I beg to move, That the Bill be now read a Second time.

The Bill implements the principal recommendations of the O'Donnell review of the revenue departments. It brings together the Inland Revenue and Customs and Excise to create a single new department called Her Majesty's Revenue and Customs. It also establishes a new, fully independent prosecutions office, the Revenue and Customs Prosecutions Office. This office will provide independent scrutiny of all Her Majesty's Revenue and Customs prosecution cases, and will conduct prosecutions where appropriate.

It is principally a machinery-of-Government Bill to implement sensible reforms to tax administration, and I was pleased to hear the shadow Chancellor support that when he said in the debate on the Loyal Address last week:

"The Treasury's Bill on the merger of the Inland Revenue and Customs and Excise carries our general support".—[Official Report, 1 December 2004; Vol. 428, c. 636.]

I therefore look forward to a constructive and useful debate on the detailed measures. Before I go on to discuss those, I should like to take a moment to thank members of the Treasury Committee for their excellent work, which culminated in the recently published ninth report, exploring the issues around the merger of Customs and the Inland Revenue.

Will the Minister comment briefly on the employment implications of the proposals? Will they be substantial or limited? Can she give us any idea?

I shall address that in the course of my remarks. If the hon. Gentleman forgives me, however, I will continue to pay fulsome tribute to the Treasury Committee's report.

I welcome the Committee's endorsement of a pragmatic approach to legislating for the creation of the new department. I have carefully considered all the points contained in its thorough report and will respond to them. Although it is not a matter for the Bill, for completeness I shall quickly clear up one concern that the Committee raised about the clarity of ministerial accountability arrangements for the new department. David Varney, the prospective chairman of Her Majesty's Revenue and Customs, wrote to the Committee Deputy Chairman, who I am pleased to see is in his place, on 15 October to help with this matter. The position is clear. I shall be the departmental Minister for HMRC, and all Treasury Ministers have lead responsibility for specific matters. Such arrangements are normal in central Government departments. We regularly review such arrangements and, as suggested by the Treasury Select Committee, we shall review these arrangements as the merger progresses.

I shall return in more detail to the other points raised by the Committee in the course of my remarks and, no doubt, as we discuss the relevant clauses in more detail in Committee. As I have said, I am pleased that the shadow Chancellor and the Treasury Committee are not alone in their support for integration. Over the summer my officials have conducted a programme of consultation with representatives of the new Department's stakeholder groups to inform the development of the Bill. A summary of that consultation is reproduced as an annex to the regulatory impact assessment. I am pleased to say that support for integration was almost universal.

I shall explain what I mean by integration. I am talking about a major change in the way in which taxes and revenues are administered. This is not about shuffling a few Whitehall deckchairs, creating a new department and then assuming that the job is done. It is far more fundamental than that, as the Treasury Committee highlighted. I am talking about a process that goes beyond a simple merger of departments. It is a process of real integration, of bringing the two existing departments together and developing better new ways of working. It is about delivering truly joined-up services to taxpayers, and about creating an organisation that can meet taxpayers' needs because it can look across their affairs and tailor its services to their particular circumstances.

The question of meeting taxpayers' needs is a key one. That means that integration must mean different things in different parts of the business—another point touched on by the Treasury Select Committee—with parts of the business with very similar activities and remits merging in their entirety. For example, there are the corporate services; business areas with similar stakeholders or functions fully integrating their structures and activities—for example, the large business service—and other parts of the business that deal with a unique group of stakeholders not shared by other parts of HMRC connecting into the new Department structure. One example is some of the frontier protection work.

That sounds like a huge job and of course it is. Integration cannot be delivered overnight nor can it be delivered in this Bill alone. I shall give the House some idea of the scale of the task.

Before the right hon. Lady moves on, I thank her for mentioning frontier protection work. The Bill proposes the saving of 16,000 posts by 2007–08. There is already considerable dissatisfaction with the extent to which our borders and ports are left open to smuggling. The Bill appears to be driven more by revenue than by the prevention of smuggling. Will the right hon. Lady assure me that our ports will be better protected as a result of the Bill and not less well protected?

The hon. Gentleman confuses two subjects, one of which is not connected with the Bill. When he refers to reductions in staff across the Inland Revenue and Customs and Excise and to savings of 16,000 posts, he is referring to the Gershon efficiency savings, not the Bill. If the hon. Gentleman looks at the regulatory impact assessment, he will see that the proposals surrounding the merger are very different from those that he has suggested.

I hope to make it clear in the debate that the Bill takes every opportunity to protect the current functions of both departments. It involves a change in the machinery of government to allow the departments to start to come together and, over the period of integration, many issues will need to be addressed. However, I absolutely assure the hon. Gentleman that the figure of 16,000 that he quoted is not correct.

Will the right hon. Lady give way?

I will give way again, but if the hon. Gentleman looks at the regulatory impact assessment—I do not believe that he has it with him—he will see that figures are given for the expected savings across all the departments. They involve 100,000 staff and they will not have the impact that he fears.

I am grateful to the right hon. Lady for giving way again. Among other things, the press notice issued by her Department on 23 November said:

"Through delivering a single Department, the Bill would . . . Enable the new department to meet its demanding Public Service Agreements and realise efficiency savings, with integration contributing 3,000 posts towards total savings of 16,000".

Yes, but if the hon. Gentleman will allow me to make progress, I can specifically address that point. We are discussing the merger Bill today, not the efficiency savings that are in the agreements arising out of the Gershon review. My speech will touch specifically on the reductions in staff anticipated as a result of the departments being merged and duplication being removed. I will also touch on safeguards, efficiencies and the delivery of services. If the hon. Gentleman is a little patient, I will be happy to give way to him again if he feels that my remarks have not addressed the points that he has raised.

The Inland Revenue and Customs and Excise are among the oldest Government departments. The Inland Revenue can trace its history back more than 300 years—it is a rather junior partner in some senses—while a nationally organised customs system dates back to the 13th century.

The new department will have more than 30 million taxpayers and stakeholders, of which 4 million are businesses. HMRC will collect more than £400 billion a year in receipts and pay out over £25 billion in tax credits and child benefit. The costs of running HMRC will amount to some £4.8 billion a year, and the department will have nearly 100,000 staff; 20 per cent. of the civil service. It is a huge task and I very much understand the hon. Gentleman's point about the continuation of services through the period of change.

Given the huge task, it is not particularly surprising that the Treasury Committee has suggested that further primary legislation is required fully to implement integration. Of course, as we the start the process of integration, I cannot confirm what will be needed, but I can say that we will be doing further work with David Varney, the prospective chairman of the new department, to look at how it should manage its business. If legislative change is needed to support our conclusions, it will be brought forward in an appropriate form for consideration by the House.

Delivering real, meaningful integration is a process that should be measured in years, not weeks. That has been acknowledged by all those who have commented on the Bill. It must be an ongoing process of continual improvement; a process that identifies and responds to taxpayers' needs, involving proper consultation where appropriate to produce robust and effective new policies. It must develop and exploit new technologies and working methods to create the integrated, coherent and consistent approach that we all seek, and that taxpayers rightly expect.

The Bill is, and can only be, the first step in that process, but it is a vital step. It creates the organisational structures within which the process of integration can develop. Without the Bill, that process of improving the way in which we deliver services to taxpayers cannot even start in the systematic way that we all want.

I shall explain briefly why integration is so important. The O'Donnell review identified clear benefits from integration that will pay real dividends for people and businesses throughout the UK, and are vital to ensuring that this country remains a highly competitive place to do business. Foremost among those benefits are the improvements to taxpayer or customer focus that integration can deliver. The delivery of more joined-up services will result in a more consistent and coherent approach to taxpayers' affairs. Understanding taxpayers and taking a view across their affairs is essential to deliver a world-class service, built on support for taxpayers that is tailored to their needs.

