perhaps got from mail-order companies or mobile phone companies that gave you additional information to corroborate a Scottish taxpayer, you had it anyway? Yes, so what we did was we have got an address for this person. Does the evidence on these other databases tend to corroborate the address that we have, or do they cause us to raise a query about the address that we have, or do they not tell us anything at all, and it's basically uncorroborated and we've got no evidence either way? Where they tend to corroborate what we have, we regard that as some evidence that our database has good quality. Where they say something different from our database than a service says that raises a query on our part to go back to, for example, the taxpayer and check just where exactly are you living. Where they don't corroborate either way, and there were a significant proportion of them where there was no corroboration. We then looked at other factors to assess that. So, for example, if you had someone and we haven't addressed for them, these other databases don't show anything at all for them, but we know they're employed by a chip shop in Aberdeen, then the chances are their Scottish taxpayer and our Scottish address for them is correct. So, yes, we do learn from them. That's why we spend the money on the exercise, but they have tended to corroborate our Scottish addresses. As we said, between 90% and 99% of those have been corroborated by that exercise, and we have yet to identify the database where we think, oh, that's a much better database than ours. How did you resolve those addresses that had partial post codes you mentioned in some of the data? How did you resolve that? We work with Royal Mail in those cases, and we have teams of people who will go through individual addresses to work with Royal Mail to try and make sure that we can, if we've got a road and a house number, we'll work with Royal Mail to make sure that we can then make sure that we've got the right post code on the record. Why would that not have been done, as a matter of course, to make sure that the data that you have is always correct? It only seems to have arisen because of this requirement to identify separate Scottish data. It is a continuous process. We do that work year by year to make sure that we're keeping our addresses, but we have millions and millions of addresses. It's a constant process, and this is the first time that your address has actually made an actual effect on your tax. It makes it even more important that these addresses are up to date, so we put extra effort into making sure that the Scottish addresses were corrected. What's to stop the problem continuing if people move around as they generally do, and particularly cross-border addresses? What's to stop these anomalies continuing to be part of the system? I think it is a never-ending task to maintain and improve the quality. It's not a static one-off exercise. We have assessed that there are about 80,000 moves a year across the England-Scotland border, roughly half in each direction, so if we did nothing and didn't update our databases, then they would degrade over time. It is a continuous exercise. We do obviously get a continuous flow of data. For example, taxpayers contact us all the time to tell us that they've moved house, employers contact us all the time to say, we've taken on a new employee and this is their address, and we periodically run those corroboration exercises against the commercially available databases, which throw up cases for us to query. It will be a never-ending process. Lastly, in the data set that you have, is the solution to this not as simple as allowing people to identify themselves, the country they live in? That's exactly what we want people to do. Are you doing that now? Yes, we expect people. We rely on people to give us their address. Yes, and the country that they live in, Scotland, England, Wales, Northern Ireland, they ask people to give you that information. For self-assessment, we will. Where people are filling in a tax return, there will be a specific, are you a Scottish taxpayer? We need to have people's addresses for all sorts of purposes, and that's our main source of information for this. I think if they're prepared to tell us that they're a Scottish taxpayer, they ought to be prepared to tell us their address because we need it anyway. I know that I understand what you're asking there, but that's not what I'm asking. Are you asking people to give their country that they live in? They may be a Scottish taxpayer or they may not think that they're not a Scottish taxpayer, but do they live in Scotland or England or Wales? Do you ask them that information so that you can record it? You were talking about S codes, I think that's what we're best at. For self-assessment, it's important to understand that there are only about nine million taxpayers in the whole of the UK who have to complete a self-assessment return, and therefore are under an obligation to tell us that information and they will be asked for that on their self-assessment return. The vast majority of taxpayers, their affairs are administered between HMRC and their employer, and there is no obligation for them to get in touch with us, and therefore we have to look for data that we can get that tells us where they live, and the address obviously is the key thing. We haven't gone down a route of asking all taxpayers to declare that the country in which they live for tax purposes, we've asked them to keep us up-to-date with the address where they live, and then we will apply that to determining their taxpayer status. If for any reason people feel that that comes out with the wrong answer for them, they have of course the right to either update the data if they think that the data is wrong or if the data is right, but they don't think that they've passed the tests to challenge that. Would it not be easier just to ask them the country they live in and gather that data? In my view, there is a test for determining whether someone is a Scottish taxpayer and it applies over the whole of the tax year, so it's a slightly complex thing to ask some people, particularly if they're mobile, that we feel that if we know the address where you live, that's going to enable us to determine it accurately. The test that you applied so far missed 420,000 of them? Yes. There was an error in our original scan, so while we had a Scottish address on our database for those people, the technical parameters of the scan of the computer did not pick those addresses up, and that was an unfortunate error for which I am very sorry. It was identified and fixed very quickly, but it does not go to the accuracy of our data about where people live. It went to the accuracy of that one-off job of running the scan against our system. If you don't mind me just, President, what does it mean when you say running the scan and the scan didn't pick up the value that we're Scottish? Do you mean that it missed a field where there should have been a postcode or it was in the wrong field or it was a partial postcode? Yes. The technical parameters, so obviously we had all that address data on our systems, but we had not in the past flagged people as Scottish taxpayers because there had been no there'd been nothing in the tax system that would have required us to do that. When the Scottish rate of income tax came in, we had to identify all of those addresses that we held on our database and flag that record as a Scottish taxpayer record, so there was a technical specification of the scan that ran across our whole address database to pick that up. Some of the parameters of that scan did not pick up some of the input methods that had been used for our addresses. In particular, it did over-rely on postcodes and the way in which the address had been inputted from postcode. In fact, there are other means by which addresses can be input, which that initial scan did not pick up. Two things should have happened. First of all, the people who designed the scan should have had a deeper understanding of how addresses are input to our system and got the scan right. Secondly, there should have been more testing of the results of the scan to identify the error. Unfortunately, that mistake got through and, when it was picked up, we fixed it. However, if I was doing that exercise again, which we will be doing for Wales shortly, there are lessons to be learned from that to get the quality of that and the testing of it better. Is it not the solution to simply have the word Scotland or Wales or England in a column in the data attached to every address, then you will not miss any? If the software works like that? At the moment, until now, because the country in the UK where you live has not been relevant to your tax affairs, that is not a field that we have required people to capture. With the exception of some small number of postcodes, I think that it is about six that straddle the border, the postcode tells you which country the address is in. The postcode is what we have always had on our address list, because that is what is relevant for mailing. We feel that that is the best way from the data that we have of identifying Scottish taxpayers. I think that, with hindsight, if you had known when we were starting to collect addresses from people 30, 40 or 50 years ago that there