 I welcome everyone to this, the 14th meeting of the Public Audit Committee in 2022. The first item on our agenda for committee members is to agree or not to take items from the agenda for 5 and 6 in private, are we agreed? We are agreed, thank you very much for that. I would like to welcome to our first session this morning Graham Simpson, who is an MSP for Central Scotland, who is joining us for the agenda item 2, which is consideration of the 2020-21 audit of South Lanarkshire College. I am pleased to welcome to give evidence to the committee this morning the Auditor General for Scotland, Stephen Boyle. Welcome. We are also joined by Rebecca Seidel from Audit Scotland, who is a performance audit and best value manager there, and from Lucy Nutley, who is a director at Mazzars, who carried out the audit on the ground in the college. Can I invite the Auditor General to begin this session by giving us a short opening statement? I have prepared a section 22 report on the 2021 audit of South Lanarkshire College. The report highlights governance issues at the college, which resulted in areas of non-compliance with the code of good governance for Scotland's colleges. In July 2021, the Scottish Funding Council was alerted to potential governance issues and strained relationships at the college and decided to commission an independent review. The college cancelled board and committee meetings in September and October 2021, and this led the college to being unable to fully comply with the code of good governance. I note that the board and audit and risk committee were not courted on occasions during the year. There were no formal meetings of the board for five months or the Audit and Risk Committee for six months. The college was not able to meet its requirement to report on committee meetings to the regional strategic body. There were delays in finalising and improving minutes of the board and committee meetings and making them publicly available, and there were delays in approving and appointing an internal audit function and approving the internal audit plan for 2021-22. On 30 November 2021, the college board agreed to commission two independent investigations into complaints and grievances against the chair of the board and the principal and interim clerk to the board. At the same meeting, the board agreed to suspend the principal and interim clerk to the board and accepted the offer of the chair to voluntarily step aside from their role while those investigations were being conducted. Convener, those investigations have yet to conclude. The college has taken steps to address the concerns raised by the external auditor and ensure that it is now again compliant with the code of good governance. It has also developed a governance improvement plan. The appointed auditor and I will monitor progress that the college makes in restoring good governance. Finally, convener, I want to highlight two specific areas where I will be limited in the information that I can provide to the committee. That is the content of the review of governance commissioned by the Scottish Funding Council and the scope and conclusions of the independent investigation into complaints and governance, which, as I mentioned, remains in progress. As you note, convener, I am joined by the appointed auditor Lucy Nutley from Mazzars and my colleague, Rebecca Seidel, from our performance audit and best value team. Between the three of us, we will look to answer the committee's questions this morning. Thank you for reminding us that there are still some active investigations taking place. That might provide some limitation on the areas that we can probe into this morning, but we are still an awful lot in the published report that we will be seeking further evidence on in the next hour or so. I turn first of all to the deputy convener of the committee, Sharon Dowey, who is going to open up the questions. Looking at the Scottish Funding Council governance review, paragraph 10, page 4 of the report states that, following discussion with the Lanarkshire board, the Scottish Funding Council commissioned a review of governance at the college at the start of July 2021, can you tell us what prompted the Scottish Funding Council to undertake the review? We will do our best, deputy convener, to share the information that we have on that, and I will invite Lucy Nutley to come in in a moment to update the committee. As we set out in the report that, upon the conclusion of the review by the independent investigator, the information was shared in a number of phases, both with the principal, members of the management team and the board, before a full consideration of the report in redacted form towards the end of 2021. As you know, you mentioned that the concerns about relationships and grievances were prompted by the Lanarkshire board and the principal of South Lanarkshire College to raise concerns with the Scottish Funding Council to ask for their support. Lucy can say a bit more, if she can, about the nature of the scope of that work. I am really just to reiterate what the Auditor General has said. I understand that the SFC undertook that review due to concerns that have been raised with them by the chair of the regional strategic body and the principal of South Lanarkshire College. Is it normal for a body to take out a governance review and then not share its findings with an auditor? There are circumstances here, as we know in the report much of the independent investigation. This is the Scottish Funding Council's investigation, as opposed to the college. Our audit work in our report today is about South Lanarkshire College, as opposed to the Scottish Funding Council. Nonetheless, it matters clearly where it is possible to be transparent. I am tempering my remarks somewhat, because much of the report includes what could be deemed to be personal data and the appropriateness of sharing that. However, in arriving at a stronger position, more effective governance for the college, the college board will need to be satisfied that it is aware of all the relevant factors that had led to a deterioration in effective governance during the year. Lastly, we understand that the college will shortly consider its governance improvement plan that will ought to satisfy itself that has addressed all the relevant content of the investigation and to assure the committee that, through Ms R's work over the course of the year, we will be following the college's progress against that governance improvement plan. Looking at paragraph 11, page 4, the report states that the Scottish Funding Council shared a redacted copy of its report with the college's principal and chair of the board in August. Other board members in the senior management team receive a redacted copy of the report in October and December respectively, but it goes on to say that the redacted Scottish Funding Council report was formally considered by the board in December. Do we know why it took them until December to formally consider the report? I think that there are a combination of factors to that and, unless you can give a point of order perspective on that, the investigation influenced events that followed in terms of the availability of the chair of the board, the principal, the clerk to the board, that meetings were cancelled during this period. We will no doubt have led to a point why it took so long, but it is not really an excuse that good governance requires that meetings are held, scrutiny is effective and that the board can satisfy itself at appropriate regular intervals that it is discharging effective scrutiny over the college's affairs. As a highlight of my opening remarks, the board and the Audit and Risk Committee did not meet for a significant period of five and six months of the year that led to the overall conclusion that they were not meeting the code of good governance for colleges. Probably as much as we were able to say, it may be a line of questioning for the committee to explore directly with the college, but if I may pause for a second, Lucy may wish to add. Just to add to that, November was the first meeting after there had been quite a gap. There was a lot for the board to get through that November meeting, so December was really the first normal meeting. If I can use that phrase, where business was undertaken. That is why it took so long. Just one final paragraph 12. It has the independent auditor notes in their annual audit that they have no assurance that the action plan covers all the recommendations made due to the level of redactions in the Scottish Funding Council report, so I do not know whether you are aware or not of that. The Scottish Funding Council have reviewed the action plan. Are they happy that all the points are covered, and are they involved at all to make sure that the action points are being actioned? I understand that verbal assurances have been given to the South Lanarkshire College Board that the Governance Improvement Plan covers all recommendations that were in the unredacted and redacted report. I have had no such assurances from the SFC. Right, thank you very much indeed. I am now going to turn to Colin Beattie, who has got some questions in an area that the committee is very interested in. Thank you, convener. General, I just want to fully get my head round the different investigations and so on that are going on. My understanding is that the SFC started a governance review in July 2021. It delivered it in August 2021, which is extremely quick. Do we know what the terms of that particular investigation was? On the back of that, the extraordinary board meeting on 30 November 2021, it was agreed to commission two independent investigations. I am assuming that that is one against the chair of the board and one against the principal and the interim clerk. That was in November 2021. We are now in May 2022. How did the SFC manage to do theirs in four weeks or whatever? Here we are months later, and apparently nothing has come out the other end than the other investigations. If I may take your questions in reverse order, I will answer the point that you made about the two latter investigations and I will ask Lucy to come in and update the committee further as much as we are able to on the scope of the Scottish Funding Council investigation and the timing of it. Following the receipt and consideration of the SFC review, as we touch on in the report, the college board considered the redacted SFC review. At that point, it took a decision to suspend both the principal and the interim clerk to the board, and the chair of the board also voluntarily stepped aside at that point. The commission two independent investigations, as you said, are both being undertaken by a law firm, Mr Beattie. The first investigation is to review matters relating to the chair of the board, and the second covers the principal and the interim clerk to the board. Those investigations, and we have been closely monitoring and inquiring of the college in advance of today's committee session, are still on-going, so they have not concluded. The nature and timing of it is probably difficult for us to say terribly much more that these are matters in respect of individuals. We know that investigations can vary in their timing duration and the scope can broaden, depending on what investigators may or may not find whilst they are carrying out investigations. The only concluding comment that I would make on that before turning to Lucy on the comparability with the SFC review is that it is our commitment, and it is my expectation that we will carry out further work on that. I anticipate that that will include once we are clear on the conclusions of the investigations and to report during the 2021-22 audit of South Lanarkshire College. I will pause Mr Beattie and ask Lucy to update the committee further on the funding council investigation. I understand that the SFC review was a lot more limited than the current investigations, which would explain why it happened a lot more quickly. It is probably inappropriate for me to comment on the content of the redacted report and the terms that were shared with me at this point, but I understand that the SFC review, the terms were a lot more narrow than the current investigations for the reasons that the Auditor General set out. Without looking for the conclusions, which clearly are a different issue, do we know what the terms of the different investigations were, what the scope was? I have seen the scope of the SFC review, but I have not seen the scope of the independent investigations as yet. Are you able to share that scope of the SFC investigation? It is the SFC's report, Mr Beattie, so I would need to speak to the SFC before that could be released. As we set out paragraph 10 to the report, the nature of the investigation and the SFC's decision