We have already started identifying areas where this approach would be beneficial. The Chancellor's announcement at the pre-Budget report of a new small business unit at the heart of the new department is a key example. Improvements to the use of information within the new department should, as IT capability is developed, reduce the need for taxpayers to supply the same information several times over. The Chancellor's pre-Budget report announcement of work to develop ways of minimising the requirements on small businesses through, for example, a single tax return for all taxes and a reduction in the number of forms, is a key component of this agenda. Returning to the point made by the hon. Member for Isle of Wight (Mr. Turner), that will bring efficiency savings for business and Government alike.

The same developments that will improve the taxpayer experience will also improve the effectiveness of revenue administration, helping to reduce the tax gap. Better use of information, built around an ability to look across a taxpayer's affairs, will allow for more effective targeting of resources to areas of risk. That will improve fairness, making it harder for those who seek to avoid their obligations to succeed, and reducing unnecessary interventions in the affairs of honest taxpayers. There will also be efficiency improvements. Through economies of scale and alignment of common areas of activity, integration will produce efficiency savings of 3,200 posts by 2007–08.

The Treasury Committee's report rightly suggested that a detailed analysis of the costs and benefits of integration would be helpful. The regulatory impact assessment published alongside the Bill sets out the costs and benefits of the legislation. Future substantive proposals for legislative reform will also be accompanied by regulatory impact assessments in the usual way, so that the costs and benefits of particular measures to effect integration can be considered. That further addresses the hon. Gentleman's point with regard to progress on integration over a period of time.

The Paymaster General is right to say that the regulatory impact assessment contains some, but perhaps not all, of the costs relating to the merger. Will the merger result in a net cost saving over the period of the existing spending review? Will there be a total saving, taking into account all the cost savings and all the additional costs?

I shall make two points to the hon. Gentleman. First, the regulatory impact assessment includes an initial setting-up cost of £75 million for the department. If further costs are incurred, they will be identified in any subsequent regulatory impact assessment. Secondly, on savings, over the period to 2007–08, the reduction of 3,200 posts will produce a net saving in the region of £500 million—I will make sure that that figure is exactly right—by taking out duplication.

Will the Paymaster General clarify whether the £500 million saving will come from the gross staff reduction, to which the hon. Member for Isle of Wight (Mr. Turner) referred, or from the 3,200 posts, because the saving sounds rather large for 3,200 posts?

If I have not got the figure exactly right, I will make sure that it is corrected. The saving will result from the merger's taking out duplication in the departments as the services provided by the Bill are delivered more efficiently and effectively.

Will the Minister clarify the time frame over which the £500 million will be garnered? When will we see the full benefits?

The total annual efficiencies and the figure that I have quoted are by 2007–08; I thought that I made that clear in my initial comments. Savings across the department as it delivers both its public service agreement targets and integration will produce the required savings.

Turning to the content of the Bill, hon. Members undoubtedly will be pleased to hear that I do not propose to describe the detail of each and every clause today—that pleasure awaits us in Committee—but I want to take a moment to outline the key measures that the Bill introduces. I confirm that we will table a number of Government amendments later. That is unfortunately inevitable, because those technical amendments involve cross-referencing right across the tax system. However, with the exception of a measure, which is currently being finalised, to provide information gateways for the new prosecutions office, those amendments will be minor or technical drafting amendments; the Bill before hon. Members today is, in essence, complete.

The Bill establishes HMRC as a non-ministerial department, led by commissioners acting under the general directions of Treasury Ministers. That arm's-length relationship between Ministers and Revenue administration will maintain the existing convention that Ministers do not intervene in individual cases. The Bill transfers the statutory functions of the two existing departments to HMRC, and it provides for the manner in which the commissioners and their officers may exercise those functions. It also provides for the method of financing the costs of running HMRC, and creates a new framework for managing and accounting for the revenues, tax credits and other moneys that the department collects and pays out. That new framework includes measures to enhance parliamentary oversight of HMRC's finances; for example, it enhances existing arrangements for reporting daily revenue flows to the Comptroller and Auditor General.

The Bill introduces flexibility around the future functions of HMRC, putting it on a level footing with ministerial Departments to allow the transfer of functions into or out of HMRC by Order in Council.

The Paymaster General has just said that important functions could be transferred out. Those important powers could include intelligence gathering, enforcement and criminal prosecutions, and the transfer would simply be agreed by statutory instrument, which, as she knows, are seldom debated and not amendable. Does she think it right that important powers on enforcement and criminal prosecutions should be transferred in that way? Surely the point of the Bill is carefully to circumscribe and limit powers, so that Parliament knows in advance and in primary legislation who will exercise those powers, which should not exercised by Ministers as provided for in this Bill.

If what the right hon. Gentleman, who was a distinguished Treasury Minister, suggests were true, I would agree with him, but the Bill introduces flexibility without compromising either the integrity of the tax system or the principle that administration of revenues is held at arm's length from Ministers. The transfer from HMRC of taxes, duties, national insurance and tax credits work is not permitted under those arrangements, and the functions are the same as those of other departments. I assure the right hon. Gentleman that the Bill does not provide a gateway for transferring the responsibilities of the department without the proper scrutiny of the House.

The Paymaster General has mentioned tax-gathering powers and tax credits, which will remain in the department, but I have mentioned other powers, such as intelligence gathering, prosecution and enforcement. She has not said whether there is a block on those powers being transferred. It would be different if those powers went from the new department, which will be headed by appointments by the Crown and therefore will be at one remove from Ministers, to Departments headed by individual Ministers. Will she give an assurance on those points?

I want to be as clear as possible in giving the right hon. Gentleman an assurance on that point. I want to make it clear that all the department's current functions associated with tax and tax credits cannot be transferred under the Bill. The department could collaborate with a devolved Administration or undertake particular work—for example, the collection of student loans—on behalf of another department, but that does not include the administration associated with any of its revenue collection or protection duties.

That leads me on to the department's powers. The Bill is, as I have mentioned, the first step in an incremental process of integration. It does not introduce substantive changes to the administration of regimes, and existing powers for enforcing regimes therefore will be transferred to the new department without any change to the way in which or purposes for which they may be used. The Bill achieves that by ring-fencing powers to prevent their inadvertent extension within HMRC.

Let me spell out what that means in practice. I think that the right hon. Member for Wells (Mr. Heathcoat-Amory) will recognise this from the time when he was Economic Secretary. It means that a VAT inspector will retain all her current powers in HMRC, with no changes. Similarly, the powers of a corporation tax inspector in HMRC will remain as they currently are in the Inland Revenue. The Bill ensures that the VAT inspector's powers do not become available to the corporation tax inspector, and vice versa. That applies across all HMRC functions. Powers in the new department remain as they currently are in the separate organisations.

This is, of course, only a temporary position. As the Treasury Committee report acknowledged, delivery of integration in the longer term on the scale that I described is likely to require greater consistency of approach to enable effective working across different taxes and duties. To that end, I can announce today that the Government will issue a consultation document in January that will consider the suitability of the existing range of powers, including the requirement to provide information; interest and surcharge regimes for late payment; penalties for non-compliance and rights of appeal; and the modern regulations and practices that HMRC will need to be a high-performing 21st-century tax administration.

The Government intend that following that initial consultation and the completion of the Bill's passage, HMRC officials should enter into more detailed discussions with representative bodies. The consultation exercise does not aim to deliver reform in time for the creation of HMRC, but will be the beginning of a thorough review, with the aim of legislating where necessary in the 2006 Finance Bill.

In the meantime, to aid clarity on and public understanding of the powers available to HMRC for its different functions, an advice note on the powers available to officers of the new department will be published in time for the inception of HMRC. The Inland Revenue and Customs today placed a copy of the draft of that advice note on their internet site, seeking comments. It is also available in the Vote Office and the Library. The departments will also write to key representative customer and tax bodies to invite their comments.