might have been a differential, you might have asked people for the country, but that is not where we are. I do not think that it is necessary to do it in order to get at the identification that we need because the address data and the postcode data pretty much do it. So there will be no errors the next time around? I hope when I was sitting before the equivalent of Wales that I would be able to say there weren't. Certainly I think we have learned lessons from that exercise, which unfortunately I think Scotland will not gain from, because it was a one-off exercise, but Wales will. But we have also learned lessons about the ongoing need for assurance, which I think probably have strengthened our assurance activity that you will benefit from on an ongoing basis. Okay, thank you. Okay, Liam Kerr. Thank you, convener. Good morning. The costs of implementing the Scottish income tax powers keep reducing, the estimate, which on one analysis sounds quite good, but first of all, how can five million, I think, is the latest saving that's being made? How can five million be saved briefly? I think the story of this is that the initial estimate, which was, I think, 40 million, was given back in 2010, so it was really a long way ahead of implementation. We were doing a lot of new things that we'd never done before, and I think we were cautious in the estimates that we gave. Over time, there have been a number of things that have happened. We've been able to have a better idea of how to do the IT changes, the cost of the IT changes have come down, but I think the big reason that the estimates have come down is that we thought there would be a lot more cost of contact with the public, a lot more cost of the mail shot that we did, a lot more actual staff costs and operational costs in our business, where we would have to deal with changes and correspondence. As it happens, because we've had good time to plan for it, we managed our communications, we did the work at the level of the database to check our addresses, we didn't need to do so much contact with customers, and we have had, I think, quite a lot less contact and queries from them that we thought we would have to deal with. A lot of the cost reduction is on less contact with the public, less administrative work that we thought we might have to do. The recent reduction is, again, largely less administrative operational work. I think that we've also got a clearer idea of the IT requirements for working with the pensions relief at source schemes, where we've had to put in a separate system to make sure that pension schemes that are claiming relief at the basic rate from HMRC are able to identify Scottish taxpayers so that, if the basic rate is different, they will claim a different amount of relief for that. That work is still on going, that's the most recent, that's the last big chunk of work that we've got to do. This committee often sees it going the other way. On one analysis, it's all quite encouraging, but, of course, there is a concern in my mind that significant overbudgeting has consequences as well in terms of how one makes provision for that. Are you aware, has the Scottish Government, in terms of its own funding, made provision anywhere for £40 million, in effect, said, okay, we haven't got £40 million to play with, let's put it over here? If so, what impact has that had on day-to-day running? I can't comment on how the Scottish Government manages its budget. Our contact with the Scottish Government has mainly been, certainly we've been keeping them in touch with our reassessment of the costs, but we've also been working closely with them with the short-term forecasting, so each year we've been giving them an estimate, which is the best estimate we can give them. They've been involved in our programme governance, so they have the same access to cost forecasts as we do. They see all our programme and project papers, so I think they have as good an understanding as we have. I agree, I think, the estimate of £40 million back in 2010 was pretty speculative. I think it was done well before we had done a lot of work on it. I think we were asked to give an estimate and we did, and we erd on the side of caution because we thought this was a big novel and it was difficult to predict at the time. Just moving slightly in the area, if there is an error, we've looked at an error on the number of Scottish taxpayers. There is an impact on the tax take and there is a rectification cost. Now, this time round, understanding that HMRC have borne that cost, if there were to be a further error, there would be a rectification cost. Presumably, there would be potential for rectification of the opportunity cost of not having taken all the tax that was taken in. Is it reasonable to assume that HMRC would pick up that cost again if there were to be a further error? I think that's hypothetical. We have in our memorandum of understanding with the Scottish Government a presumption that they will bear all our costs of implementation, and that is following Treasury rules for public expenditure. In the case of the error that led to the 420,000 people being missed off the database, there wasn't any effect on tax take there, partly because it was rectified quickly and also because obviously there was no difference between the Scottish tax rate and the UK tax rate at the time. However, for that particular issue, we did agree that we would bear the cost because it was clearly our error, but I think that we would want to look at future circumstances according to the circumstances at the time. Just to be clear, if there were to be an error by HMRC in the future, which had a cost, one couldn't automatically assume that HMRC would pick up the cost of rectification. Is that fair to say? I think that it is fair to say that you can't automatically assume that. I would expect us to follow the approach that we followed in the instance of the 420,000 taxpayers, where we would approach ourselves in a reasonable manner. That was clearly our mistake. We took it on the chin financially ourselves. However, as Sarah said, we would have to look at each instance. Hopefully, there won't be any, but if there were, we would have to look at them individually and assess what we wanted to do. We would have to enter into a dialogue with the Scottish Government, which I can pretty much understand where they would come from in that debate. Of one final issue that I wish to explore, the Scottish Rate Resolution requires to be agreed by the end of March. This committee heard previously that if the Scottish Rate Resolution is agreed right at the end of that period, that could give rise to extra costs, because you guys have got to change people's tax codes at the very start of the financial year. That being the case, the previous committee heard there would be extra costs. Have you any idea how much those extra costs are and whose costs are those? The costs are borne by the Scottish Government. Those are costs that are passed on to the Scottish Government. The extra costs will depend on the nature of the change. The change this year to the higher rate threshold was relatively small. It only affected a minority of tax codes. A change to the basic rate later on in the process would affect a large number of tax codes, and therefore there would be a much greater cost. Are you able to give me any ballpark? I don't think I can off the top of my head, but we may be able to write and let you know. I think that might be useful, because just thinking aloud, presumably the Scottish Government has to factor that into its consideration. If we change this tax rate, there is a cost. It's a very small proportion compared with the yield from the tax change, obviously. The analysis predicates on the Scottish rate resolution not being agreed until right up to the end of March, and that could incur additional cost. How far before the end of March would the rate resolution need to be agreed to avoid incurring that additional cost? We do an annual tax code update for the whole of the UK, which runs around the end of the year, so December, January. The agreement that we have at the moment with the Scottish Government in the minimum round of understanding is that we need by the end of November to have at least an assumption, if you like, to use in those codes that we issue in the main coding exercise. We're going to have to review that, because now, potentially, the UK budget and the Scottish budget are going to be later in the year, so the end of November may not be a realistic assumption. We certainly have been able to accommodate the Scottish budget announcement in December, and still be able to reflect that in our main coding exercise. However, if a change comes, as it did this year, after January, that means that we then have to do an additional exercise to redo some of those tax codes, and that's where the extra cost arises. It doesn't mean that, even if it was right up to the end of March, we would still do an additional tax coding exercise. It would probably be after the start of the tax year, and that would mean that employers would have to update codes after they started the tax year, so there's a bit of a knock-on effect there. It's all possible to do, and there are precedents for us changing tax codes after the start of the tax year, of course. There's a whole