to undertake one was following discussions with both the principle of the college and the regional board, the new college Lanarkshire. We talked about potential governance issues and strained relationships in the college. The SFC's independent investigation was carried out by an experienced college professional from elsewhere in the UK. You can probably tell from the nature of the content of the investigations that much of that contains very personal data for individuals. We are limited in the extent to which we are able to set that out publicly in the report, although there are other related investigations on-going. However, we are entitled to look at the outcomes from the strained relationships and the impact on the board and the functioning of the college. That is what the basis of today's section 22 report is to highlight publicly that, although investigations were on-going, governance in South Lanarkshire College did not operate in accordance with the expected standards. We note that meetings were not being held, minutes were not being published and internal audit function was not in place as expected, although investigations were being carried out in respect of those matters. You are satisfied that, in terms of what we can see visibly, being the impact of the poor governance, that has manifested in your report. We set out for a period during 2021 that South Lanarkshire College's governance was not operating as intended. Millions of pounds of public money that the college is responsible for were not being overseen properly in accordance with the code of good governance for Scotland's colleges. We note in the report that, and it is important that I say this, the college now has taken steps to rectify the areas that we highlight that were non-compliant with the code of governance. They now have an internal audit function, the board is meeting, they are publishing minutes and so forth, but nonetheless, as Ms Arsyn and Lucy Nuttley considered prior to the signing of her audit opinion and consideration of the governance statement, they were not compliant during a period of 2021-22. I was going to press you on the timescales for completion, but from what you are saying, you do not really have a grasp of that at this time. As I mentioned, we are continuing to engage with the college through Ms Arsyn to track progress of it, but other than reporting to the committee today that the investigation is still on-going, there is little else that I can offer, unfortunately, for the committee. I suspect that the investigation will take as long as it is deemed necessary to take, and it is a matter for the college to consider the conclusions and update when they are able to. The two internal investigations are being handled by the same law firm? That is our understanding, and it is the same law firm that is carrying out both investigations. We have not got the results of the independent investigations and you are unable to comment on the conclusions on that. Are you going to give us more comment once the investigations are being completed? Will you be in a position to do that? Is this something that you are going to come back on? As I set out in the conclusion of the report, given the nature of investigations being material to the circumstances and material to the good governance of the college, I commit to undertaking further audit work on that. Ms Ars will complete her audit of the 2021-22 financial year of South Lancer College report publicly through their annual audit report, and upon seeing their conclusions, I will decide whether to do another section 22 report. Given the fact that it feels like an interim report, Mr Beattie, that feels more likely than not. On that point about the independent investigation, you said that it was the same law firm that is carrying out both independent investigations but with two separate teams. How does that work? Is there a Chinese wall between them or does it matter whether the two investigating teams are from the same firm as it intended that they will come together? How does that work? I have not been aware of all the details, but I understand that, yes, there will be Chinese walls in place. It was deemed important by the college that the independent investigations were undertaken by two separate teams, so I want to look at the complaints around the chair and the principal and the clerk to the board. The college will want to be satisfied in the terms of their appointment of the investigators that the appropriate scope has been agreed and how the investigations will be discharged. We can surmise that the law firm will have offered those assurances, but it is not something that we have audited thus far. If it is part of our work next year to report publicly and, indeed, for the committee to be assured on that point, we will need to consider at what point it is the right juncture to bring in the accountable officers if that is the route that we decide to go down. I want to bring in Willie Coffey at this point. Willie Coffey, I want to drill in a wee bit of a can on the issues of non-compliance that you raised. I realise that you might be limited in what you can tell us, but, nevertheless, we have to try to get to the bottom of that. Your report and your comments have told us that the Audit and Risk Committee and the Board basically suddenly stopped meeting round about May and June 2021, and there were no formal meetings of either body. What explanation was given to anyone about that? Surely the staff in the wider student body must have been aware of that. Were any explanations given to anyone about why they suddenly stopped meeting? Good morning, Mr Coffey. I will ask Lucy again just to set out some of the circumstances that we know about for the Board and the Audit and Risk Committee. One of which that Lucy may wish to elaborate on is that there was a change of membership during the course of the relevant months. People stepped down, new members were appointed, we identify factors about induction of members and so forth that may have influenced it. I think that it is particularly relevant that the internal clerk to the Board and the Committee was part of the review and the subsequent suspension, which will no doubt have influenced the timing and availability of meetings to take place. I will ask Lucy to set that out in more detail for the committee. I can only comment on the Audit and Risk Committee meeting—that is the only meeting that I am as standard invited to. That was cancelled with around three hours' notice this September meeting and no explanation was given as to why that meeting had been cancelled. I understand the other meetings that were cancelled in that period were cancelled at relatively short notice, but I do not think that it is short as three hours. They did not meet again for a considerable period. We are talking five and six months, the lapsed presumably before they decided to meet again. Is that right? I think that it took a while to manage diaries and to get to a point where, on 4 November, all board members could meet. There is a vice chair, surely. The Audit and Risk Committee is semi-autonomous and able to act on its own behalf in a volition shoot. Why on earth did they meet? I just cannot understand why the meetings would not continue. As you have said, the Audit and Risk Committee is a good Government. Why did they not convene the board meetings on the vice chair with stepping in? Listen to me, Mr Beattie. What we have here is that they have a vice chair. The vice chair has stepped in as part of the chairing arrangements while the chair has voluntarily stepped aside as part of the investigations. There was turnover of board members, which I have contributed to the timing of it. However, it does not offer a satisfactory explanation for why effective governance in the college fell below the standards of the code of good governance. You are quite right there. The Audit and Risk Committee plays a key role in overseeing the effective running of any organisation, including the public reporting, transparency, oversight of risk, internal controls and so forth. It is unsatisfactory that it did not meet during this period and for six months at that. When they subsequently did meet, presumably in our minutes from that point on, they referred to the gap and explained to anyone the reasons for the gap. They catch up on the business that had elapsed for the five or six months and reported that formally in their minutes and did they publish the minutes? To give you background, Mr Coffey, if I can, the college documents require that there are three members of the Audit and Risk Committee. One member had resigned from the board during the 2021 year. As we put in our timeline and appendix one of the report, the Audit and Risk Committee chair resigned from the board in the 7 September. That took the Audit and Risk Committee membership to one, so it was unable to meet without additional members being co-opted to the Audit and Risk Committee. That did not happen at that point because there were very few members at that point because the college was aware that a number was due to end their tenure at the end of September. I understand that the decision was taken to wait until those new members were in place to bolster the Audit and Risk Committee membership. I understand that. What about the impact on staff and students, the wider impact? Has anyone assessed that? Have you had a chance to look at that in your scope to examine that? Is the board looking at that issue and come to any view about the impact that this hiatus has had? In terms of our work, there is also an important role for the Scottish Funding Council as part of those arrangements. The funding council is responsible for overseeing the performance of the college. Our work looks at the accountability of the use of public funds, the compliance with financial reporting requirements and governance arrangements. We very clearly in this report, as we have set out, looked at the non-compliance with the core of good governance. The role of the board is also clear, Mr Coffey, that they again need to be satisfied that the college is functioning properly and can evidence that through effective scrutiny. In spite of the governance issues that we set out in the report pending the conclusion of further work on the investigations, we have not reported nor have we seen that that has directly translated into the effective functioning of the college, nonetheless. There inevitably will be concerns among staff, students and the local population about the effective running of the college and what that might mean. The report also says that meetings held up after June 21 and up to when the auditor signed their opinion off on the 24th of March 22. Nothing had been made available online up to that point. Is that now corrected as material being published online so that people can see what is going on in this college? Yes, that is our understanding that the material minutes are now being published and available, but to have a diminution in transparency of how public money is being used through the college is not acceptable. It is very clearly a contravene to the requirements of the good governance code. I am now going to turn to Craig Hoy who has a series of questions. Craig, thank you. Good morning, Mr Bald. I just want to turn to the composition roles and capabilities of the board. Before I do that, perhaps it is just a technical question. On 30 September, the tenure of four board members ends and the board fell short in terms of the numbers required by statute. However, the board meets again on 4 November, so, given that it is not staturally competent at that point, what status does that board meet on 4 November have? Lucy can say a bit more about how the college's standing orders effectively will set out how competent meetings have to be in terms of an appropriate quorum of members. The chair is appointed by the Government and the public appointments process, but the board is responsible for the appointment of individual members of the committee. It is reasonable to say that the term of individual board members, the duration and the end point, is known. There ought to be a reasonable anticipation of when the individual tenure of a member is coming to an end, and that public bodies, colleges and others included, can take reasonable steps in anticipation so that they preserve good governance and will have members in place to support the functioning of the college's business. That was clearly an issue as part of the circumstances that we set out in the report. However, Lucy may want to comment a bit further about the detail of how that affected that particular meeting. As the Auditor General said, the end of the tenure was known that the college had taken appropriate steps in line with all the processes that were