This considered and incremental timetable for change has been welcomed by key representative taxpayer bodies, as well as by the Treasury Committee. I hope that the House, too, will endorse it.

The Bill confirms HMRC's authority to pool information internally so that information supplied for one of its functions can be used for any of its other functions. That authority is vital to deliver the joined-up services that the O'Donnell review envisaged and to capture the consequent benefits in service and effectiveness. Again, that has been recognised by key external commentators as a necessary prerequisite for the successful integration of services.

I stress that HMRC will of course take taxpayer confidentiality every bit as seriously as the predecessor departments; the importance of that was recognised by the Treasury Committee's report. There will be no let-up in HMRC's commitment to safeguarding taxpayer confidentiality.

rose—

If the hon. Gentleman will allow me to finish the passage on confidentiality, I will give way to him then.

To that end, the Bill introduces a statutory duty for all officers to maintain the confidentiality of information that they acquire in the course of their duties. That replaces the Inland Revenue oath, and for the first time extends it across former Customs and Excise matters, giving statutory backing to existing duties of confidentiality under employment contracts, across a larger range of functions. To reinforce that duty, the Bill provides for a criminal offence of unlawful disclosure of confidential information about an identifiable person by an HMRC officer. That extends the existing provision for Inland Revenue and Customs staff to all functions of the new department. The Bill replaces the existing authority for commissioners in either department to authorise disclosure of information with a much tighter provision that restricts them to authorising disclosures in prescribed, limited circumstances where there is a public interest case for doing so, as defined in regulations. Those regulations will be available for Members to see before the commencement of the Bill's consideration in Committee.

The Treasury Committee identified the importance of maintaining taxpayer confidentiality where the Treasury and Ministers are concerned. The Government strongly agree with the Committee's view, and I can confirm that confidential information about identified taxpayers will continue to be kept in HMRC and will not be passed to the Treasury or to Ministers.

May I take the Paymaster General back a paragraph or two to the streamlining of powers? Will she give the House the benefit of her initial views about how that will take place, particularly in relation to culture and tone, tax-gathering and co-operation, and policing-type functions?

We need to consider whether powers are, for example, necessary, appropriate, proportionate, sanctioned by the correct level of authority, have a right of appeal against them, or are sufficient in a changing environment. The Bill and the consultation give us the opportunity comprehensively to consider those issues.

It will be vital for taxpayers—for all of us as taxpayers—to understand exactly what is expected of us and what the sanctions may be if we do not discharge those obligations properly. It is important, in a new department, to try to ensure continuity of powers. This is a huge task, hence the need to consult instead of putting everything in the Bill. Because many of the powers have developed over a long period to deal with specific circumstances, it is much more appropriate that we consider them in the round.

The Paymaster General spoke about confidentiality. Although I welcome the clause on that, confidentiality was a matter of concern to the Select Committee. The department's officers currently have to sign a statutory declaration on taking up employment, and I hope that she will reassure us that including the welcome provision in the Bill does not necessarily relieve officers from signing that individual statutory declaration.

I assure the hon. Gentleman that officers will be required to sign the declaration. When he reads the points that I made, he will remember that I spoke about the employment contract for the new department. We have improved all the protections that currently exist. If the new department can start at the beginning of the next financial year—parliamentary process permitting—the new confidentiality requirements that I have identified will operate. I cannot express too strongly the importance that I personally—and the hon. Gentleman, the Treasury Committee and, I believe, every hon. Member—place on a clear and unambiguous commitment to protect taxpayer confidentiality with the necessary functions. It is vital for continuing compliance rates that taxpayers provide information to the Revenue departments. The bedrock of that process is the knowledge that their confidentiality is protected. We should guard that at all costs, and I hope that the hon. Gentleman believes that the Bill provides for that.

The Bill also introduces new arrangements for ensuring the highest possible standards in HMRC in relation to criminal investigations. As my hon. Friend the Economic Secretary announced in September, the Bill extends the remit of Her Majesty's inspectorate of constabulary to provide for it to inspect HMRC's compliance with the requirements of the criminal justice system. It also extends the remit of the Independent Police Complaints Commission, giving it a key role in considering allegations of criminal or gross misconduct by HMRC officers. Those two proposals will implement the recommendation of the Butterfield review that Customs identify how additional external scrutiny can best be introduced into investigation work. Given that the departments are merging, I hope that hon. Members agree that it is right to take the opportunity to ensure that the new department is subject to the highest standards of scrutiny and accountability.

The Bill provides for obstruction, assault, or impersonation of HMRC officers to become a criminal offence, thereby consolidating existing provisions that relate to the Revenue and Customs. That ensures that officers can perform their functions within the protection of the law and protects the public from the unlikely event of unscrupulous people passing themselves off as officers.

The Bill aligns the penalties for those offences with their police equivalents, helping to deliver coherence and consistency throughout the criminal justice system. It also restricts the officers who could previously arrest for such Customs offences, so that only officers authorised by the commissioners to exercise the power of arrest for the offences can do that. That tightens arrest arrangements and will remove the power of arrest for the offences from several Customs and Excise officers who currently have it legally but do not need it in their current jobs and are therefore administratively barred from using it.

The Bill establishes a fully independent prosecutions office—the Revenue and Customs Prosecutions Office—to provide independent scrutiny of criminal cases investigated by HMRC. The creation of that office was a key recommendation of the Butterfield review. The director of the prosecutions office will be accountable to the Attorney-General, ensuring a clear separation of responsibilities from HMRC.

The Paymaster General has spoken for 45 minutes and interested us with many of her comments. Will she refer to the Bill's employment implications at some stage?

I referred to the employment implications when I identified staff savings of 3,200 by 2007–08. There was an exchange between several hon. Members and me about that. I went on to demonstrate how that would be achieved in some cases by removing duplication and moving forward on several reforms. I gave the example of the pre-Budget report announcements on the Small Business Service and allowing one tax return for all taxes.

I am grateful to the Paymaster General for giving way again so graciously. She is obviously learning from the Chancellor. Will she confirm that the figure of 3,200 is a working assumption, been taken from the example of other mergers, or does it follow detailed work examining specific aspects and estimated savings that might be made?

Of necessity, it is a working assumption at this stage. The merger, the preparation for it and the commitment to spend public money to begin the process cannot start—the two departments do not have the authority to undertake that work—until the completion of Second Reading. I have therefore been advised of the figure by the prospective chairman and management of the new department. I know that hon. Members will keenly follow the implications. However, hon. Members have also pressed me on many occasions over the years to remove duplication, simplify the system and allow one contact point whenever possible for information for a taxpayer—I gave the example of a taxpayer's having to give the same information to several different components of the existing department. When we achieve that, we will be more effective, but it is inevitable that fewer staff will be required.

Let me revert to the fully independent prosecutions office. As I said, the director will be accountable to the Attorney-General, thus ensuring a clear separation of responsibilities. The creation of such an office is an important contribution towards maintaining public confidence in the criminal justice system, because it ensures the independence of the prosecutor from the investigator in cases that require criminal proceedings.

That independence matters because it ensures that the prosecutor can conduct a fully impartial assessment of the merits of a case before it reaches the courts. Independence does not, of course, mean distance. HMRC and the new office will work closely together to ensure that the prosecutor's expert and independent advice can be called on to provide guidance on the requirements of the criminal justice system at all times.

This constructive approach to prosecutions, with clearly defined and distinct roles for the investigator and prosecutor, will ensure that the quality of criminal justice work undertaken in HMRC and by the new office is of the highest possible standard.

Will the new arrangements make it easier or more difficult to sustain convictions? While billions of pounds are being evaded or avoided each year, it is important to ensure that the system is able to sustain convictions and that the Exchequer receives the maximum possible benefit from them.