range of different things that can happen, and it's always possible for us to accommodate decisions, but there's just a range of costs that might be available, that might be incurred. I wouldn't mind at all having more clarity on those costs when they're incurred. What's in my mind is, at some point, the Parliament will be debating the rate resolution, and if there's further cost, or if there is a cost implication of not getting something agreed by a certain time, that might be something that the Parliament wants to know. Go away and look at what we can come back and give you. Obviously, as Sarah has explained, there's a whole range of different scenarios, and each one would have to be looked at individually, so we would expect to be in close liaison with the Scottish Government on any particular instance or issue. We'll see what we can give you in general terms, but obviously there's quite a wide range of different scenarios that each one would have to be separately impacted. First, I'll just pursue some supplementary questions on this issue of who's liable to pay the Scottish rate of income tax and who isn't. There are three particular questions. The first one is supposing that I have two houses. I have a house in Scotland and I have a house in England, and I tell you that my main house is in England, but I've got a second house in Scotland. Would I pay the Scottish rate of income tax? It would depend on which of those addresses is your main home, and we've got a set of criteria that we apply. We have, for example, identified just over 2,000 cases of the nature that you describe, where we have people who we know have an address in Scotland and an address in elsewhere, and where they've told us that the address elsewhere is their main address, despite the Scottish address being a correspondence address for us. We've done some compliance work to understand the accuracy of what we are being told. The wealthier you are, the more likely you are to have two homes, and the more likely you are to have scrutiny by us, and affluent and high net worth people basically are manmarked by a relationship manager in the UK who tracks their residence status, but I think Sarah can probably give you more details of the test that's applied. Yes, we're looking at things like where your children go to school, where your family is, where you're registered with a GP, that kind of thing. We would expect people to have a main home that has those types of characteristics. So, if Scotland introduced a 50p rate of tax, and I said to you, my main home is no longer in Scotland, my main home is south of the border, would you automatically accept that, or would you apply those tests and say, no, we don't accept that? First of all, I would say that, whilst this is a new scenario for us within the UK, it is something that we're very used to in the international context. We have lots of taxpayers who tell us that they are a resident for taxpayers in France or whatever, but who appear to have a presence in the UK, and we're very used to policing that. Our approach to compliance is risk-based, so we assess what is the risk that someone is misleading us, and it is based on that risk, the level of intervention that we will take. Factors that are relevant are things like, well, what is the tax differential between Scotland and the rest of the UK? For the current tax year, it's a maximum of about £300, and our assessment is that that's a pretty low, generally it's a pretty low risk of people deliberately not complying as a result, but obviously if that differential grew in the future, we would have to reassess that risk, and that is something that we intend to do annually and share with the Scottish Government. In the circumstances that you describe, I think that we would have assessed that the risk would have grown significantly, and therefore that is a risk that we would have to actively police. That's exactly the type of case where we might well decide to investigate. It depends on the taxpayer and their level of income and what we know about their tax behaviours generally. For example, if that is a high net worth individual who we know has actively engaged in avoiding schemes in the past, for example, they are someone who we keep a close eye on. On the other hand, if it's someone where we can see evidence that they appear to move house, we may assess that in that particular case an intervention is not required, but we would certainly constantly reassess risk all the time, and the level of compliance intervention that we would expect to take, subject to discussion of the Scottish Government, would be relative to the risk assessment. Can I ask, as part of the compliance, do you look at people who are claiming that they are getting free tuition because allegedly they are staying in Scotland? I think that factors like that would all pour into the risk that someone would actively mislead us. We would look at all the factors that might cause someone to mislead us about their address, which would also have a tax consequence. Clearly, there can be a range of factors that drive people's behaviour, and it's not just the tax benefit, but the tax benefit may be part of it. Let's say that I've got a son who is 19, and I'm really living in England, and I am the taxpayer in England, but he has told the authorities up here that he's resident in Scotland, and he's getting free tuition and not having to pay tuition fees. Would you pick that up? Obviously, we're not directly accountable for administering that risk of fraudulent access to tuition fees. However, it will be someone in Scottish Government, I assume, in your department for education. However, what we do have is gateways to share data with other agencies that are investigating potential frauds. If the police in Scotland, for example, were investigating fraud, there are gateways to share HMRC information, and we collaborate very closely with other agencies on tackling fraud, because if someone commits fraud in one area, they're quite likely to commit it in another, including in ours, so it's something that's in our interest to do. Do you ensure the necessary information between the Scottish Government enforcement officials or compliance officials in yourselves? Provided that there is a legal gateway for us to do so, we have to comply with the data protection rules, and we have to comply with the rules that say that we have to keep taxpayer information confidential, but there is quite an extensive range of gateways for us to collaborate with other law enforcement agencies. For example, here in Scotland, we've got HMRC staff embedded in Garkosh, so they're both working on joint operations but also are ranging to share information, but we do obviously always check that we've got the right gateway. If there is a risk where there is not a gateway that enables us to share information, we have a very good record, and our ministers have a very good record of acting quickly to create the necessary gateway. Can I ask about another scenario, which is quite a common one, not necessarily just amongst high net worth individuals? This is not somebody trying to defrode the system, but just trying to catch the definition of a Scottish taxpayer for the purposes of income tax. I live in Scotland, but I work in London. I go down in a Sunday evening or a Monday morning, I work in the city, I stay in London five days a week, and I come back up to Scotland on a Friday night, but I live in Scotland for all intents and purposes I live in Scotland. Does my employer in London deduct the Scottish rate of income tax? So Willys, I believe, they're known as, and work in London live in... Oh, right, right. I never knew that. Well, I'm glad I got an opportunity to explain what I was saying then. And the answer is yes, so we would have that person flagged on our system as a Scottish taxpayer, and the fact that they're working for their employer in London would not alter the fact that their employer would be given an S code to operate. Okay. That's fine. Thank you, that clarifies that. Can I now go on to... Nothing to do with fraud or people trying to avoid or evade tax, but there's been a big debate in Scotland, as you probably know, about whether we should increase the 45p rate to 50p, and what would be the behavioural impact of doing that. Now, I know there are many other scenarios, you know, not just at the top rate, but at the standard rate and the low rate of income tax you could paint, but for the purposes of this discussion, how much work has HMRC done on looking at the behavioural impact of tax changes, such as increasing the 45p rate to 50p rate in Scotland? Yes, so we had a 50p additional rate in the UK in 2010-11. It was only in place for one year, and in March 2012 the department did publish an analysis of the behavioural impact of that, and that is available for... You can find it online if you need me to. I can send you a link to it. Obviously it was quite a difficult analytical exercise to carry out because the rate was only in place for one year, and obviously the behavioural impact, as you've got a series of data, you might get better understanding of what the ongoing behavioural impact was. In broad terms, the outcome of that analysis was that there was a very significant behavioural impact in affecting the tax tech in 2010-11, which we had