required to have six new non-executive members waiting in the wings that were ready to be appointed, but due to the cancellation of board meetings, they had been unable to be ratified by the board at the point that the other members left. The RSV New College Lanarkshire board approved the six new non-executive members in October 2021, and they were approved formally by the South Lanarkshire College Board at the start of the meeting on 4 November 2021. Obviously, in terms of good governance, you would assume that the board is fully aware of its role and responsibilities. The board was appointed on 4 November, but it was not inducted and given full induction until the beginning of February 2022. Could you just talk to me briefly about what the normal induction process would cover and what are the risks of having board members who have not gone through that process? The Code of Good Governance recommends that inductions are done promptly following appointment. We understand that all members were sent weighty governance documents, apologies and all the standing orders of the college, but a decision was taken that they would prefer a face-to-face meeting, which at that point was impossible. We had the Omicron variant, so they elected to have face-to-face in February 2022. Obviously, the benefit of hindsight is a wonderful thing, but given the seriousness of the issues that were at play within the college, it would not have been far better that they made sure that the board was fully aware of its roles and responsibilities at that stage. I think that you mentioned the benefit of hindsight, Mr Hoy. Clearly, there were circumstances about a new Covid variant. Perhaps you could have suggested that, rather than waiting for a face-to-face meeting in the knowledge that, at that point, we probably weren't all collectively sure how long that outbreak variant would last and that there had been governance issues already in the college, that an alternative arrangement to support the induction of new members could have been found. As we look back on it, that might have been a better approach to take rather than a wait for an unknown date for when face-to-face inductions could have resumed. Did you ask or did you get any indication as to why inductions didn't take place virtually? As we said in the report, Lucy can say a bit more if she can, that there was a preference for face-to-face induction sessions to take place rather than in a virtual setting. Lucy, do we have anything further to say? No, not really. Okay, thanks very much indeed. You have outlined in the report a number of headings, not just one but a number of headings, where there has been a failure to comply with the code of good governance. We have gone through a few of them. Craig Hoy is just there speaking about the induction of new board members being one example. One other example that I have to say quite worrying for us as the Public Audit Committee of the Scottish Parliament is the failure to appoint internal auditing arrangements so that the existing provider contract expires on 31 July 2021 and the appointment of a new provider was not confirmed until November 2021. There is no internal audit function at South Lanarkshire College for three months. Can you explain why that was and what the impact of that is? You are quite right, convener. We set that out as one of the important areas of non-compliance. We share the committee's views about the necessity of an internal audit as a core part of the effective running of the governance arrangements of public bodies colleges included. I will turn to Lucy in a moment just to set out again some of the circumstances, but I will maybe cover the implications of it. With any organisation, we are not in doubt about the importance of internal audit, but at a time of handover between the outgoing internal auditors and the incoming appointed internal auditors. That matters. It matters for continuity, sharing of intelligence, that the Audit and Risk Committee can be assured of that transfer of information and that the incoming internal auditors are aware of the circumstances as they shape their internal audit plan to support good governance and internal control environment in the college. It is an important gap that we have in the governance and internal control at the college. Much like the conversation that we have just had about the appointment of board members, we would have reasonably anticipated that the timing of the conclusion of the internal auditor's contract would have been known and prepared for so that there was not an important gap as we have set out in the report. I will turn to Lucy just to set out as to what further we can say about why those events transpired as they did. I think that it is much the same as the response that I gave on the board members, that everything was in place, a procurement had taken place, a preferred supplier had been identified, but due to the cancellations of Audit and Risk Committee in board meetings, that appointment was unable to be ratified. In those circumstances, it would not have been expedient to roll over the contract of the existing provider until the procurement deal could have been ratified at the appropriate level in the college governance structure. There must have been an alternative to a gap of there being no audit, no internal audit facility whatsoever, surely? I think that in theory that is possible, probably with the agreement of the outgoing internal auditors that they were prepared to extend their contract. I suspect, convener, that they would have concluded their final work and the options available, I think probably, as Lucy described, that the procurement exercise had been undertaken, rather than accept a six-month gap without an audit committee meeting, is that whether there were other arrangements that could have been explored to have a virtual meeting co-opt other members of the board, so that this important part of the college's governance infrastructure could have been implemented, it feels that it is an area for more clarity from the college as to why wait for six months with no audit and risk committees when this important piece of part of their governance was left in abeyness. I do not wish to labour the point, but for the benefit of people watching this and people that have got an interest in the good governance and working in the success of South Lanarkshire College, could you explain in lay person's terms what the implication is or what the risks are of there being no internal audit function for that period of three months? I will do that, convener. An internal audit function has a plan that they discharge for the year, covering the key risks to the college's function, so they will want to be assured that financial management is operating effectively, governance and align their programme with other aspects of the delivery of the college's strategy. That did not happen, it increases the risk that financial transactions were not happening as intended, governance was not being delivered properly or the aspects of the college's overall strategy were being interrupted. An internal audit also plays an important reactionary role. It is there as a deterrent against fraud and corruption in any organisation and it is there as a conduit for people to raise concerns that they feel that they are unable to do so through other means. It is not having an internal audit function matters, convener. It is a gap in the internal control environment and the effect of running of any organisation. Thank you for that illumination. I think that that is helpful and we will inform any future evidence sessions that we have with the principal people from the college. Before I bring in Graham Simpson, who I know is anxious to come in, I will turn to one final area. That is the area that identifies the report about the ownership of the Governance Improvement Plan, particularly the role of the Lanarkshire Board and the Scottish Funding Council. Can you tell us what your understanding is of the role that each of those bodies will play in monitoring the progress of the implementation of the Governance Improvement Plan that has been agreed to? I will start, and I will bring in Lucien. I think that probably Rebecca is well to say a bit of word for the committee about the role of the Lanarkshire Board, which is also changing, given some of the recent considerations that the Scottish Government has consulted on. The SFC, first of all, is responsible for overseeing the performance of Scotland's colleges. As we have discussed already this morning, it commissioned the initial investigation following concerns raised by the Lanarkshire Board and the principal to areas of concern about grievance, conduct and so forth. The Scottish Funding Council will want to be assured that the Improvement Plan is complete, reflects both its report and those of the independent investigations, and that good governance is maintained in the college convener. I will turn to Rebecca next to say about what role the regional board will play given some of the uncertainty about its duration. As Auditor General said, the regional strategic body, so the Lanarkshire Board has a responsibility for ensuring that both of the colleges in the Lanarkshire region are providing high quality, further and higher education. The regional arrangements were established in 2014, but following a review by the SFC in 2020, they found that the regional arrangements were not working as originally anticipated and were probably having a negative impact on the functioning of both colleges. They found that the regional arrangements were not well understood or really accepted in both colleges, that they were leading to some friction between the two colleges and distracting from the core day-to-day delivery of their mission for students and providing better outcomes for students. On the back of that review, the SFC recommended that the regional arrangement be dissolved and that both colleges manage themselves as separate entities reporting directly to the Scottish Funding Council. That recommendation was made in 2020. Legislative change would be required to allow that to happen because the Lanarkshire arrangements were based on the Lanarkshire Order 2014, so that would require Scottish Government consent. The Scottish Government endorsed that recommendation towards the end of 2021 when it responded to the SFC's wider review of the provision of tertiary education, but at that point—and that was October 2021—a lot of the issues that we discussed in the section 22 report were happening. No further action has been taken to date to take that forward and a timetable for the dissolution of the regional arrangements has not yet been agreed. I think that it probably just speaks to a level of uncertainty about who—other than the SFC. Importantly, the South Lanarkshire Colleges Board itself will oversee the improvement plan, but the role and the duration of new college Lanarkshire as the regional board, as Rebecca rightly highlighted, remains uncertain. Okay, thank you. I think that there are wider policy implications of that, which are probably not necessarily for us to pick up, but I think are of interest to us as MSPs. I have one final question, which is picked up in your paragraph 24 of the report, where you identify additional costs that have been incurred by the college in its attempt to try to understand and then plan for improvements to the governance structure. Do you anticipate that there will be further additional costs as a result of the improvement plan that has been agreed to? I think that the brief answer is that we do not know how much those investigations, additional costs, precisely have been incurred. It is part of our audit of the current financial year and we expect that that will be set out by the college in its financial reporting on the 2021-22 year. The scale of that, I would anticipate, is growing, given the fact that the investigations remain live. Beyond that, we are probably not able to give a precise figure of the information that we have at this stage, but it remains part of our audit for the year ahead. Thank you, that is reassuring. I am now going to turn to Graham Simpson, who I am delighted to welcome to the committee this morning. Graham, over to you. Well, thanks very much, convener. It's good to be back at the committee. Of course, I served on this committee in the last session, so I should say at the start that I've got no relevant interest to declare. I don't think that that carries over from one session to another. I've been interested to listen to the line of questioning from members, and I just want to pick up on some of that, and then I've got some questions of my own. I've been aware of concerns at the college for some time now. I've been approached by people at the college and in answer