My hon. Friend is absolutely correct. It is vital to ensure that a case has all the information and evidence required to secure a prosecution. These recommendations arose from the Butterfield report, which was commissioned by my hon. Friend the Economic Secretary, and will ensure that investigations will be able to benefit from the expert advice of the prosecution service, which will then take a decision on whether the evidence supplied by the department would secure a prosecution. It is also important that we set a high standard for operations in this area, in order to maintain confidence and to ensure that the tax system works as it should.

Will the right hon. Lady give way?

I have given away many times, but I shall give way once more. I realise, however, that I must be testing the House's patience by speaking for so long.

I do not think so: many of us are extremely interested in what the Paymaster General has to say. I have been bellyaching for years about taking the Inland Revenue prosecution service and the Customs prosecution service and putting them under the aegis of the Attorney-General, and I very much welcome this provision. As she knows, the Butterfield report related to a Customs case, and things have not been too happy in that prosecution service for some time. I should like to know the answer to one or two questions that might superficially sound mundane but are not. Will staff regularly transfer from the Inland Revenue to the prosecution service; and will the prosecution service be housed away from the Inland Revenue premises?

With regard to the staff, the necessary expertise currently in the two departments will transfer to the prosecution service. As the Bill states, the appointment of staff will be a matter for the director. I do not know exactly which office block the service will eventually be housed in, although I am sure that we can find out before we reach the winding-up speeches. From memory, I think that it will be in separate accommodation, but I do not want to mislead the House on that. I honestly cannot remember, but I will ensure that the hon. Gentleman has a reply to that question before we conclude our debate today.

The Bill establishes the office under a director, who will carry out his functions under the superintendence of the Attorney-General. I think that that will be widely welcomed. The director may designate appropriate members of his staff as prosecutors, who will enjoy the rights and responsibilities necessary to enable them to conduct prosecutions on his behalf. All staff of the office, including prosecutors, will be subject to the director's instructions.

Confidentiality remains as important an issue in the prosecutions office as it is in HMRC. The Bill therefore places a duty of confidentiality on RCPO staff, and backs this up with a criminal sanction for unlawful disclosure of information. The prosecutions office will operate to the highest possible professional standards. In order to provide independent assurance of those standards, the Bill provides for the office to be inspected by the Crown Prosecution Service inspectorate, and in a reflection of this focus on standards, the Bill sets out clear minimum requirements for qualifications, which all RCPO prosecutors must satisfy in order to be appointed to the role.

The Bill is modest, although the task that it sets in train is not, as it will involve a very substantial programme of reform and change, which will deliver incremental improvements to services over the coming years. A key challenge for HMRC management throughout the integration process will be to ensure ongoing, consistently high standards of service to taxpayers, and to ensure that the delivery of business as usual is not compromised. Indeed, this very point was identified as a risk in the Treasury Committee's report, and we are very alive to it. The House and the Treasury Committee will be pleased to hear that it is a challenge that HMRC management are absolutely committed to meeting, as am I.

The O'Donnell review acknowledged the importance of strong leadership in managing the transition process, and I am confident that the management team led by David Varney will maintain an absolute focus on business results alongside the delivery of the new departmental structures and processes. I have equal confidence in Inland Revenue and Customs staff, who have delivered, and continue to deliver, high standards of professional service in their respective departments.

We can trace a nationally organised customs service back over 800 years, to the time of King John. In 1671, King Charles II put the service into the hands of commissioners. In fact, anyone who visits Customs headquarters can see the swords that have been blunted, once used—I do not know what for—as a testament to the long history of the department. Direct taxes, in the sense of a contribution from the local community to royal expenses, are also ancient, but the modern national administration is much the younger of the two departments, dating from the introduction of income tax in 1842 and the creation of the Board of Inland Revenue in 1849. In all that time, the staff in both departments have served the House and the taxpayers of the United Kingdom to their greatest ability, and their professionalism is beyond question.

The formation of HMRC will build on the proven track records of people across Customs and the Inland Revenue, to deliver a world-class organisation that is truly fit for the 21st century. The challenge is significant, but so too is the potential for delivering real improvements in the way in which the new department does business. The Bill is a crucial first step towards delivering those improvements, and I commend it to the House.

I shall carry on more or less from where the Paymaster General left off, although I shall not try to match her symphony of heavenly length. That was partly because she gave way so generously that she had to make such a long speech, but I shall try to make mine in about half that time. I should like to thank her for inviting me, my hon. Friend the Member for Rayleigh (Mr. Francois) and the Liberal spokesman, the hon. Member for Yeovil (Mr. Laws), to the Treasury to discuss the Bill. We found that briefing very helpful.

I really will carry on from where the right hon. Lady left off in one particular regard. She talked about the culture of the departments. The Revenue departments come in for a lot of criticism, both from individuals and businesses—and sometimes from me—particularly when they fail to use common sense and end up making my constituents' lives a misery. Customs, in particular, has come in for a rough ride in recent years.

At the outset, however, I want to say that we are lucky in this country with our Revenue departments. In many ways, they are the salt of the earth. They probably provide the least corrupt revenue service of any major country in the world, and are assiduous in protecting the Revenue. Above all, they have a sense of collective loyalty and duty that only the best organisations can hope to nurture.

Some might think that I say all that because I might be sitting on the other side of the House shortly, so it would be handy for the early part of my tenure to have said it. As it happens, I say it because I believe it, having worked closely with both departments in the 1980s. I would like any criticisms and reservations that I and my party might express about the departments in the weeks ahead, as we consider the Bill, to be put in the context of those remarks.

I agree strongly with the hon. Gentleman's remarks, but does he agree that sometimes when the Revenue and Customs and Excise come in for flak, it is because of the bad legislation that they have to implement, or the absence of clear rules, particularly on the importing of alcohol and tobacco from the continent of Europe, on which we never quite know where we stand?

I shall not get drawn on the alcohol and tobacco point, but I agree with the hon. Gentleman's comment that a high proportion of the problems of Government departments are caused by politicians getting in the way and trying to run things, rather than getting out of the way and reducing the size of departments to enable the rest of the country to get on with their jobs.

The Opposition will not force a Division on this issue tonight. Our primary concern is not that, in principle, there are no benefits to be had from merger, but that in practice, we are not yet convinced that the Government have thought through fully how to capture the benefits of merger, or even tried to measure them much.

Although we have had the O'Donnell report, a regulatory impact assessment, a Bill and its explanatory notes, rafts of evidence to the Treasury Committee and much else, we have not yet obtained clear thinking from the Government on why we are merging these departments. The nearest that I have found to a clear summary for the reasons for merger is in Gus O'Donnell's March report—a very long report, which I have here—particularly in paragraphs 1.18 and 3.41. It would be far too tedious to read it all out, but I shall try to provide a summary, which I think the Paymaster-General will agree is connected to what she said earlier.

Mr. O'Donnell says that there are four benefits of a merger: first,

"more complete information and analysis to improve risk management across the tax system";

secondly,

"better and more flexible use of resources";

thirdly,

"a more focused approach to compliance across the tax system";

and fourthly, "better deterrence" through increased

"compliance allowing greater targeting of the non-compliant."

I was not much the wiser having read that.

In a speech only a few weeks ago, Gus O'Donnell had a go at his predecessor, Lord Bridges: he read out a passage of Lord Bridges's prose, which he described as something of which Sir Humphrey Appleby would be proud. I think that I have worked out what Gus O'Donnell meant in his passage. Great man though he is, he seems to have fallen into a similar mandarin trap.

Much more worrying, however, is the lack of clarity in some of these documents about why the departments are being merged, which may conceal a lack of a sense of purpose in doing it. My concern is not just that it is not explained, but that those who are doing it may not be clear in their minds about why they are doing it.