underestimated in the forecast of the yield from that 50p rate. In particular, we saw a significant level of forestalling, where people who had the option brought forward income into the previous tax year when the rate was lower, and that had a consequential impact on the yield in the following tax year. You can look at that analysis. It draws what conclusions we could from having that rate in place for one year, but it did indicate that there was a significant behavioural impact, which you would have to look at whether and how you could constrain that impact in the future if you were introducing a higher rate. Would it be fair to say that, based on your analysis, if there is a 50p rate in Scotland, you can end up receiving less revenue potentially because of the result of likely behavioural impacts? I'm not sure that it's safe to draw conclusions on what would happen in Scotland, but that was a UK-wide rate. As I said, we only had a very limited data because it was only in place for one year, but certainly in that instance we saw that there was a large behavioural impact that we had underestimated at the outset. It did mean that, in the one year that that rate was in place, it raised less revenue than had been forecast for it. That analysis says very little about what the ongoing effect would have been, because obviously we didn't have any ability to test that. It wasn't a permanent rise of that, obviously, because it had been announced at some stage that it was going to be abolished. From recollection, it was introduced as a final act of the Labour Government before the coalition government came in in 2010 and repealed it. From recollection, it wasn't announced as a one-year measure, but in practice it was only in place for one year. The point that I'm making is that, if it had been in place longer, would the behavioural impact have been greater or smaller or new-pliesed? I think that that's something that we don't have the data to test. For example, to the extent that people took income early or delayed taking it, there may be a different impact over time. People may have an ability for a period of time to do that kind of thing, but after a while they may have less of an ability to do it. That analysis doesn't really get to that, because, as I say, it only had data for one year. Have you done any more general work on behavioural impacts? I mean, we do that all the time for policy costings for our ministers, but I can't share what policies they do or do not ask us to ask us to cost. Is that the kind of exercise you would do for the Scottish Government if asked? I think it would be for the Scottish Government and the Scottish Fiscal Commission to carry out that kind of work. But you would co-operate with it? Well, what we certainly do is provide them with the data sets to enable them to do policy costings and forecasts. For example, in the UK, the Office of Budget Responsibility uses the survey of personal incomes as a key data set, and we have, essentially, given the Scottish subset of that data to Scotland, so that the Scottish Government and the Scottish Fiscal Commission can make their own forecasts. We haven't got an agreement to provide an analytical service, but we certainly provide data. I wonder whether I could pursue this just a little bit further, because you are absolutely right that it is the Scottish Fiscal Commission that will be providing some of the modelling of behavioural impacts to us in our budget discussions. We have already seen forstalling, I think, with the land and business transaction tax, which you may have noted. But I wonder, in planning any tax system, how much of this you can do in advance? So, if the Scottish Government indicated that they were considering a £50 top rate of tax, whether they or the Fiscal Commission sought you to do some of the modelling in advance, you could conceivably put tax avoidance measures in place before that was brought in. Would that be correct? I think if you are a policy mecher and you know that a policy measure is in consideration that it is likely to have a big behavioural impact, you would then look at are there measures that we could not put in place to manage the ability for people to have that behavioural impact? There may be certain avenues that you could close off. There may be other avenues where you may feel really the options to close that off are more limited. That is the kind of thing that you could look at. So, you could effectively minimise the bulk of the impact in advance? I mean, undoubtedly, there may be some behavioural choices that taxpayers might have available to them that you could close off. There may be others that you would have options to close off. There may be others that you would have less options to do anything about it. It is in the nature of the people who have got wealth and high incomes that they can plan their affairs, they can plan whether and when to take income, whether and when to sell an asset and realise again some of those behaviours you might be able to legislate to constrain some of them, you might decide that you cannot. That is helpful. I recall having been on the finance committee at the time, one of your senior colleagues coming along in the discussion about this very subject and telling us that tax avoidance measures had improved over the course of the piece and he did not foresee necessarily any problems with that. Is that your feel for what is going on on the ground that you have actually taken more measures? There has certainly been a large raft of anti-avoidance measures in recent years that have significantly stamped out tax avoidance as an activity. It is not completely stamped out and probably never will be, but we have seen a very significant reduction in the use of tax avoidance schemes. In recent years, some caps have been put on relief, so even though it is not tax avoidance, people might choose to put their money into something that is relieved that the ability to do that in some instances is now capped. Certainly, some of the avenues that we would regard as mischiefs because of their tax avoidance have been a lot of work done to close off the opportunities for that. A key area of pressure in the tax system at the moment around tax planning is what we call tax-motivated incorporation, where we have differential tax treatment of employed people versus self-employed versus companies, and we are certainly seeing a behavioural impact where people incorporate. One of the reasons why they are incorporating is to take advantage of that tax differential, whether you call that tax avoidance or sensible legitimate steps, but nevertheless it is a behaviour that we see. If those differentials were to increase, then there would be a greater incentive for people to do that. There are still areas of tax planning that people carry out where there are opportunities, and they are certainly by no means all closed off. I am conscious that you have had a series of mergers consolidations—call it what you will—of tax offices, and Glasgow and Edinburgh have been affected. Has this had any impact on your work on Shreit? No. We have a programme over the coming years of reducing the number of small offices that we have and concentrating our resources into 13 regional centres, plus six specialist offices and a head office, because we think that that will enable us to deliver better service more efficiently. That has not been all implemented, that is in terrain over the next few years, but there has been no impact on our implementation of the Scottish rate of income tax. Any further questions from colleagues? No. In that case, can I thank our witnesses very much for appearing before the committee this morning? We will suspend briefly to allow a changeover. We will now move to agenda item 3, and we will take evidence relating to our post-legislative scrutiny of the national fraud initiative. I welcome to the committee this morning Derek Mackay, cabinet secretary for finance and the constitution, and Brian Taylor, senior risk manager for the Scottish Government. I understand that the cabinet secretary would like to make an opening statement before we move to questions. Thank you, convener. Good news, as it is a very brief opening statement. I appreciate the opportunity to contribute to your first piece of post-legislative scrutiny and appreciate your interest in the effectiveness of the national fraud initiative, which was just one tool that the public sector uses to combat the risk of fraud. The Scottish Government takes the prevention, detection and investigation of fraud very seriously, as well as ensuring that our key financial controls are robust. We work with all public bodies to share fraud, prevention, information and good practice, and this is all underpinned by effective audit arrangements. With respect to the national fraud initiative, more specifically ministers and legislation enabled Audit Scotland to carry out data matching exercises to assist in prevention and detection of fraud in Scotland. The Cabinet Office oversees the exercise across the UK as a whole and is responsible for the effectiveness of the data matching processes. It is important to review the effectiveness of the NFI and to make improvements where possible, enabling and maximising the value of participation. If, as a result of your scrutiny, you make recommendations