to Willie Coffey's question, who asked about the impact on staff. Having been an elected member as a councillor and an MSP for some time, I have never come across a situation where people are as scared as they are, and this is current staff and former staff. I've never seen anything like it, and I'll give the committee some background to that because you haven't had it yet. Craig Hoy mentioned the 4 November meeting last year, where there were six new board members. Of course, that was the meeting where the principal, Aileen McEchnie, and the interim clerk to the board, Brian Keegan, were suspended. Is it appropriate that a board with six new members who hadn't gone through the proper training should be taking a big decision like that? Following on from that, the Scottish Funding Council was present at that meeting, so is that appropriate? You're right in terms of the dates that you set out and the circumstances that the principal and the interim clerk to the board were suspended at that meeting. Apologies, I'm going to ask Lucy just to sort that out. Sorry, apologies. The first meeting on 4 November was not where the suspensions happened. That was the 30th of November. It was a separate meeting. I think that the same point applies though. You have brand new members who hadn't gone through the proper training by then. We have a representative of the Scottish Funding Council present at that meeting, so the same question applies whether it was the fourth or the thirtieth. As we set out in the timeline appendix one to the report, we had an extraordinary board meeting on the 30th of November. Although those board members hadn't been through induction, which we've touched on already this morning, you would expect that they would have been planned and programmed to have taken place, they were appointed board members at that point. If the board takes a decision consistent with its standing orders and they were quoted, then the decision is not ultra-virus, as we would see it, Mr Simpson. So notwithstanding the fact that the induction had taken place, it is a decision that is competent for a board to take. In respect of your other question, in terms of attendance of the Scottish Funding Council, we would observe that the Scottish Funding Council has a role to oversee the performance of Scotland's colleges. It's not for the funding council to take that decision, I mean that is a matter for the board to take, but we wouldn't per se see it as an unusual or unreasonable set of circumstances for the funding council to be represented at or attend or observe boards meetings. We've mentioned a report from the Scottish Funding Council, we've got on-going investigations, which seem to be stuck for some reason, don't seem to be going anywhere, so you've got two key members of staff who've been suspended for six months. That doesn't seem acceptable to me, but there's another report as well. That was a report commissioned by the now suspended Principal Aileen McEchnie, a report commissioned from a company called AZETS. Are you aware of that report and do you know what it covers? Liz, you can say a bit more about our understanding of that report. AZETS is a firm of accountants, auditors and advisers. The nature of the content of their review, which you are right in terms of our understanding, was commissioned by the currently suspended Principal Lucy, you can say a bit more. What I would say, Mr Simpson, is in respect of the report that we prepared on the section 22 on the 2021 audit, notes the life status of investigations. As I suggested in one of my earlier responses, it is something of an interim style reporting that, while we await the conclusion of other investigations, we are limited to the extent to which we are able to offer full and complete views on the circumstances at the college. I will ask Lucy to say a word or two more about what her understanding of the AZETS report is. The AZETS report, as the Auditor General said, was commissioned by the Principal in early 2021. The report identified a number of recommendations for improvements in processes and controls at the colleges around policies and procedures, for example, which we considered as part of our external audit, but, as we have said, it is not within the scope of the section 22 report. I understand that, but the very commissioning of that report, I think that the committee needs a little bit of background to all this that it has not had. I want to read out minutes of the Board of Management from June 8, 2021. I will ask you, Auditor General, if you are aware of any of this. Under a section entitled internal audit update, the chair updated members on a number of allegations of potential staff misconduct within one of the college faculties. The allegations related to three separate matters. Systematic bullying and intimidation of a number of staff over a prolonged period. Potential financial irregularities. Brackets of private businesses operating from college premises using college materials and lecturing staff time. Closed brackets. Potential timetabling anomalies. Brackets fabrication of hours of students of classes. Fabrication of hours students and classes. The allegation is, and this has actually been reported in the press previously. I am not saying anything new, but we have it in black and white here in a Board of Management minutes. The allegation of private businesses operating from college premises. When you said earlier, Auditor General, that millions of pounds of public money were not being overseen, that is extremely relevant to this. Were you aware of these allegations? Thank you, Mr Simpson. The generality of the concerns, yes, the specific minute that you referred to, I had not read that board minute from the college. Noting some of the phrases that you referred to in respect of allegations about behaviours, potential irregularities and potential fabrications, are all very serious matters. No doubt, and I think that they speak to some of the earlier conversation that the committee has had this morning about, in such circumstances, effective governance, internal control environment, the absence of an internal audit function, are all very serious. In discharging their oversight of public funds, public bodies need to have effective control environment governance arrangements in place, and the board will want to be satisfied. I am sure that all of these allegations are properly investigated. Of course, convener, in the event that that is deemed that these allegations of such seriousness have resulted in not just improper conduct but potential financial irregularities, there is an obligation to report such concerns to Police Scotland. That is my view that this could be a police matter, but do you have a role, if people want to come to you with information, even if it is in confidence? I do, Mr Simpson, under the Public Interest Disclosure Act, Audit Scotland, is a prescribed organisation. We welcome and encourage any members of public with any relevant information, any members of staff of public bodies, and indeed board members. If they wish to raise any concerns with Audit Scotland, we are clear on our website about how they can do that, and we would actively encourage them to do so. Convener, I have no further questions, but I will invite the committee to take those allegations extremely seriously. They do relate to your brief. I think that you should be delving deeper into what has been going on at this college, and I will leave it there. Right, thank you, Mr Simpson. I appreciate that pointer. I thank all the members who have participated this morning in this evidence session, and thank the witnesses, Auditor General, Rebecca Seidel and Lucy Nutley. Thank you very much for your co-operation and openness about the Audit, the section 22 report that you have been required to produce. We will indeed be considering what our next steps are to pursue our interest in what is, by all accounts, and looking at the appendix 1 of the report that looks very much like a public institution that has been in crisis. Thank you very much indeed, and I will now suspend the meeting to allow a change over of witnesses to take place. Good morning. I would like now to resume our session today. We have agenda item 3, which is about the administration of Scottish income tax, and the reports that we have received from Audit Scotland and the National Audit Office, which we took evidence on on 3 February. We wanted to further explore some of the implications of that report, which we have a series of questions on this morning. However, I would like to begin by welcoming our witnesses this morning. Alison Stafford, who is the director general of the Scottish Exchequer. Good morning, Alison. Fiona Tom, who is the head of income tax and reserve tax at the Scottish Government. We have also got Jonathan Athau, director general for customer strategy and tax design at the HMRC, and Jackie McGeehan, who is the deputy director for income tax policy at HMRC. You are very welcome. We would like to begin the session, Alison Stafford, by inviting you to make a short opening statement, and then we will proceed to ask a series of questions. Thank you very much. Good morning, convener, and good morning all committee members. Scotland has clearly been in the vanguard, implementing a rapid devolution of fiscal powers, and the onset of powers in Scotland to vary tax rates and bans for non-savings, non-dividend income tax from 2017-18 has also relied on the administration of this partially devolved tax by HMRC. The areas of assurance for the Scottish Government come from three sources. First, HMRC having a designated and additional accounting officer responsible for Scottish income tax. Second, the Scottish Government and HMRC having a service level agreement with a performance framework, which is vigilantly monitored and adapted as our mutual experience grows. And third, that the National Audit Office provides an audit opinion, which has confirmed, amongst other assurances, that the Scottish income tax outturn for 2019-20 has been fairly stated by HMRC. I also take comfort from the Auditor General for Scotland being satisfied that the findings and conclusions in the NAO controller and Auditor General's report are reasonably based. This also provides the Scottish Parliament with valuable assurance with regard to this important aspect of the Scottish budget. That said, we continue to work with HMRC and Revenue Scotland to ensure that Scottish public finances are underpinned by tax administration arrangements, which function effectively and as intended, ensuring value for money to the taxpayer. So, my colleague Fiona Tom from the Scottish Government's tax directorate, and I look forward to answering the committee's questions today. Thank you very much indeed, and thanks for setting out that introductory framework. I'm sure that you read the committee's evidence session on the third of February in the areas that I think particularly exercise does. We're around the fact that here we are in year 4 and 5 of a distinctive Scottish income tax system, and there appear to be what in our eyes look like significant gaps in the data available, and the evidence that we think is necessary to allow Parliament and the Government to make informed decisions and choices about income tax policy in Scotland. Particularly, we were interested in the level of compliance activity that Scotland-specific. We were interested in whether or not there appeared to be sufficient or any data on the tax gap in Scotland and the extent to which this information could be interrogated and analysed, which we think is extremely important in fashioning the evidence upon which we can build a sustainable and effective tax system. You mentioned service-level agreement, and we will return to that. Again, we're very pleased that both the Scottish Exchequer and HMRC are here, as parties, to that service-level agreement, because that's something that we do also want to explore in our questions. I want to turn first of all to the Deputy convener of the committee, Sharon Dowey, who's got an opening question. In his report to the committee, the Comptroller and Auditor General concluded that HMRC's outcome figures and administration of the system was reasonable, and that the administration of Scottish income tax had now reached what is essentially the implementation of business as usual. Also that HMRC's focus must now be on refining its processes to maintain an accurate and complete record of the Scottish taxpayer population and in continuing to monitor the risk of non-compliance that might or might not rise as a result of divergence between UK and Scottish tax rates. What areas of refinement are still required to maintain an accurate and complete Scottish taxpayer population? Scottish taxpayer identification is at the