I sat down and tried to work out what tests we should use to measure whether a merger would be a success. Those can be much more simply stated than anything that I have seen in these documents. If the Paymaster General disagrees with what I say, I shall give way to her, and if I miss out a major item I am sure that she will be able to leap in.

The primary task of a revenue department is to get the money in. Therefore, task No. 1 is to protect the yield. Will this merger get more money in with fewer mistakes? If so, how much? That is the first issue that needs to be measured.

The second objective must be to reduce the hassle for millions of individuals, and hundreds and thousands of businesses throughout the country—the so-called compliance burden. Will that go up or down with this merger? The Paymaster General implied that it would go down. If so, by how much? What is her estimate?

Two consequential questions flow from those two simple ones, and they also need answering. Are we confident enough about the possible gains in extra yield and better compliance to be able to justify what everybody agrees would be transitional costs? I refer not only to the £75 million in the explanatory notes but to the enormous disruption that will take place—the Paymaster General implied at the end of her remarks that the merger was a Herculean task, with which I agree, and that will also impose a substantial transitional cost. Are we confident that the extra gains in yield and compliance are greater than those transitional costs?

Finally—this relates to a point that I made at the beginning—we need to have in mind a long-run strategic objective. Even if the benefits outweigh the costs, are we confident that we can achieve that without a decline in the high standards that Revenue departments have set themselves, including their duty of confidentiality? Will the morale of the departments suffer in the long run? In particular, we must bear in mind that both departments, particularly Customs, face major criminal efforts at evasion.

I have set out my four tests for attempting to measure the success of a merger. I agree that other considerations may be relevant, but the Paymaster General has not leapt to her feet to suggest that anything that I have said is mistaken or that I have missed out something substantial.

Let us try to move forward. As we now have some intelligible yardsticks, how does the merger measure up to them? The first port of call should be the regulatory impact assessment, a relatively thin document for such an important issue. I can find in it no overall estimate of the effects on the yield. Virtually the whole of the economic costs and benefits are dealt with in five very short paragraphs. On efficiency savings, we are told that there will be 13,000 staff savings, but when we consider that carefully, and as the Paymaster General clarified earlier, more than 9,000 of those will come anyway under the Gershon review, even without the merger, and only 3,000—3,200 now, I think—as a result of integration. Incidentally, those figures have moved around a bit as they have been examined.

The Treasury Committee did a very good job generally on this subject. It is sensible, particularly with regard to subjects that are not absolutely urgent and immediate, that debate should take place on the basis of thorough scrutiny by Select Committees. The Treasury Committee also did a good job on this specific point, and I commend the hon. Member for Warwick and Leamington (Mr. Plaskitt), who is in his place, and the hon. Member for Bassetlaw (John Mann), who showed in questions in Committee just how much the numbers on potential savings had moved around.

We have arrived at the point of agreement that the Government are saying that staff savings directly from the merger will be about 3,200—just over 3 per cent. of the total work force. That is scarcely the sort of number that could justify what amounts to one of the biggest mergers in Whitehall, or indeed between any two organisations. No private sector institutions would go through all the administrative hell and business risk of a merger to secure 3 per cent. staff savings, but if we take the regulatory impact assessment at face value, that is what the Government appear to be saying as to why we should support the Bill.

At least, that was the position in all the documentation until today. Today, the Paymaster General came up with a variation: she told us that the total merger savings amount to £500 million. I should be grateful if she could tell us whether that £500 million is directly connected to the 3,000 staff saving, or whether it is also connected to the further savings that will result from the Gershon review.

I do not want to try the patience of the House. I was clear about the Department's efficiency savings, and my hon. Friend the Economic Secretary will deal with the hon. Gentleman's points in his winding-up speech.

I hope he does.

Is the hon. Gentleman concerned about the lack of clarity on a point as important as whether the savings relate to the total Gershon staff savings or the merger? In his answer to the Chairman of the Treasury Sub-Committee, David Varney said:

"We have a series of targets over the 2004 settlement, where we have got to produce efficiencies of 507 million cumulatively and save 12,500 jobs net".

Does that not suggest that the figures cited by the Paymaster General relate to the total staff savings, not the merger?

That is a good point. I think that that is what we shall find, but we shall have to wait until the winding-up speech for clarification.

If the savings are based on the combined value of the 3,000 from the merger directly and the 9,000-odd from the Gershon review, we are talking about confusion between two quite different things. The merger is not necessary for the Gershon savings, so the £500 million does not represent savings from the merger. Only a small fraction of that amount should be attributed to it. I hope that issue will be clarified later, but it illustrates a point that I was trying to make at the beginning. The true costs and benefits, and why we are going about the merger now, are not clear in the documentation before us.

The most important single question in the case of any Revenue department is "What will happen to the yield?" I can find no answer to that anywhere, but my best guess is "Not very much". That is why, although paragraph 3.43 of the O'Donnell report refers to the tax gap—which is another way of talking about the same thing: the difference between the amount that should be collected and the amount that is collected—there is no estimate of what will happen to it as a result of the merger. I think that that should have been addressed in some of the documentation.

While we are on the subject of staff, I want to refer to the slightly broader issue of relocation. I should be interested to know how many staff will be relocated out of London as a consequence of the Gershon review. I note that the Lyons review proposed the relocation of 500 from Customs and Excise and 1,450 from the Revenue—about 2,000 in all. How many extra jobs, if any, will be relocated as a specific consequence of the merger?

I hope that the Paymaster General and the Economic Secretary will forgive a hint of scepticism from the Conservatives about the relocation issue. After all, is it not the case that far the biggest relocation so far is that of 1,575 staff who have moved from the Inland Revenue office of Somerset house in the Strand to the Treasury building in Whitehall? I do not think that that is the kind of relocation initiative that the Chancellor wanted us to have in mind when he announced—I will not try to reproduce his blathering rant—

"I am publishing department by department plans to relocate civil service jobs out of the south east".

A move from the Strand to Whitehall does not quite match that.

I hope my hon. Friend has observed from the Treasury's own efficiency technical note that the Chancellor proposes to relocate only 11.5 of the 1,000 people he employs in his own Department to Norwich.

I was not aware of the 11.5 full-time equivalent jobs going to Norwich, but that makes my point.

Let me return to the broader theme. The first of the two tests that I mentioned at the beginning was that of "getting the money in". We have virtually nothing from the Government to help us to assess the merger. What about the compliance-burden test? That is covered at length in the O'Donnell report, which points out that companies may obtain benefits from being able to engage with only one Department to fulfil their requirements for all their taxes. Here again, however, I have not been able to spot any figures, I suspect because most of the gains—although possibly there in the long run—are extremely difficult to capture. That is because the Inland Revenue and Customs have fundamentally different sets of skills as organisations, and are trying to collect two completely different types of tax—which is why the merger did not take place decades ago.

The Inland Revenue deals with organisations retrospectively. It is trying to capture income flows on which there is usually a great deal of ready documentation. Its approach is analytical. Customs, on the other hand, is dealing with transaction taxes. Its role is, of necessity, partly forensic—quasi-legal. It needs to capture the transaction as it happens. That is why it may not be easy for the new department to deliver the compliance gains that we should like for its customers. There is also a real danger that each organisation might find its skill sets diluted, to the benefit of neither. Of course there is the opportunity to get the best out of both skill sets, but that is easier said than done. It is a big undertaking. I think it will be particularly difficult to achieve in the next year or two, because both departments already have their hands full.

The Inland Revenue is grappling with the task of transforming itself from a revenue collection service into a very different institution: a tax and benefits agency. As we know, it has already been a bumpy ride. Customs has its own problems. It is about to install a massive information technology system, and we know the Government's history on those. I shall return to that subject later.