that would require statutory amendment, then this would be for Scottish ministers to consider and take forward and we will be happy to do so. Other recommendations to improve the effectiveness of the exercise may be for the Cabinet Office as owners of the data matching service offer audit Scotland as a facilitator of the process in Scotland, but Scottish Government officials will be happy to support those considerations. Thank you very much, cabinet secretary. I understand that the cabinet secretary is also willing to take questions on our previous evidence session from HMRC, but if we could hold those back and start perhaps with the national fraud initiative, Colin Beattie. Cabinet secretary, in the last evidence session that we had on NFI, I was quite interested to discover that there was the possibility of having real-time pre-transaction checking. I had no idea that it was actually available. Clearly, there must be advantages in that. The NFI is, I think, if I remember correctly, a three-yearly exercise, a big exercise in itself. Surely, this real-time checking has a huge advantage in eliminating fraud that could otherwise be on-going for a lengthy period. I understand that, if I remember correctly, the cost is less than £2,000 for each local authority, let's say. Now, there's one thing arising from that, of course, is that part of the benefit would be for the DWP, but part would also be for the councils. Is there a way that this could be introduced sponsored by the Scottish Government? Well, at the moment, we support Audit Scotland as well as the local authorities through the general financing. It is up to those organisations to contribute financially. If you have further recommendations around the financing of it, I'd be interested in that, but that's an operational matter that we could consider. Absolutely. The app checker and its use has some restrictions to it in terms of the data in it. Some of it is quite old. Some of it is refreshed every two months, so some of it is quite valuable. The Cabinet Office has used the app checker to try and encourage people to promote it, so they have given it reduced rates. If we were going to try and rule something out across Scotland, we would want to talk to them first about how best to do it and cost would be part of that, so hopefully we could overcome any barrier. We have already had initial arrangements with them about coming to Scotland and helping to roll out the app checkers. It is quite new, so we would be absolutely willing to talk to them about how best to do it. It is something that we would consider in terms of central funding. I will say that this is in course at the moment. Discussions are underway on that. When do you expect that to be completed? It is part of the NFI steering group discussions. We had our last meeting in October, and the next meeting is yet to be scheduled. On the back of those hearings, we have been in touch with the Cabinet Office, so they are scheduling, but I could not tell you when the next one will be here. One of the things that arose again in the last evidence session is that there are significant areas that are excluded from the NFI, such as housing associations. Are there any thoughts about bringing them on board as well, whether that needs legislation or other encouragement? I do not know. Again, I am interested in considering that, if you think that it is required, but there is the ability to have current data matching powers. It does allow voluntary participation, but if there is a sense that there should be compulsion, I am interested in that. There is a range of measures that can be used in terms of preventing fraud and there is work from the regulator and others, but they can participate in it already, but there is an issue of compulsion if you thought that that was required. Why didn't it go? I think that the difficulty that this committee has picked up is that there seems to be a significant number of housing associations that simply do not, almost by default, participate, which leads us to look at whether they should be compelled to, given the fact that there is such a significant part of the opportunity to eliminate fraud. There has not been evidence that that is required in terms of fraud identified that they would necessitate that, but if the committee is willing to produce that as a recommendation, I will look at it in terms of compulsion. However, there are other checks and balances in place. The other thing is that current legislation does not actually allow for enforcing follow-ups from NFI. Some of the councils that appeared in front of us did make the point that they take the discretion in certain cases where the amount involved is so trivial that it would cost more to follow up on this particular line of investigation, they just drop it. Would you think that there could be a benefit in bringing in legislation to enforce follow-ups, while still giving a little bit of a wriggle room for councils? Operation might be for the organisation to take forward in the audit agencies as well. Were they a further consideration? Sorry, just to add, in terms of Downscythe, the Cabinet Office does work on an encouragement basis, and that is Audit Scotland's approach to trying to get people properly engaged in it rather than taking away the organisational flexibility and the resource requirements that might be required if it is in force. Two questions. First of all, on the National Fraud Initiative, from the evidence that we have taken so far, it would appear that the National Fraud Initiative has been quite effective in reducing incidences of fraud. We can always go further if there is always more to do. As Corinne says, there is a need to look at compelling organisations such as housing associations to participate. Given the success of it, is the time come to look at what is possibly widening the remit? Let me give you an example. Tuition fees, which takes up a very large amount of money in Scotland, quite rightly, every year. Clearly, we have people resident in Scotland who qualify for getting their tuition fees paid, people living in the rest of the UK do not, people living in the EU do, although some of that will change policy-wise after Brexit. However, the fundamental point is picking that as an example, as the case comes to look at where the National Fraud Initiative could be employed and have an extended remit to weed out fraud in other areas such as tuition fees, if indeed there is fraud. However, we do not know. I think it is a very helpful point. It is very hard to quantify the preventative effect of this initiative and other initiatives. You cannot quantify what fraud has not happened because of these measures. Just looking at the impact on the Scottish Government so far, the very small amount that was alerted at its risk and investigated and resolved, we could respond where there are demands around risk or the potential threat. A huge issue coming our way, of course, is going to be social security. I think it will require careful consideration of where the data with social security can play into this as well. I think it is right to look at risk and areas of risk and then say what is appropriate. That specific example has not come up as an issue, identified to us as an issue, but again worthy of consideration in terms of remit and scope of the exercise. However, maybe Brian can say more about that risk analysis. I think that the thing to add is about any extension of scope. You are absolutely right that it should be considered. It is not just about adding more and more data. It is about adding data that is going to bring about good value, high risk matches that are going to be of use to the organisations that participate. You are right that it should always be reviewed about what extra data sets should be brought on board, particularly things such as social security. Something about tuition fees has not come up, but it may well be something that could be included. We seem to be always chasing and spending a lot of resources and chasing people at the lower end of the income scale, who rely particularly on social security benefits. I am not justifying fraud. Fraud should be weeded out no matter where it is. We criticise quite rightly the UK Government for spending something like four or five times as much on identifying and dealing with fraud among social security alleged benefit fraudsters, but it is four times as much spent on that as there is on tackling tax fraudsters and tax avoiders and evaders. Maybe we are in danger of making the same mistake. Maybe some of these, if you like, benefits that tend to benefit more middle-class people, better off people, but we should be looking to be sure that there is not any fraud of any scale on these programmes. I am not suggesting that there is, but nevertheless I would have thought, given the amount of money that we are now spending. It is not just tuition fees, but there are many other programmes as well. We are dishing out a lot of public money to people. Surely we should be taking as robust an approach to those people as we are to people in lower incomes. I think that you raised an important point there in that it needs to be risk based, but it also needs to be proportionate. Absolutely, but my point is that it is not time to look at proportionately whether we need to extend the remit