core of what we're doing, to administer Scottish income tax, and it's an on-going process. It's not something that we do once and leave. The population is clearly not a static one, so it's an on-going process. Every year we do a postcode check, and every two years we do clash our address data. The address data that we hold in our systems is checked against third-party data, electoral roll, credit agencies, post office data, things like that, to match individuals with that third-party data. We're able to match 70 per cent of individuals in that exercise. We look at those matched individuals if the address is the same in 99.9 per cent of cases, but there are a small number of cases where the address will be different and it will be for some on one side of the border or the others. We then need to check which side of the border the individual is actually living on, whether it's Scotland or England. We write to them, we ask them to update their address records or tell us if their addresses are wrong. For the remaining 30 per cent where we didn't get a match, we will look at our pay-as-you-earn records, what we've got in our real-time information system, and we look at our self-assessment records for the addresses. In those cases, we're able to corroborate the addresses. In total, we think that we have corroboration for 98 to 99 per cent of Scottish taxpayers. The remaining 1 per cent, not necessarily incorrect, we just haven't been able to corroborate them. We get a very good level of accuracy and we simply keep that going backed up by communications to taxpayers, encouraging them to tell us when they change their address so that we can keep addresses up-to-date. We also get addresses from other sources, but we maintain that. We're constantly repeating the communication, we're constantly checking our databases and making sure that those addresses are under correct format. Any of the errors that are found, does it appear to be intentional or unintentional? We see no evidence of intentional errors. Most people will tell us when they move house so that we get their address. People sometimes give us incorrect post codes. We get the addresses in a format that doesn't quite work with the system and we have a process of checking those post codes and correcting them where, where someone's got an employment or a pension, we will correct those incorrect post codes to make sure that we have them accurately recorded as Scottish taxpayers. There's no loss to the Scottish Government in terms of any revenue that they're accurately recorded as Scottish taxpayers. I'm going to now invite Craig Hoy to ask some questions. My first question relates to finding in the NAO report that says that HMRC has limited performance data available about its compliance activities in Scotland. Why is that the case that there is limited performance data on compliance activities and what, if anything, has been done to try and rectify that? Let me start. There are two key factors here. One, as Jackie has said at the moment, we don't think there is a particular issue with people not complying or trying to misrepresent their address. That reflects partly the work we're doing, but also the fact that the rates, there is not a large differential between rates of income tax. Secondly, our approach to non-compliance as HMRC is, we try to be very holistic, so we try and look at how we can minimise non-compliance across the UK as a whole and across all the taxes we administer. Obviously, income tax is one of the largest revenue raisers, so it obviously requires due care, but we do look across all taxes. Our approach at the moment is to look very much at where we can maximise compliance activity for the UK as a whole. That compliance activity isn't always just chasing money. Obviously, we want to collect all the money that is due under the law, but we also have responsibilities in terms of anti-money laundering. We are often sometimes tackling fraud cases, which involve organised crime. We have a number of objectives for our compliance activity. Some of that is about collecting money, some of it is about tackling wider illegal activity. From that point of view, fundamentally, we operate what is the best return, not necessarily financial return, but what is the best public policy return across the UK as a whole. That is how we tend to operate and means that our systems are set up in a way to record that. Obviously, there will be different geographic patterns between Scotland and the rest of the UK or at more granular levels than that. That is not how our systems are set up, because of the way we optimise or try to optimise our activities. You are saying that the variation is not particularly significant, so you do not think that you would have concerns. However, somebody earning £50,000 in Scotland will pay £1,489.10 more in tax in Scotland than the rest of the UK. Given that, when you look at tax, there is always compliance, there is evasion and there is avoidance, what level of variance would you start to have significant concerns that you would need to probe deeper into this data? It is very hard to give an exact figure, because I think that it would depend also on understanding what patterns we were seeing in the work that Jackie talked about in terms of compliance. We will be seeing more people with problems and identifying their residents, and could we identify that as some deliberate action, either deliberately misdating or not updating or negligent behaviours. We would look at those sorts of behaviours as well as the difference in rates. Our approach to compliance is different for different taxpayer groups. We have a dedicated team of people who look at what we call high net worth individuals, and those in Scotland will be managed differently. High net worth individuals might be a group who are most at risk of trying to arrange their affairs in a way that might minimise their tax. What we will do there is to have a unit that looks at those individuals. Obviously, their residents will be part of that work. Again, it is about a tailored approach, not just geographically, but also thinking about the different types of taxpayer we have and the different opportunities different taxpayers will have to arrange their affairs either legally or less so. Again, that is the approach that we would take there. Do you know that the Scottish Government has taken a decision to raise tax on middle-income earners upwards and you identify high net worth individuals or a millionaire? A millionaire with a house in North Berwick and one in Berwick upon Tweet who works both in London and Edinburgh, that is conceivably the case. Is that no agree area that concerns you? No, I think that we would say that we have clear rules in terms of looking at residents. Of course, there have been long-standing issues around residents internationally as well as within the UK. Jackie, do you want to comment on the issues there about the clarity of the residents rules? Residents rules are, we think, clear in legislation. For most people, it is absolutely clear cut where they live, whether they have one residence and it is in Scotland or it is in England or Wales or Northern Ireland. For those who have two, it is a question of where they spend their main residences, where they spend most of their time, where their life is. If they spend most of their time in Scotland, then they are a Scottish taxpayer. If someone has multiple residences and it is not clear where their main residences are, then it becomes a day counting issue. How much time do they spend on each of those before we can reach the conclusion? It is fact-based. It is not something that someone chooses. If they cannot say that they are fancy being a Scottish taxpayer or an English taxpayer, it is based on where they actually live and spend their life. If I fly in and out of the country from Buenos Aires, you can probably monitor and decount me much easier than if I go between North Barrack and Barrack upon Tweetus. How do you monitor that? Are you just taking it at face value? Are you taking people's word for it? In most cases, we do not think that there is an issue, but if we are looking at it from an inquiry point of view, we would be seeking evidence, really, about where someone is living, where do their children go to school, that kind of thing. Are they a member of a golf club and spending a lot of time? If it got into that level of an inquiry, which would not often, but there is evidence that we can look at to decide where someone is actually living. Thank you very much. The last session, Colin Beattie, got into some detail about one aspect of the report that we received. He is keen to get back into that level of detail on this aspect, so I am going to invite Colin Beattie to put some questions to you. I do have a couple of specific questions to ask, but one of the things that I did do after the last meeting was that I looked at the NaO report, and I extracted from it just an A4 page. It could have been more, but I just kept the main ones. This was where there were references to estimates, where there was information that was not available, where projections and all sorts of things were involved. If you take each one individually, perhaps it is explainable away, but if you take them in the aggregate, surely the impact on Scottish income tax is quite significant. I do not know whether you have done an exercise crudely like this, but it seems to me that taking this in the round, there must be concerns as to the accuracy of the income tax take. Obviously, that has huge implications both for the Scottish Government and for HMRC. I would ask you in a general way, how are you going to deal with all these? Are we going to get away from all these estimates and the fact that we cannot identify individual figures and so forth? Maybe that is one for you, Jackie. I might come on this one. I think that there are a number of different figures that we are talking about here. Let me move it into three groups. First, the amount of income tax that is Scottish income tax. 97 per cent of that is identified because, through the PAYE system or through self-assessment, there are actual liabilities that have been established. That is just adding up all of those residents in Scotland—either what they pay through PAYE or what they pay through self-assessment. 97 per cent is established liabilities taken off forms. All you are doing there is not making any estimates, so you are just adding things up. That is one element. There is a bit that we have to adjust because we know that there will be some people with self-assessment returns who will be late filers and we will not have that information. The 3 per cent is estimated, but 97 per cent is based on established liability. We have a high degree of confidence there. While there are estimates in that, they do not affect that 97 per cent. There is an awful lot of estimates here. There are two other elements where the estimates are needed. One is in the forecasts. We have the Office for Budget Responsibility and the Scottish Fiscal Commission making forecasts. Some of that forecast data relies on some of the assumptions that you have there. That does not affect the money that is achieved, but it is important for setting budgets and overall plans in public spending at the UK level and in Scotland. Those estimates will affect those forecasts. Then there is the block grant adjustment. Again, some of those assumptions will affect, but in terms of the outturn data, I really want to go back to that. That is 97 per cent on established liabilities. Having worked in related areas for a long time, I know that we need to make lots of assumptions, particularly with issues of tax. We will probably get on to this later. There is always trying to understand what non-compliance is. That is a very difficult issue to tackle, and you will need to make assumptions from that. In terms of the outturned tax collected, I will come back to my fact that 97 per cent of that is on established liabilities. The 3 per cent does not require estimation, but 97 per cent is pretty clearly established. staff wants to come on that question as well. Just to emphasise the difference between what the National Audit Office opinion is in relation to the 2019-20 actual tax recorded and the difference between that and the provisional figures that have been audited for 2021. As Jonathan has said, 2019-20 is the figure that we have to place reliance on as the tax collected and due to Scotland. That is a really important figure for us in Scotland. It is the one that we use to assess how the forecasts that we used in setting the budget that comes from the Scottish Fiscal Commission performed. The difference between the Scottish Fiscal Commission's forecast and the block grant adjustments that are associated with that was £34 