Explanation and justification of both those crucial issues—the effect on the yield and compliance—is pretty thin. To its great credit, the Treasury Select Committee has tried to elicit some by asking questions about long-term savings, but that has not helped us to obtain a better regulatory impact assessment. When David Varney was questioned by the Treasury Committee on the gains of merger, he said that it was impossible to answer without knowing the details of the sequencing—the timetable. The Government must have done the work required to establish that by now. Will the Paymaster General give us a quantitative analysis of the costs and benefits?

I have tried to describe how to assess whether the merger is really worth it by providing some basic yardsticks. We will of course have a couple of days in which to examine the Bill in detail in Committee, but a number of points should at least be alluded to now.

First and most important, the Minister has been at pains to stress—it is stressed in the documents—that this is a minimalist Bill. The Paymaster General has told us that, and the regulatory impact assessment assures us of it. The regulatory impact assessment tells us of two other possibilities that the Government rejected: a more comprehensive early Bill that would make substantive changes in relation to powers, and a fully comprehensive Bill in a later legislative Session. However, I am a little worried—we will explore this issue in Committee—that the Bill might have included provisions that fall into the category of a comprehensive Bill. I noted carefully that the Paymaster General sought to provide reassurance about powers of arrest, but an initial reading of clause 29 does not give me that reassurance. It appears to extend the power of arrest to new HMRC officers.

I was very grateful to the Paymaster General for making it clear that she will publish proposals on the powers in January; we will of course develop the proposals when we are in government. It is important that this issue—the one to which many pressure groups will pay the most assiduous attention—be given a full airing, and I am pleased that there will be a consultative document as early as January. The advice note on powers has only just been published, so I was unable to read it before today's debate, but I shall read it carefully as soon as I can.

Another significant issue, which the Paymaster General hardly touched on, is policy formulation. My best guess is that the lion's share of the 1,500 people who are moving from the Strand all the way to the Treasury will be doing policy work. In justifying the new policy arrangements, Mr. O'Donnell has sought to distinguish between strategic policy and policy maintenance. I have thought quite a bit about this distinction. Is it really helpful? Perhaps it is in theory, but I am not sure that it will be in practice. The current arrangements work reasonably well. I could not help feeling that the ghost of Sir Humphrey—or perhaps I should say Lord Bridges—was lurking in Mr. O'Donnell's lengthy description of the distinction between strategic policy and policy maintenance.

Does the hon. Gentleman believe that we have good reason to be confident about the origination of tax policy in the Treasury in recent years? Can he cite any evidence to suggest that it has been doing a good job in developing tax policy in that time by, for example, simplifying the tax system?

As I have said, it is the politicians, not the officials, who should be blamed. Tax policy can be dramatically improved and the tax system dramatically reformed if politicians have the will to do so. The system has become far more complicated and it has set the economy back some way in the medium and long term. Eventually, it will have a corrosive and sclerotic influence on the economy's performance. I do not want to blame Treasury officials; rather, I put the blame fairly and squarely at Ministers' door. In many cases, these often distributional reforms have been pushed through with the best of intentions, but in the long run they are likely to have the opposite effect to the intended one. If one presses the right buttons in respect of the officials, one gets the right results. I am sure that the new arrangements can be made to work—a way will be found to make them work—but I am simply trying to point out that I am not absolutely sure that this apparently major reshuffle will make much difference to the overall quality of policy work.

There are a few more issues that I want to touch on, and which we shall discuss in more detail in Committee. The first is information sharing and confidentiality, to which the Paymaster General referred. Clause 16 and schedule 2 enable the use of information acquired by the Revenue and Customs in connection with a function for any other function. Before integration, information could be passed between the Revenue and Customs only through statutory gateways. As I understand it, the Bill will enable the new department to pool all its information, irrespective of the purpose for which it was originally obtained. That issue could also be of concern, and we need to examine it carefully in Committee.

If this provision makes it easier to collect the revenue that the country so clearly needs, is it not a good thing?

The hon. Gentleman is right: that is why the gateways were created in the first place. The question is, are we confident that relaxing them is either necessary or desirable? As I said at the outset, if it can be shown that relaxing the gateways could increase yield, such a provision might be worth considering carefully, but it must be balanced against the consequential risk to confidentiality.

It is vital that nothing in the Bill threatens taxpayer confidentiality. If people do not have confidence in the Revenue department, they will not share information and the tax yield will suffer. According to clause 19, information can be disclosed "in the public interest", but the explanatory notes provide little clarification. I should be grateful for an explanation of the meaning behind this apparent widening of the disclosure provisions.

On reading the O'Donnell review, I was also somewhat apprehensive at discovering that the new Bill provides

"an opportunity to consider gateways with other departments, such as DWP."

I should be grateful if the Paymaster General would tell us to what extent the opening of gateways to other Departments has been considered and what decision has been arrived at.

I am surprised and disappointed by the Government's decision to abolish the oath that officers are expected to take and to read out in front of a witness—it is properly known as the statutory declaration—thereby impressing on them their duty of confidentiality. The Law Society told the Treasury Committee that there would be advantages in restating the Inland Revenue oath in legislation, so that it is made clear that officials keep taxpayers' information confidential. I agree, and I am really perplexed by the Government's decision to abolish it. It is used in courts for witnesses, and we swear the Oath of Allegiance before we can take our seats in the House. The oath has previously been the subject of much controversy, but many hon. Members feel that it should be used even for witnesses who appear before Select Committees, particularly during major investigations; in other words, they feel that the use of the oath should be extended. Keeping the oath of confidentiality would certainly do no harm, and might even do some good. I find it difficult to justify its removal.

I thought that the Paymaster General said earlier that the oath would appear in contracts of employment.

indicated assent.

Does the hon. Gentleman think that sufficient, in addition to the Bill's provisions on confidentiality?

I shall listen very carefully to what the Government have to say on this issue, but I am inclined to say no, I do not think it sufficient. I want to stay on the road that we are currently on, which is keeping the oath. In fact, we should extend the Revenue oath to all members of the new department. However, let us discuss this issue in Committee.

Let me say a brief work on IT systems. Although not the most crucial questions, two important ones are: to what extent can these systems be merged, bearing in mind the different needs of the two departments; and what savings are to be made from such a merger? As David Varney said in giving evidence to the Select Committee, the new department will have 250 major IT systems and 3,000 staff working them. It will

"put out 170 million forms a year and run 100,000 desktop computers."

I was not at all surprised to see that, in its report, the National Audit Office told Customs that contingency plans were needed to deal with the O'Donnell review. Are the Government prepared to put into the public domain the necessary information to reassure us that contingency planning has indeed been conducted? Do the Government have a contingency plan for weaknesses in IT that they could publish, and can we please have it before we consider the Bill in Committee? I hope that the Government do not think that I am wasting officials' time by asking Whitehall to produce a document or amend an existing document before January.

IT systems are never easy, but the truth is that the Government's record on them does not inspire confidence. My hon. Friend the Member for Rayleigh (Mr. Francois) will discuss it in greater detail later, but let me give a few brief examples. The Child Support Agency's computer system, which cost nearly £500 million, recently failed and staff at the Department for Work and Pensions were unable recently to process new benefits and pension claims for several days because the system went down. The computer systems of the Passport Service, the Criminal Records Bureau and National Air Traffic Services have also had problems. And so we go on.

We inherited those problems.

Actually, what the hon. Gentleman says from a sedentary position is not true. I checked every one of those before I mentioned them and they have all been substantially altered or completely renewed under the present Government.

I would like to say a few words about the law enforcement provisions. I support in principle the creation of a new prosecuting authority, but we need to look carefully at the detail in Committee. That new authority is, in its way, the single most important direct, clear and visible change made as a consequence of the merger. Outsiders will see it and it is extremely important that we get it right. Rather than go into detail now—I notice that I have been going on for more than half an hour—let us leave that for examination in Committee.