to cover some of these other programmes. In the consideration of extension, proportionality should absolutely be a factor, yes. Two questions arising from the previous evidence session this morning, cabinet secretary. First of all, one of the things that is very clear about the Scottish rate of income tax or any rate of income tax is that the level of allowances and reliefs is an important element of deciding the tax take and indeed the economic and behavioural impacts of any level of taxation. Can I ask if the Scottish Government is pressing the UK Government to extend our powers over income tax to cover all aspects of income tax, including reliefs and allowances, which would give us much more power to be innovative in the application of income tax policy north of the border? This is a substantial reach from the evidence session this morning, but I will allow the cabinet secretary to answer it. Convener, it would be unlike both you and Mr Neil to want to spring any surprises on me coming from earlier evidence. I'm sure you're fast enough in your feet to deal with it. Yes, well that bought me a few seconds to think about how to answer it. The simple answer is yes, of course we take a maximalist position in the Scottish Government in terms of the devolution of powers and the functions within it and we have repeatedly made the point around revenue generation issues around tax avoidance and so on that of course if we had more levers, more opportunities to tackle that then we would welcome that. We have made the point and I have certainly made it with the Treasury ministers. Maybe we need to step that up a wee bit, do we? Yes, I mean I think it's fair to say that on income tax we and of course we'll have an opportunity with a new UK Government to set out the media asks but it would be a continuation of our argument around tax collection in Scotland and the decision that we can take and address some of the anomalies that now exist because of the partial control around income tax for the reasons that you've given. If the committee wishes to collectively add to that then I would certainly welcome that intervention. The second question arising from this morning's evidence is in relation to the debate about the behavioural impact of any tax changes. Obviously that debate has been around whether you increase the top rate from 45p to 50p and obviously the HMRC, if you were listening to the reverence earlier, which you may have not been mentioned, their analysis of the one year when there was a 50p tax rate in recent times in 2010-2011 and clearly the analysis they did showed that there was a substantial behavioural impact for the duration of that extra 5p on the rate of top rate of income tax. What work does the Scottish Government commission to look at behavioural impacts of any rate changes in particular whether the top rate should be raised from 45 to 50p? So without getting into the political argument on that and the Scottish Government's position on a Scotland-only change compared to a UK-wide change, we've commissioned the Council of Economic Advisers to look at this issue and to report back in good time for the budget process because clearly it would be a budget consideration for the Government and therefore the Parliament to consider all of those issues and report back. So it's the Council of Economic Advisers that the First Minister has requested to look at this issue. And will the report be published? I haven't been asked that before so in anticipating that question, first of all it will advise ministers and I would want to double check this but I think the evidence was published last time around so I would try and stick with the precedent to do that. Whilst keeping within the parameters of guidance and advice to ministers I would be happy to share the position. I'm not suggesting it will be published before the budget but presumably it will be published with the budget. I'm not sure from last time around the analysis when it was published but in the interests of transparency I'd want to do that although keeping within the protocols of advice to ministers but I think people would want to see that evidence, would they not? And can I ask, is the remit to the Council of Economic Advisers limited to looking at the behavioural impact of increasing the 4 to 5p rate or is it a wider piece of work looking at any variation in the lower rates? No, it was specifically to look at the additional rate. Right, okay, thank you. Okay, if we could perhaps stick to the national fraud initiative first and then we'll come back to, but you see once Alexine gets going it's very difficult to stop him. Liam Kerr. Thank you, convener. Good morning. So I'm interested in the cost benefit of the national fraud initiative. So just a number of questions around that. We heard in a previous committee session about there being diminishing returns, diminishing financial returns from the NFI and various witnesses expressed their views about that. Do you have a view on the diminishing financial returns on the NFI? I suppose to answer that question I would take you back to my point around it's difficult to quantify the preventative element of this, you know what we've prevented in terms of fraud not happening and discouraging it. If you take just what we have been able to run through the system and identify as an issue for Scottish Government it goes from a substantial figure of over £1 billion worth of transactions put through the system down to identifying payment of just over £10,000 and then addressing that successfully recovering it. So put in context that's our figures. So I still believe it's very worthwhile exercise. I don't want to overstate our role within it as a legislative enabler of it, participants in it but I think we all see a value in its continuation hence the discussion around extension of its scope but it appears to continue to be worthwhile. Do you think that there is any way to quantify the deterrent effect because the witness is very clear and gives a similar answer and says that there's this whole deterrent going on and I suspect that's true but there must be some way to at least go some way to quantifying that deterrent effect and if so it then begs a question about whether resource should be spent on a more proactive and comprehensive marketing campaign to increase the deterrent value. It feels like more an operational issue for Audit Scotland and other agencies. I think we'd be more concerned if we removed the function, removed the initiative. Now of course there's many other tools in place to tackle fraud but my sense if it was removed it would probably cause more concern than trying to promote it but yes there are public agencies that could could play into it and more data that could be considered. Brian, can you maybe say more then about a risk and how you see it playing within that? Would that be helpful? Yes, of course. I mean the other point around being part of the NFI is it does give good assurance on the financial systems so having our data run through it and having the small returns does give us assurance that our controls are working well so there's that aspect to it as well. It confirms how well they're working. The deterrent factor is mentioned. I think the difficulty in measuring it has been undertaken in the past with things like the annual fraud indicator. An awful lot of it is based on estimates of fraud so you could do crude comparisons of the deterrent and look at the fraud identified against the kind of average figures that you would find in organisations that vary between 5 and 10 per cent so you could do that. I think that the answer really is trying to continue to improve the value of the transactions so that we get more results for less matches, whether that's possible and at the same time do the kind of promotion work that you're talking about because I think that's important as well. Moving on from that cabinet secretary, you said in your opening remarks that we need to maximise participation, I think, with the words you used. One way that we explored in the previous session was if the public were able to see outcomes. If there was some way whereby the public can see when they flag an issue what actually happens as a result of that. I'll throw this in as a question but do you think that within the current data protection restrictions that we have that is something that could be considered? It could be considered. I suppose anything could be considered. There will be parameters that we have to work within so we could look further at that but of course each organisation and Audit Scotland who facilitate this and cabinet office who oversee it could ultimately produce reports around how they believe it to be working so it could be considered. Do we really at the same time want to produce a report every time there's a complaint and then action and then an understanding because I say this is one of many tools in terms of tackling fraud so it could be considered but I'm not sure the value of publishing too much bearing in mind as you say quite rightly the difficulties around data protection. Just finally to pull together the whole cost benefit piece so for example Murray Council in their evidence talked about 2,800 matches of which there were 20 positive outcomes. Now the cost of those outcomes the cost of getting to that point