million. That adjustment had to be made in our current year, the 2022-23 budget. Those elements of estimation to arrive at the figure of £11.833 million is the thing that we absolutely place reliance on. Reading the detail of the National Audit Office and the assurance that it can give the Government on that is absolutely essential. I am not wishing to diminish the work that the National Audit Office has done on the provisional figure for the 2021 year, but we actually do not use that. We rely on the forecasts that are generated by the Scottish Fiscal Commission in actually setting the budget and then determining what is the flow of cash in that year that comes from the Treasury in terms of our budget expenditure plans. In terms of which of the estimates that I am most vigilant on to get as robust a position from the National Audit Office's opinion of the work of the HMLC, it is that 3 per cent that Jonathan mentioned. The impact of the net adjustment was £150 million, which would then be a net estimation of minus 1.3 per cent. It was important to make the distinction about which are the numbers that we use in Scotland. The number that the National Audit Office is looking at for the 2021 is for the relief of the purposes of the HMLC account. We have to wait until the full outturn, when the self-assessments and all those come in to get the final figure for 2021. I just wanted to clarify and say where the emphasis of assurance is absolutely needed for us in Scotland, because it is the outturn figure that we use and we rely on the Scottish Fiscal Commission for all the provisional work. If I look at the fairly long list of estimates and workarounds that came out in the NAO report, do most of those exist for income tax in the rest of the UK, or are they really specific to Scotland because of the way the settlement is being done? There will be a wide number of estimates used at a UK level as well. The challenge that we have, and I will explore this in terms of compliance data, is sometimes having a Scottish specific figure for some of these estimates is more challenging to produce because of the way the data is collected, because of historical decisions about the way IT systems were set up. We do not always have a split whether that is Scotland or Wales or Northern Ireland or regions of England. We often do not have a lower level of geography to allow us to break down some of those assumptions. Assumptions will be used at a UK level. Sometimes we are using a UK assumption and applying it to Scotland. Given devolution across the different nations, you would expect that by now there is some effect of what will be taking place on being able to give individual figures to the individual nations? On certain parts of these figures, we can be very specific as I go back to my 97%. The challenge for some of the other estimates is, do we have that data available? There is a wider conversation going on between the Scottish Government and the Scottish Parliament about what other economic data should be available for Scotland. Often it is that economic data that is needed to work out what share of an activity arises in Scotland. There is a wider programme there in terms of more data. Sometimes we are constrained by decisions that were made well before many of the current devolution arrangements were ever considered that limits our ability to provide more cranial estimates. I still remain of the opinion that the aggregate total of all these estimates and workarounds and so on must be significant. It is a concern, but let me move on to something specific. You have very touched on the question of the missing Scottish post codes. My concern is that this has increased from 13,708 to 23,351 when the NAO last reported. That has increased to 70 per cent. Although points have already been made that that is somewhat like 1 per cent of the population, there is still the concern that the missing tax payers can equate to a fair or large sum of money in terms of tax, especially if they turn out to be high net worth individuals. Three questions. What is behind the increase? What is the likely impact on revenues? What is HMRC doing to fix this? I might start and then hand over to Jackie. This issue of missing post codes is something that we will want to monitor. It is an important indicator for us. If I go back to some of the questions that I answered earlier, we will want to just keep making certain that we understand what is happening with this number and understanding exactly what is the longer term trend, while four or five years might feel quite a long time. For us, in terms of operating tax systems, we need a bit of a track record to really understand how data is changing over time. What we do is, if we have problems with post codes, as Jackie said, we have a process for working that through. We are able to identify sometimes that those tax payers no longer have any liabilities. It may be the reason we no longer have any record for them is maybe they have left work, and that might be the reason we don't have a post code for them, but it might mean that they no longer have a tax liability. There will be reasons for that, and what we will do is work through all of those post codes, identify where we think a missing post code should be in Scotland, and so far we don't see any widespread problems here. I think that we will want to monitor how that number changes over time. It is an important indicator. Also, back to your point, there are 2.5 million income tax payers in Scotland, so when we are talking about numbers 25,000, while they are quite large, it is 0.1% of tax payers, so the numbers remain very small. We do not think that there is any disproportionate effect on income tax raised in Scotland. Jackie, do you have anything that you want to add? The address data that we get comes from a number of different sources, so individual tax payers will tell us their address. Employers can give us the address of employees who join them, and we get data from other Government departments. As you might imagine, and similar to many other organisations, the data that we get in is not always perfect, and we need to do quite a lot of work to cleanse that data and make sure that we can put it right. We check the post codes annually, and we correct all the post codes for those who are in employment or getting pension, who are tax payers. We correct all those in-year, so there is no loss to the Scottish Government in terms of the revenue. We will monitor that, but the data is coming from other sources. We then put it right to the extent that we need to get the right number of tax for Scotland, but it is a very small proportion of the population, a very tiny proportion of tax that is due to Scotland. I will check on a figure that you gave. You said that this represented 0.1 per cent to the taxpayer population. Is not it 1 per cent? Sorry, my fault. It is 1 per cent. Just to be sure that we are on the same page. You have not said what is behind the increase. At the moment, we do not have a good indication of why that is. It might arise because of changes in the economy. I think that we will want to understand what is going on, is it people moving between those different categories that Jackie was talking about that creates more noise in the system? At the moment, we do not have a good indication of that, but it is something that we will want to understand. Is it about economic change or is there something else going on? Back to my point, this is something that we will continue to monitor because we think that it is a valuable piece of information that tells us that it might be an early indication of other concerns that we could have with the way the system is operating. You did not indicate any scale of the impact on revenues? As Jackie said, what we will do is we will work through that. We do not think that there is any meaningful impact on revenues because while that is the starting position of those taxpayers, we then do all the work to make certain that we have a proper postcode for where there is a problem. By the end of that, there is no residual problem. We are confident that we are able to tackle it, but it is when we want to keep an eye on to make certain that it stays a small problem. The Public Accounts Committee in Westminster reported on the HMRC's management of tax debt, which is particularly relevant for the Covid period. It came up with a number of conclusions, principally six bullet points, and some of them are quite strongly worded. For example, we are not satisfied that HMRC has a clear plan to tackle the amount of tax debt that has built up during the pandemic. HMRC is not being ambitious enough in bringing down debt levels and securing the resources that that will require. Rogue companies are exploiting the pandemic to profit at the expense of taxpayers. Scotland will not be exempt from that, I am sure of that. HMRC is far behind where it needs to be in making good use of data to manage debt effectively. HMRC is not using all relevant data sources to understand how the pandemic is affecting taxpayers' ability to pay. Finally, we are concerned that HMRC is not doing enough to identify vulnerable people who need extra support with their debts. Has HMRC accepted those conclusions? We would not express the issue in quite the same way. I think that there are elements of the report that bring out some challenges that we face, but I would not characterise it as saying that we do not have plans or approaches. So HMRC has not accepted the findings of the committee report? I would not say what I said before. Is it yes or no? There are elements of the report that are absolutely true. The way it is characterised is not, I do not think that it is correct. There are elements of this that we will partially accept, because I think that there is a great deal of important work to be done here. So if I just go back to the overall issues, during the pandemic we deliberately chose to make changes in the way we collected debt to recognise that both businesses and individuals would be in financial distress, and that caused a very large rise in debt. So the outstanding debt balance we have rose to £70 billion. Now we have brought that down, and I think at the end of the last financial year that was £40 billion of outstanding debt, but there is further to go. And I think what the report says is we now need to work through how do we continue to get that debt to fall. So we've already made substantial inroads into that stock of debt, but there is further to go. And in that respect I think the committee is absolutely right that there is more to be done here to reduce debt back towards the level we saw pre-pandemic. So in that sense I'm completely with the committee. I think the way the committee's recommendations are expressed implies we have not done anything or do not have clear plans. We are working through those plans. Whether those plans will need to change is another question. This has been an unprecedented time for us, and we need to work out what we need to do differently now. Has HMRC responded to the committee report? I don't think we've responded yet, so best of my knowledge. Now you've obviously got a huge task here, because the forward pandemic you managed about 3.8 million taxpayers in debt. That, as it's September 2021, that's 6.2 million. That's a huge hill to climb. Indeed, as I said, the overall stock of debt reached 70 billion as a peak during the pandemic. We've managed to bring that down to around 40 billion, but that is still above the levels we saw pre-pandemic, and your figures are entirely consistent with that, so there is still further to go. The challenge here is to make certain we strike the right balance. There will be individuals or businesses who are still in financial difficulty, and we wish to support those taxpayers who can't pay, but where taxpayers can pay, it's also important we collect that money, because, as you all know, that money is important for the UK and for the Scottish Government in funding public services. Do we have any specific figures for Scotland in terms of this? I do not know. I can update you if we have anything. I think that the committee would be interested if there were specific figures about debt in Scotland. I will take that away and write to the committee on that one. Johnathan, can you tell us when you will officially respond to that report? I understand that there is a three-month grace period on this, so we will normally be responding within that time period. I cannot comment any more. It is not fully in my area of responsibility, so I am not fully sighted on all of the ins and outs with that report. We will, obviously, await that with interest. Can I go back to Alison Stafford that you said? As I understand the process here, the amendments to the Scotland Act provided for the