I want to make a general point before concluding. Many business people say that when they deal with the Inland Revenue at its best, they are having a conversation with someone who is thinking carefully about the needs of the business as well as a narrow calculation of the yield. Both parties know that accounting practice can vary and that recourse to the law will probably not help very much. The idea that they should always pay exactly the correct amount of tax in any one year needs to be taken in the light of the fact that accounting practices vary and companies' decisions can alter liability in any particular year. The Revenue knows that most companies do not want to break the law and do not want to find themselves on the wrong side of the Revenue, so a modus vivendi delivers the yield.

We should compare that with Customs. As the Paymaster General said, anyone who walks into its headquarters—I have not done so for a few years, but my opportunity will come shortly—is confronted with a wall laden with cutlasses. That shows that its history and approach are closer to that of a police force than a revenue service. The Revenue has had many decades of dealing with reluctant but honest men and women. Customs has had rather more experience of chasing dishonest men and women. It is still chasing smugglers and other highly organised criminals who seek to evade the excise. I spoke earlier about the blending of cultures and it is crucial that we pick up the best of each. In many ways, that means the Revenue showing Customs what can be achieved on the basis of its culture, whereby dealing with basically honest but often busy business men brings about more co-operation and yields more tax.

This has been a long speech—probably longer than I thought it would take to deliver, but still a good deal shorter than that of the Paymaster General.

I gave way a lot.

I agree. I am sure that the right hon. Lady is pleased that I also gave way a good few times.

The merger of the two Departments was first described by a royal commission in 1887 as an "old question", and a Select Committee had looked into the matter 15 years before that. Gladstone was first against it and then, as with so many issues—home rule, the great Reform Act, extension of the franchise—eventually in favour of it. It took him about 20 years to change his mind about the merger of the Departments, but this Government have stood on their heads in a mere four years.

The Government's response to the Select Committee's first report on the matter in 2000 said that they believed that the synergies

"can be achieved without the risks, upfront and opportunity costs and structural upheaval which merger would inevitably entail . . . Thus, while the Government accepts that merger might bring some of the benefits outlined by the Committee, it believes that they can be achieved without the disbenefits of merger through a dynamic and focused programme of closer working."

That is official jargon for saying that it is not worth the candle. Four years later, we are told that it is worth the candle. Why the volte-face? I hope that it is because the Government have done a good deal of backroom work, which they have not yet published, and that they will shortly show us that the real benefits of the Bill relate to protection of the yield and reduced compliance. I hope that they will be able to add some numbers and some substance to their claims and be able to quantify the so-called synergies in order to produce a sensible estimate of the full benefits of the merger.

I hope so, but I fear not. I fear that the Government have not been feeding on the pure milk of administrative common sense, but have taken a dose of raw politics. They have sharply increased the size of the civil service. In the Revenue departments alone, the number of civil servants has increased by more than a third in seven years, from 73,000 to almost 100,000. The public—the Labour party's focus groups will have told them this—made it clear that they did not believe that they were getting value for money, and they were probably right. So the Chancellor had his Gershon review, and subsequently put the whole recruitment drive for the civil service sharply into reverse. But he could hardly go around telling other Departments to put their recruitment into reverse without having a look at his own. I believe that that matter explains, at least partly, the timing of the Bill.

There may be some benefits from the merger, but they are not necessarily great. The two Departments have developed different styles and different cultures for very good reasons. As a result, capturing the benefits will take a long time and will not be easy. There are attendant costs and risks. Conservative Members will not oppose the Bill, but we would like to see much more evidence that the Government have carefully thought through what they are trying to achieve with the Bill and what their ultimate objectives are. We would also like to see more evidence that the Government know how to accomplish them, but we have not heard much evidence today.

The merger of Customs and Excise with the Inland Revenue was proposed by the previous Treasury Committee and has been welcomed by the current one. On the face of it, as the hon. Member for Chichester (Mr. Tyrie) touched on, it is a peculiar coupling. Customs and Excise has an image of speed boats and James Bond activity in remote inlets of the coast, whereas the Inland Revenue has the Bob Cratchit quill-pen image of someone at home in a dusty office with ledgers. That is not how it seems to many business people, who deal with one set of people to pay VAT and another set to pay company and income tax.

Bringing those two cultures together with compatible IT systems will ostensibly lead to savings, as already mentioned, but realising the potential benefits that are pointed out in the O'Donnell report needs managing—indeed, a degree of management that has not always been apparent in the past. That said, we must not lose sight of the wood for the trees. The dominant and primary objective of this merger is not cost saving in organisation: the overriding aim must be to reduce the gap between the potential revenue to the Government from tax and what is realised. That tax gap is too large.

The touchstone of success of this merger is not some recondite measure of administrative efficiency—it is the reduction, virtually to elimination if possible, of tax evasion. The amount of tax currently not paid by those who should pay VAT or company tax or income tax would make a significant contribution to the national accounts. At the same time, we must foresee and minimize the impact of new tax policy on the competitiveness of businesses.

In that context, I welcome the proposal for retaining an ability to assess the business impact of tax proposals within the new organisation, while at the same time strengthening the Treasury's ability to assess the overall effect of tax policy. If there are to be adverse effects of new taxes, at least we should expect that they were known about and weighed against the benefits of the tax. Normally, we should expect that adverse effects are anticipated, and eliminated as much as possible.

Above all, we must avoid the costs that honest organisations face in complying with tax law. I know very well that the CBI goes on and on, boringly, on the subject, as though all tax were an unnecessary imposition, and Digby certainly does moan an awful lot—but he is not always wrong.

There is no real reason why the basis for calculating income tax, for example, should be slightly different from the basis for calculating national insurance contributions and so involve a different set of calculations. More generally, the accounting needed for tax purposes could be brought nearer to the principles involved in normal company accounts. I hope that the new tax policy unit will home in on such issues.

A great gain for many businesses will be that they will have to deal with one inspector only for VAT, company tax and income tax. However, the primary measure of success of this reform will be the reduction of tax evasion, and the record is not good in either detection or prosecution.

The case of the London bonded warehouse was a scandal that could be presented theatrically as a farce. Duty-free spirits were donated to the back doors of public houses throughout south-east England on a grand scale. They left the bonded warehouse heading for the continent, and so no duty was paid on them. However, they had a regular habit of turning round at the sight of the channel and returning to London. Once that was spotted, an exercise was established for acquiring the evidence needed for prosecution. The Exchequer lost the unbelievable sum of £670 million just in the process of gathering the evidence.

Then there was the case of Regina v. Doran, a large-scale drug dealer. He was caught redhanded in possession of a huge haul of class A drugs. Someone had to try really hard to allow him to avoid due punishment, but the case failed because of a legal mix-up in mounting the prosecution. After those two cases, the Roques report looked into the management and administration of Customs and Excise, and the Butterfield report analysed whether Customs and Excise should have its powers to mount independent prosecutions taken away.

The Treasury Sub-Committee was assured that the findings of those two inquiries had now been acted upon. That is no doubt true, but I should like an assurance from the new chairman, Mr. Varney, that he is personally satisfied that these events could not be repeated in the new organisation. The Sub-Committee was not reassured when the previous Customs and Excise chairman was asked for an assurance that staff vetting procedures were such that no one with a criminal record could be employed in Customs and Excise. The answer was no, he could not give us that assurance.

Likewise, action against cigarette smuggling is not reassuring. A few years ago, no duty was paid on one in four cigarettes sold in Britain. That 25 per cent. has been brought down to 18 per cent. but many cigarettes are still being smuggled, at a cost to the Exchequer of around £2.5 billion per annum.