is borne by presumably the local council or a Scottish agency if I can put it that way but the benefit accrues to the department of work and pensions in this particular example. Do you have a view of that and is that something that we should be looking to review as part of the NFI? I don't have a strong view it's in the public interest that the public sector all works together to identify fraud to tackle value for money so on and so forth and if you look at the figure I was able to give you of Scottish Government since actually you know what we were able to to look at you know there's a still value in reassuring around our systems and identifying what might not be fraud but duplication and address that so I do believe there's value to the public parts irrespective of who's contributing to it. Thank you. Monica Lennon. Thanks, convener, good morning. We heard in oral evidence from a number of local authorities and one of the things that surprised me I guess is that the way the exercises are set up they're very much standalone exercises so there doesn't appear to be a way to track and identify repeat offenders. Now Jim Harra from HMRC this morning said in his evidence that a person commits fraud in one area they're likely to commit frauds in another. Do you recognise the limitations in the current system with the current statutory powers and cabinet secretary, do you think that this could be addressed through legislative change? In terms of repeat offender I think that this has been identified as an issue. Cabinet officer working on it and I would be interested in their conclusions as I say. There's a lead organisation across the UK and you know if we require legislative change again I'm open to that in terms of presenting that. If that is what is required but cabinet officer leading that piece of work. Yeah I think it just struck me certainly from the evidence that we've got a really static picture obviously there are a retrospective nature in looking back at these data matches but if there's good intelligence there it seems that there could be missed opportunity if people are not proactively using that information. As I say I'm happy to consider this based on your recommendations on what the cabinet office conclude. The other thing that came out of the evidence from the local authority officer very much at the coface of this is that by looking at the sheer volume of data matches and all the other sorts of intelligence that they get that they appear to be absolutely drowning in data and it very much is about taking a risk based approach and really trying to prioritise but when you hear about the number of matches and data is it your concern that there's not enough resource in the system to really properly drill down into all that data and try and detect frauds? Again so we're looking at our specific role within the NFI which is a legal enabler and a participant in. It hasn't been identified to me that there is a resource issue in following up work or engaging within it but as I say there are a range of ways that public sector organisations deal with the issue that if you've got further evidence around resources then I'm interested in hearing that but bearing in mind of course how the audit agencies do their job and the public sector organisations do their job and how we fit in with that in terms of cabinet office audit Scotland and as is a legal enabler. Just from the evidence that we heard it looks like within local authorities there's very small teams who are dedicated to this work and there's also some concerns that there can be delays with other public bodies providing information so it's maybe worth a closer look. Liam Kerr touched on the data protection aspect of this. One of the concerns, I think it was the officer from Aberdeen City Council, he had raised it, the public do get frustrated when they provide information and no one can get back to them and partly again it's about the volume of work in the system but also about data protection. Now we understand that data protection laws are in place for very good reasons to protect people's privacy but again it seems that there's very little awareness of the national fraud initiative so if we can without generating lots of reports and lots of paperwork but can you for sure, I know you've worked in the whole government too as a councillor so can you see simple ways that the public can be kept informed and at least they'll feel encouraged to cooperate? So I think on the two points on terms of resource for each organisation that is a matter for them and referencing local authorities specifically the size of their internal audit or their audit function and facility is a matter for them so it's not as if there's a central co-ordination of that resource that is for each organisation of course there's specific funding arrangements for Audit Scotland as well so that resource matter is for them but yes I'm interested in any recommendations around awareness of this initiative but again I'm respecting the Scottish Government's role within it as well we're a legal enabler of and a participant in if there are any recommendations out of the way and we as a partner promoted to the public so be it without raising any unnecessary alarm at the same time as well but also to as you've described give appropriate and proportionate feedback without creating new bureaucracy and protecting people's position in terms of data protection. Thank you just one last question which is perhaps more directly aimed at Scottish Government I'm just interested to know what work the government is doing to ensure that the new social security powers will fit well with the national fraud initiative? I can go into some more detail in terms of the forward planning but I suppose it was the point I just touched upon earlier that when you look at the scale of data number of transactions people involved then it would be part of our risk analysis and in essence knowing that the government through through our agency will be doing more transactions you know in a week than we're currently doing a year as a consequence of the social security powers and functions so planning how that may play in future whilst working that into the program over the next few years again Brian might be able to say a bit more operationally about that? Yeah it's just important for the committee to be aware that the social security agency in its formation has counter fraud as a key aspect of its program of work so it will have comprehensive data matching built into that that will be consideration of the NFI but it will go beyond that as well in terms of what data matching is required to make sure it counters fraud effectively. Brian, I wonder if you can maybe say something about the anticipated costs then because as the cabinet secretary said you know it's going to be a huge you know additional volume so have you got any figures on the costs of NFI in terms of the social security powers? Well there shouldn't be I would need to talk to cabin office in Audit Scotland to see if there's any significant cost implications from what I'm aware of it shouldn't because the data pool because it's vast as it is with 300 million pieces of data I don't think it would be significantly affected but I would need to tell it. Thanks very much convener I wonder if I could just stick with this issue about the repeat offender cabinet secretary I raised this a couple of weeks ago and I think I was surprised maybe like colleagues round the table to learn that they don't automatically investigate frauds in the second year if they were perpetrated in the first year it's all down to the data set that's presented for analysis and I think I was quite surprised at that if someone would try to commit a fraud in year one then why don't we check them in year two are we permitted to do that I presume we are so we don't need legislation to do that I don't think could you try and clarify that there are some restrictions on what can be done in terms of profiling I I'm not an expert on that but there are restrictions on what can and can't be done I think the important point and it's been raised already in the discussions it was had will be the extension of UK legislation that will allow the sharing of information with third parties which would include credit reference agencies as well as agencies that would have information on known fraudsters so that way we would be getting to be the kind of repeat offending issue that you're talking about and would be able to check the data against that that I'm not aware of the exact details of the rollout but I could get that information and feed it back to the committee for the conclusion of the cabinet office work on that yes we were doing a pilot exercise okay that's really helpful um some of the councils also said that there was there's no legal gateway for them to request information from hmrc to help with the national fraud initiative and detection there's quite a number of them i fact said that they would like that to happen what would be the mechanism for for us to achieve that would we have to get agreement from hmrc could it can be compelled it can be required or how would it work if we wanted to do that um the that yeah the the restrictions would be around the the fair and lawful use of the use of the data in terms of hmrc itself what we would do