setting of a Scottish rate of income tax from April 2017 onwards. HMRC collects and administers Scottish income tax, and HMRC's accounts are audited by the National Audit Office. The Comptroller and Audit General is required to report to the Scottish Parliament on HMRC's administration of Scottish income tax. His seventh report on Scottish income tax was laid in Parliament on 14 January 2022, but you told us earlier on that you do not take any account of NAO's estimates of Scottish income tax. Why would you ignore that important body of evidence and solely rely on the Scottish Fiscal Commission's estimates? The way that the arrangements are for Scotland is that the fiscal framework, which is the arrangement that has been agreed by the Scottish Government and the UK Government, is what determines how we set our budgets in the first place and how those budgets are adjusted when we have the outturned data. The arrangements for that require us, and it is in legislation, to use the forecasts as generated by the Scottish Fiscal Commission when taking into account the level of income tax that we bring into our budget each year. That is the arrangement that is in place, and so we are absolutely complying with that. The Scottish Fiscal Commission set out and it published how it generates the forecasts for the partially devolved tax-like income tax, but also for the taxes that are fully devolved. Those are collected and administered by Revenue Scotland and the NDRI tax, in effect, that is administered by local government. We use what we are required to use under the fiscal framework and the legislation that is in place in Scotland. Obviously, the Scottish Fiscal Commission do have access, and this is one of the things that, over the time of there being some data available in terms of the real-time information, there are different sources that the Scottish Fiscal Commission draws upon. It publishes the basis on which it works through its forecasts. In terms of the strict requirements of what we need to use, it is set out in the fiscal framework and we use the Scottish Fiscal Commission's forecasts as set out in Scottish legislation. I understand that you are complying with your requirements by legislation, but would it not, as the director general of the Scottish Exchequer, make sense for you to at least take into account the NEO's estimates of future tax take? So, what makes sense for me is to actually use what comes from the Scottish Fiscal Commission. Do they use the NEO's estimates as part of their deliberations? They will use a whole range of data sources, and that is published. Does that include the NEO? They will use a whole range of things that come from different sources. It won't necessarily be the NEO. Some of it actually will be from HMRC, but from other sources as well. So, those are the figures that we use. It's part of what's set up, as I say, that we're required to use in operating the fiscal framework here in Scotland as part of the whole package that's the fiscal devolution that's taken place. Okay. Maybe it's the DG for the Scottish Exchequer. Could you possibly write to the committee to let us know what those range of sources are that are used? By the Scottish Fiscal Commission? Yes. Of course, by all means. I provide the link for all the different data sources that they use. It's published by all means. I'm happy to do that. Thank you, but we're still not clear whether the NEO is included in that. I can probably just clarify. As far as I'm aware, they don't use the HMRC provisional estimate as part of their current forecasting data sources. Obviously, if you wanted to have more information about why or why not, that is used within that. You would have to speak to the Scottish Fiscal Commission, but as far as we're aware, they do not use it in their current forecasting of Scottish income tax. However, it is an additional Scottish-specific number that we can compare against what we get from the Scottish Fiscal Commission. If they were completely different, that would be something that we would be aware of and be discussing with the Scottish Fiscal Commission. However, to answer your initial question, we don't think that they use it, but we can, of course, send a list of the data sources that they use. I'm not trying to trip anybody up, so we don't think that the Scottish Fiscal Commission uses it, but you do use it. No, we... As a reference point. No, I'm saying that Alison clearly stated that we don't use it because we use the Scottish Fiscal Commission's forecast for our budget. However, I'm saying that it is an additional piece of data that we don't ever look at. It is an additional piece of data that is part of our overarching understanding of Scottish income tax, but it is not used in our budget setting because that is done through SFC figures and the actual outturn data. Okay, okay. Well, maybe we'll return to that before we finish. I want to go back, Jonathan Athau, to you and just to talk through one of the points that was made in the Audit Scotland report, that accompanies the NAO report, was around good governance and assurance arrangements and keeping those under continual review. The report says specifically that this should include on-going consideration of the frequency of third-party data checks and service level agreement performance measures, such as setting compliance target levels for Scottish taxpayers without S-prefixes. Why has HMRC still not introduced a target for the number of missing S-prefixes and will it do so at some point in the future? I might ask Jackie to just talk briefly about how S-prefixes work and then if I come back then on what we will then do around that. Do you want to just explain how S-prefixes work? So, when we identify a taxpayer as Scottish, we will send their employer their tax code every year. We send tax codes out for all payers who earn taxpayers to their employer usually in advance of the start of the tax year and that's the code they should apply to that individual. Where they're Scottish, there's an S prefix on the code. So, those taxpayers are correctly identified by us as Scottish. In a small number of cases, the employer for whatever reason doesn't apply that code correctly, so doesn't treat the individual as a Scottish taxpayer, they apply a different code, they don't change the code. We identify those and we take action, we write to the employer and say you haven't applied the correct code, you need to apply it, here it is, please do it. Where employers seem to be persistently failing, we will contact them and find out why. Sometimes they've got problems with the software, sometimes they simply take a long time to update their codes and we have a programme of educating those employers and supporting them to get it right. When that happens, we still have those taxpayers correctly identified as Scottish on our systems and at the end of every tax year, we do reconciliation of our pay-as-you-are-on scheme system so that we look at what the employers have deducted and we look at what we'd expect them to have deducted based on our codes and what we think they should be paying. If there's a difference, if someone has overpaid or underpaid, then we'll correct that. The Scottish Government is getting the tax that it should get, the individual ultimately pays the right amount of tax. The unfortunate thing when an employer gets it wrong is that the individual is having the wrong amount of tax deducted during the year and then may find, unfortunately, they've got a bit more to pay because the employer wasn't deducting the right amount. These are employer errors and we take steps to reduce that number of errors as far as we can. I think that we have something like 4 per cent when we first started issuing S codes. We're incorrect. We're down to around about 1 per cent so that the number is coming down and we're going to push to make sure it stays down and goes down further. The main thing to draw from that is that, obviously, the right amount of tax is collected in the end. There is an inconvenience here. In terms of the operation of S codes, therefore, it's not really a question of money not being collected. It's the sort of good governance and good operation of the PAY system that is the problem. That's not me. That's the issue there. Now, there is a wider sort of small problem we have with some PAY systems not being operated correctly and we do have work with employers to make certain. They are collecting the right amount of tax. However, that's a very small issue. In terms of the S codes, we don't think that's a particular risk to the collection of the right amount of tax. In terms of more general data sharing and how the SLA will work, we already do quite a lot of data matching. The challenge really is to make certain we respond as events develop. I've already talked about the number of post codes not being correctly identified. As this becomes more mature, as new issues arise, we will have to respond. I think that we've got the tools to do that, whether that's post codes, S codes or anything else. At the moment, we are confident with the system, but we also cannot be complacent that there won't be issues that arise as the system develops, perhaps as there is a greater divergence in tax rates. We've mentioned in the session so far the impact of the pandemic. Willie Coffey has got a series of questions to ask on that. The conversation earlier was quite fascinating. I suppose that what I drew from that was that you can have any number of forecasts that you like, but it's the outturn that matters, really, isn't it? I do remember the discussion that Alison led there about that arrangement being firmly embedded within the fiscal framework. If there's any scope to you and revisit that, which I'm sure that some people are asking about who knows that may evolve in the future. I just wanted to ask a couple of questions on the impact of the pandemic on tax receipts and maybe a little question on the compliance issue that was mentioned in the report. At our earlier meeting in the year, the forecasts that we heard about had increased significantly. Could you tell us a little bit about what your estimation of the impact of Covid has had on your forecasts? Probably both to Jonathan and Alison, whether those forecasts have changed as a result of the Covid impact. I perhaps talk at very high levels. There have been a number of effects. One of them has been an impact on operations and, as I said, I talked about debt already. We are talking large numbers there, and that is a bit uncertain. This has had impacts on the amount of cash coming into the extrecer. In terms of underlying liabilities, one of the things that we've seen is that the impact of Covid on receipts was perhaps less pronounced than many of the earlier forecasts. This has both been because the overall labour market—particularly when we're talking about income tax, employment is a key driver of that—has held up better than people expected. The levels of employment have recovered more quickly. They haven't got back to their pre-pandemic levels, but they have recovered quite quickly. We saw wage growth holding up quite well. Obviously, for tax receipts, it's the number of people in work and the wages they pay and growth in both of those. It's been perhaps more encouraging than we might have thought. Even this year, with self-assessment, it is obviously paid with a long lag, but the self-assessment receipts that came in in January and February this year were covering their pandemic year and were higher than forecast. Again, suggesting for self-employed people, the impact of the pandemic was not as large as first thought. As I said, I think there are still question marks. We don't know how many companies or individuals are still struggling with legacy of debt or those sorts of issues, so there are still a number of uncertainties out there and there might be a long tail to this of companies that struggle as the economy develops. Obviously, there's a whole set of new challenges with rising energy prices and supply chain disruptions, both in China and from the war in Ukraine. Lots of uncertainties, but I think that, in general, receipts held up better than most people expected. Thanks, John. Alison, what was your view on that? Do you mirror those estimates and are you some of all the confident that there's a better possibility of an outturn than first anticipate? To take that in two parts, the 2019-20, which is the year that we have the NAO's assurance on an actual outturn, was predominantly pre-pandemic, so we've not really seen any impact on the pandemic in that particular year's figures. From the point of view of them, what does this mean for our budgets? As we've been discussing, the Scottish Fiscal Commission sets out a forecast position, so that's the figure that we used in our 2021 