is work with cabinet office they already do a great deal of work um with hmrc and dwp in matching data and including more hmrc data and the NFI exercise would be something we'd have to work with the audit Scotland the cabinet office with and i suppose from those discussions we'd find out whether or not any actual additional legislation would be required or whether it could simply be done and through you know more effective communication and and engagement i think i think it was more a case that there just was no legal mechanism for us to get information for the councils to get information should they think they needed it even if they made the request it was it wasn't forthcoming because there's no legal framework for it but they all said it would be very helpful and it would add to the initiative's success rate we think cabinet secretary if that were the model that we used yes and i think the same would be true around the legal gateway issue would be engaging with cabinet office through them and hmrc to to make sure i mean i'm not aware of of the actual barriers that have been highlighted so we'd absolutely want to understand what what those were and what would be required to get over it whether it would be and just a disagreement on the legal position or whether actually further legislation would be required okay on data presentation sorry can i just be clear on that i mean that that's our willingness to be open if this is identified as an issue between local authorities in hmrc and it requires a legal remedy then we are open to that to help enable that if that is indeed the issue but that does seem to be a dispute on whether it is legal issue or around implementation okay based on your evidence right on wider data protection issues you'll you'll be aware that the european union regulation on data protection comes into force next may which makes which introduces even more stringent arrangements for data sharing and data security my understanding is that the UK government is signing up to that regulation whether or not it leaves the european union it's signing up to it do you think the tightening of data security will make it harder for us to detect fraud across a range of agencies that have been mentioned today you know between tax and benefits and social security do you think it'll make it harder when the regulation comes into force to do that i'm not aware of the the full implications that those new arrangements would bring i certainly the controls that we have around the data protection that she's a very stringent just now so again i wouldn't expect those to be significant but in terms of a detailed response we'd have to have a further look into it and and report back to you okay last question convener it was in relation to this morning's business in terms of the accuracy of the data the hmrc actually have on that particular issue on scottish rate of income tax are you assured in what form does the assurance take from hmrc to the scottish government that we have correct and accurate data that enables us to identify scottish taxpayers i'm pretty sure mr coffees asked me this question on the finance committee as well so we have a range of assurances there's the political level agreement there's arrangements around the fiscal framework and its implementation and then essentially the officials engagement and there was that earlier issue identified were not all scottish rate income tax players were identified but have been identified and say they're doing their various checks that they can answer for as to assuring us as a scottish government indeed the parliament that they've identified everyone that should be paying tax in scotland so i think i'm as assured as i can be based on all the information that i have that they've undertaken the range of exercises to identify everyone and um there's been some further exercises to to ensure that that is the case but yes there was a substantial amount of people identified further on in the system didn't cost any money it didn't lead to us losing any revenue but yes i'm as assured as i can be and if i wasn't i'd be raising it with the secretary of state and the chancellor and other ministers as well but there's ongoing work with officials okay thank you okay the clearly the temptation of committee members to move over to the evidence session this morning couldn't be contained but but we'd reached the end of those that had indicated they wanted to ask questions on the national fraud initiative so now i will properly move over to the evidence we heard from hmrc this morning is there anybody who would like to come in at this point Monica Lennon if i because i'm such a fan of the national fraud initiative you can be our champion yeah and apologies if it was asked earlier on i know there was some discussion about you know sort of voluntary participation um but cabinet secretary is it your view that all bodies that are spending public money should participate and should that include or should that be a condition of procurement bids for public projects i'm not quite sure i don't i don't think just make it compulsory for for everything and everyone has a potential answer in terms of procurement because all organisations will have policies in terms of fraud and procurement and comply with the Scottish public finance manual as well so there's a range of checks and balances in place so i'm not sure that you know compulsion for everyone for this data matching exercise it should be compulsory and essential it should be proportionate okay thank you i'll let go of nfi and are you sure now back to you this is your last chance and can can i just to round off the mfi but hearing me it's clearly been a long day um i very much welcome the fact that the cabinet secretary has been so open um to the committee's recommendations even before we've made them um so that's a very refreshing approach and i commend it to to other ministers but but we will indeed produce a report in due course on that and i look forward to receiving the the bits and pieces of information that you've said you'll provide to the committee um to this morning's evidence session on hmrc are there any further questions on that i wonder whether i might ask just a couple then um we we had some interesting discussions about liability for errors made and obviously you've just said in relation to identifying the 420 000 taxpayer Scottish taxpayers late there was no cost to the government and actually no impact on on the ultimate tax take okay um so i'm curious to know if there should be an error in the future what is your understanding of how that would play out with hmrc particularly in the case if it was their error i would want to come back to the committee on a specific issue of administrative error or identification error because of course the very detailed and complex arrangements around the block grant adjustment and reconciliation of tax collected from forecast bga and actual outturn which is quite different from administrative error um where there is fault because of course we are we're paying for a function and we want that to be to be exercised so let me in writing respond on a very specific question of administrative error by our delivery agent and who pays the consequential impact okay that would be very helpful um i have a second set of questions really around the the the issues alex neill touched on because very welcome if if you're able to do so publication of the council of economic advisers work on looking at behavioural impacts um Scottish fiscal commission will of course be charged with doing all of this won't they yes yeah okay um in time for forecast yes yeah and the there was it's true to say there was no consideration of behavioural impacts in relation to the land and building transaction tax where we've seen a lot of forestalling in terms of its first implementation and creation so that was before my time so i would need to double check what was provided to mr swiney at the time um that there you know there may have been uh well maybe i could help me as a member of the finance committee at the time there was no behavioural impact assessment done um and this was pointed out by the fiscal commission at that point and we've subsequently seen quite substantial forestalling um the the point i want to make though is that hmrc said that they could in advance of the implementation of a tax if they knew about it coming actually work proactively to stop unintended consequences and put in anti tax avoidance measures um for want of a better phrase is that something you would want to see as a result of the studies that the fiscal commission will do on behavioural impacts and behavioural changes yes okay so you could anticipate you know taking out a lot of the potential difficulties by being proactive and putting tax avoidance measures in place in advance yes one of the issues that the council of economic advisors has been asked to look at is is there any way of mitigating those issues to be able to change the tax position so yes looking at mitigation measures is part of that consideration that's excellent thank you very much any questions from any other members of the committee no in that case i thank very much the cabinet secretary and mr taylor for coming along to give evidence this morning and could i move the committee into private session