budget, and the outturn on that will be published by HMRC this summer, so that's when we'll actually see. What data do we have in the meantime? Yes, I recognise a number of things that are being explained by Jonathan from our economic analysis, and I also recognise that, with the data that we do have from HMRC, that's the real-time information that comes from the PAYE system, that we were not actually seeing anything that was particularly showing any particular shock from that flow in that particular time. There is a lag in how we get that data, and there's still things that then have to be refined and cleaned in that data, but during those particular years, that was at least some source. I will wait with interest to see what the actual final outturn is for 2021, and any reconciliations that are needed will be applied in the budget that will be for 2023-24. This is the interesting thing between seeing performance in the economy and then how it filters through into our public finances. Is it too early to say anything about the possible impact of the ending of the various support schemes that may have had in both your forecasts? At the moment, we're not seeing any particular effects, obviously. In particular, the furlough scheme, the CJRS, ended last autumn. We didn't see any particularly pronounced effects from that in terms of people falling out of the workforce. Now, I'm certain that there might have been some unfortunate people who did lose their jobs of those scheme round down, but in terms of effects large enough to affect our forecast, no. I wouldn't say—please don't interpret what I'm saying—that Covid had no effect. There is a dramatic effect in the receipts, but maybe not to the extent that people first thought. Just to add to Mr Coffey's question, just to say that at the end of May is the usual period when we will publish the medium-term financial strategy. That's another fiscal point in our calendar, and that's a point where there will be more information on tax revenues and relative earnings growth over the last few years. That will be set out. Some of the analysis that we have will be available for Parliament, then. My last point to both of you is that there is some information in our papers that talk about up 29 per cent fewer civil compliance cases opened up by yourselves, which is much fewer than before, and the impact that that could possibly have on tax revenue. Can you say a little bit about the impact of that, please? Again, the nature of the pandemic meant, as an organisation, that we had to radically change how we worked. We had to implement a number of government support schemes in a matter of weeks from scratch, so we had to redeploy resources. At the time, that did mean that we diverted some of our activity away from some of our compliance activity. That was a conscious decision made at the time. The question we are grappling with, and I don't think we have the full answer to at the moment, is the extent to which those things are deferred, and we will catch up, and the extent to which the bus has gone and we are left at the bus stop on those particular cases. That's something we are continuing to work through. We've got plans to come out of the pandemic and increase our activity back to its normal levels, but the extent to which there is a permanent effect in terms of the amount of compliance revenue that we can collect is still a bit unclear. We are trying to work that through, but again, the pandemic more generally has left a situation where there are still many unknowns as to what will happen in the coming years. Debt, as I said, is another example of where we are starting to work through that but not fully work through all the implications. Have you been able to put even any estimate figure on that at all? In broad terms, we think that much of this we can make back, because the reason you start a compliance investigation is that you have evidence that there is something wrong. Those cases can still be worked. Now, what the challenge might be if a taxpayer has disappeared or if they are insolvent, those cases can't be fully worked through. In general, we are confident that we should be able to make back a large part of that dip in compliance activity in the future. Again, there are uncertainties around that. I would have to write to you on that one. Even now, there will be estimates of what we intend to do in the future rather than firm numbers of money that we have brought in. I am obliged if you could answer that to the committee. Thank you very much, convener. Just picking up that contemporaneous point before I come to my final question, I think that the Office for Budget Responsibility produced an assessment around the time of the UK spring budget statement where they were suggesting that there may be some buoyancy, I think, which was a euphemism for an increase in tax receipts as a result of the rising inflation, presumably an assessment based on wage and salary demands and rises perhaps going up at a higher rate than there have been for the last decade as a result of the fueling impact of price inflation. My question, first of all, is then to Jonathan. Are you seeing any impacts from that rise in inflation in your tax collection levels? You are absolutely spot on in the sense that it is that combination of if there are wage and price rises, VAT is charged on the purchase price, and if that purchase price goes up we get more tax. We are seeing, we did see some buoyancy, I think within income tax the issue is not just average wages but also the distribution of those wage growth. If there is more wage growth at the top end of the labour market—the very well-paid—where the marginal tax rate is 46 per cent here in Scotland or 45 per cent in the rest of the UK, that brings in more tax receipts than if the wage growth is for a basic rate tax payer. Some of what we are seeing, and there is some evidence that emerged more recently, suggests that some of that buoyancy is because particularly there was wage growth amongst higher-paid people with a higher marginal tax rate. There will be a number of factors going on here, but you are right in terms of tax receipts. Inflation tends to boost tax receipts, but there are many other factors at play here. I mean, and to Alison Stafford and Fiona Tom, I mean, if I look at this figure in the NAO report, figure nine, it looks at the areas where there is most divergence in the incidence of tax by earnings, and I think those on around £50,000 in Scotland pay a higher incidence of income tax than those in other parts of the UK. In light of that, and in light of what has just been said by Jonathan Athau, are you—is the Scottish Exchequer monitoring this, and do you have any sense that tax receipts might be going up, and have you got any plans for how they might be spent if they do? I will ask Fiona to come in on the specifics about how the inflation factor works in relation to the fiscal framework. Let me be really clear, it would not be whether I had any plans to spend anything, it would be for the cabinet and for ministers to decide, but before we all get too excited, Fiona. Just to echo really what Jonathan has said, for Scottish Income Tax receipts, Jonathan has described one of the effects that inflation has had that the OBR has forecast in their spring statement. The other effect that inflation can have is if bans and rates are indexed by inflation, so we know that in the rest of the UK bans and rates are frozen, so the personal allowance higher rate threshold is frozen. In our system, we have uprated some of the bans by inflation, so that would reduce some of the tax take because of that. There are two effects there, in which everyone is the strongest would then therefore come through into the overall effect. We may not see such an increase that the OBR has. Additionally, we know that there are fewer people in Scotland, fewer taxpayers in Scotland, earning at the top end of the distribution, which is one of the challenges that we face with how the net position comes to pass for Scotland. We have to wait and see what the Scottish Fiscal Commission will publish in its next forecast, which Alison said is alongside the medium-term financial strategy on the 31st of May, but it will be considering all those factors. My final question is on a much more mundane and less exciting issue, but one that is very important to us, and that is the service level agreement that exists between the Scottish Government and HMRC. You will have seen in the evidence session on 3 February that we were exploring with Gareth Davis, as well as Stephen Boyle, how it currently worked and whether it could be improved. I suppose that my question is really about what consideration has been given to the existing terms of the service level agreement and whether it can be improved and cover things like the tax gap in Scotland, for example. Alison Stafford. I am very happy to start. The service level agreement for 2022 is currently under review, so those considerations by the committee are extremely timely for us taking the observations and your comments into account. The things that we are particularly looking at and having further discussions with HMRC colleagues on are very much around the data space, so still seeing that vigilance on data quality, which is really what has been quite a lot of the scrutiny today, but also data breadth and depth, so that that tax base, the understanding of the dynamic of that tax base, is something that we are better able to understand and also the timeliness of data as well. We absolutely recognise the comments that in Audit Scotland's report on the Scottish-specific compliance data, and we are discussing that further with HMRC. Jonathan may wish to comment more now or not, depends on the time of the committee about the feasibility of that, but clearly those are the sorts of things that are really essential for us to be maximising the fair and proper collection and tax so that we can apply that to public expenditure in Scotland. You can make comments without prejudice, Jonathan, if you like. I think we are very open to reviewing the arrangements. We have a commitment to make this work in a way that works for the Scottish Government and for the Scottish Parliament to oversee this, so we are very open-minded on this. There are challenges around some of the data, and sometimes it is not the lack of willingness, but the challenges to what is practical with the information that we have. Again, this is not a static position, and what is available today may not be the position on what we can do tomorrow. I guess one of our questions and interests is whether the data does not exist or is just impenetrable, or is it a case of if the Scottish Government paid more than £700,000 a year for it, we could get that wider dataset that we think is necessary? There are obviously some things that can be done. Some of this is much more ingrained in the system. Just if I could take an example, sometimes what we are doing to tackle non-compliance, and this non-compliance will affect Scotland, is not knocking on people's doors, whether that is knocking on people's doors in Scotland or the rest of the UK, but making system-wide changes. We are putting in place arrangements where self-assessment taxpayers will have to use software to report to us. We think that that will reduce errors. That is an activity that we are taking, but that is an activity that we are taking that will affect all of the UK. We are trying to assign different elements of that to different parts of the UK. I do not know how meaningful that would be in terms of additional activity. Sometimes you have to really stand back and think, what are you trying to get at here, and not just breaking down the data for the sake of that. I think that this is a complex picture, but that reflects the complexity of administering the tax system. Do you have a time frame for when you expect your discussions and negotiations to be concluded on the service level agreement? I will be during this summer, certainly. During the summer? By September, you think? Yes. Right, thank you very much. On that note of clarity, I thank the witnesses this morning for the evidence that you have given. Jackie, Jonathan, Alison and Fiona appreciate your time. We will be considering what steps to take and how we can keep a future monitoring eye on this important work. As we have said, we want above all to be evidence-led. Whether that is around people's behavioural patterns, whether it is around compliance rates, whether it is around collection rates, whether it is about people fleeing the country in order to evade or avoid tax, those are things that are quite important to us. I thank you very much for your openness in discussing those with us this morning. I would like to move the committee into private session.