The cigarettes in question were not made of mud and brick dust in a shanty town. They were made by three major UK companies—British American Tobacco, Gallahers and Imperial Tobacco Ltd, with the Government health warning printed on the side of packets. The total estimate of smuggled cigarettes in 2002–03 was about 12 billion, out of a total consumption of 75 billion. With duty avoided on that scale, I cannot believe that no one in those major companies knew what was going on.

At a recent meeting of the Treasury Sub-Committee, we were told that progress had been made and that the companies involved had signed a memorandum of understanding to co-operate in reducing cigarette smuggling. So three major companies have decided that they are willing to co-operate in enforcing the law of the land, but that leaves rather up in the air the question of what went on before the memorandum. No doubt all will be revealed in due course.

Mr. O'Donnell, the permanent under-secretary to the Treasury, said when he was commending this reorganisation that

"you need an organisation which is capable of managing different cultures within itself. For honest taxpayers you want a culture that is customer friendly. For dishonest taxpayers and, where there is fraud going on, you need a very tough, ruthless approach."

I agree entirely that that is a good principle of operation, but we seem to have seen too little of the tough and ruthless approach. If anything, the approach seems to have been lackadaisical and benignly indulgent. The great fallacy would be to assume that, because we are setting up a new organisation, all the observations in the Roques and Butterfield reports would be complied with immediately. They will not be, unless there is a clear determination, and a management ethos, to crack down on the cheats and frauds mercilessly.

The message that I should like to see go out from this debate to Mr. Varney, the chairman, and to his management team is that he should stick to the customer friendly approach for the honest taxpayer, but use every power available against the dishonest ones. If he does not have enough powers, he should come back and ask for more.

There is a heavy dependence on management to put right the inadequacies that I have outlined. Legislation is not enough. The management arrangements of the Inland Revenue, as evidence to the Treasury Sub-Committee has shown, do not lead to unqualified confidence. The sale of all the Inland Revenue's properties on lease-back to a company registered in a tax haven did not imply a management with a highly developed sense of the ridiculous. Nor was a sense of worldliness obvious when a so-called comfort letter was given to the buyer that breached Treasury directives that apply to every Government Department. The then head of the Inland Revenue was not told about it, and neither was the Minister.

The Treasury Sub-Committee has welcomed the steps taken to tighten management in the new organisation. We have supported the introduction of a framework document setting out who is accountable to whom, and for what. We also welcome the proposal for my right hon. Friend the Chancellor to issue an annual remit to the executive chairman outlining the organisation's new and continuing tasks. However, the proposal for the executive chairman to report to three different Ministers on different aspects of the organisation is a formula for confusion, delay and blurred accountability. It is important that the new organisation hits the ground running and puts the past behind it. A first year with management distracted by a flurry of memos around Treasury departments and fruitless co-ordination meetings will not achieve that. I hope that the Sub-Committee's recommendation that this arrangement should be looked at again will be acted on, not when the confusion has happened but without delay.

This Bill is a good basic framework that recognises the inadequacies that have arisen in the past in both Customs and Excise and the Inland Revenue. However, it must not be seen as a ritual incantation that in itself will provide a revenue and customs service relevant to the 21st century. It needs complementing by a highly motivated staff, who are managed to make full use of their abilities, directed to achieve clear objectives and provided with investment in technology. All that is vital to them ensuring that the taxation that this House votes for is fairly levied on everyone who has a lawful duty to pay. I am sure that the good wishes of this House go out to all who will be involved in an endeavour that is so fundamental to the life of this country. They will not be thanked by their customers: let us thank them in anticipation of their services.

I join the hon. Member for Chichester (Mr. Tyrie) in thanking the Paymaster General and the Economic Secretary for the briefing that they gave us a week or so ago. In particular, I thank the Paymaster General for returning to me an item of clothing that I left in her office at the end of our discussion. [Hon. Members: "Oh!"] I should clarify that it was a coat. Her generosity in bringing it back to the House was welcome, especially as it was a cold day.

I also join the hon. Gentleman in broadly welcoming the Bill. We share the view of Martin Taylor who, in the evidence that he gave to Gus O'Donnell's report, which was produced in March, said that the separation of tax-gathering departments is anomalous in a modern economy. That is an accurate assessment of the position and I pay tribute to those bodies, such as the Treasury Committee, whose Chairman and other members have been in their places today, for their work in drawing attention to the potential benefits of merger. I am especially pleased that they have indicated that they will continue to track the progress of this merger over the next few years, because that will be important.

We share many of the detailed concerns that the hon. Gentleman outlined and I shall set out some of those in a minute. I am also pleased that the hon. Member for Bexleyheath and Crayford (Mr. Beard), who is also a member of the Treasury Committee, emphasised in his contribution the importance of addressing the tax gap through the merger of the two departments. The Paymaster General gave a long, detailed and helpful speech, but the one area on which she was a little light was an emphasis on how, over time, the merger will seek to address that important issue. I am glad that the hon. Gentleman put it at the centre of what the Government strategy should be.

Although I started by saying that we broadly welcome the Bill, we also share the concerns expressed by the hon. Member for Chichester (Mr. Tyrie) and by many of the professional bodies about how the merger will work in practice, and we share Martin Taylor's view—set out in his submission to Gus O'Donnell—that the change will be risky, perhaps very risky. We also share the view of the Law Society that major gains could be made from the merger if it is conducted well. The devil will be in the detail and the delivery of the changes. If the Government and those people responsible for delivering and implementing the merger get the detail and the delivery wrong, what could be a triumph—in the Government's mind—could turn into a disaster. It is the risks on which I shall concentrate, bearing in mind that the Bill is essentially a modest mechanism to get the merger up and running, leaving some of the important decisions about powers for consultation and implementation to a later date.

I shall start by setting out the points of agreement with the Government. The first is that although there are many areas in the Inland Revenue and Customs and Excise with no obvious overlap in responsibilities, we can see the potential for cost savings within the new department and in compliance for businesses. We also believe that there is a potential for improving action against tax evasion and avoidance. In our view, and as the Treasury Committee concluded—the Government appear to agree—those gains are more likely to be secured by a merged department than by keeping the two departments separate and trying to institute measures to ensure co-operation between the departments, including some of the measures that have been in place in recent years.

The second reason we support this change is that although it will lead to considerable overhauling of the two departments and, potentially, some disturbance to their activities in the next few years, I would be very surprised if it did not expose the scope for doing business considerably better and at less cost. When I was in the private sector, one particular company used to refer to Spanish practices that built up over time and institutionalised inefficiencies. I am not sure that it is politically correct to refer to such practices in that way now, but I am sure that the merger will reveal areas where things could be done considerably better.

Thirdly, we welcome the mechanism through which the Government will deliver the merger. The O'Donnell report clearly set out different options for the Government in proceeding with the merger, including legislating rapidly for the new department on issues such as its powers or taking a more leisurely approach and allowing plenty of time for consultation on the powers of the new department. The Government have taken a sensible approach in introducing this modest enabling Bill and leaving time and scope for consultation. We share the welcome voiced by the hon. Member for Chichester for a consultation paper in January that will allow people an early chance to feed their views into the Finance Bill for 2006, regardless of which party will then be in power.

The fourth area of agreement is on the establishment of a new Revenue and Customs Prosecution Office. As my hon. Friend the Member for Torridge and West Devon (Mr. Burnett) said earlier, he has argued for such a body for some time, and it was also proposed in the Butterfield report. It is a sensible change.

The fifth and final area is one in which I differ from the hon. Gentleman, although I acknowledge that he has more experience and skills in such matters, so I may be making a mistake. Nevertheless, I welcome the fact that the Government will take back some control over strategic leadership on tax policy from the two departments and put it in the Treasury. That is where it belongs.

indicated assent.

The Paymaster General may not nod so enthusiastically at my next point. I believe that considerable weakness and lack of coherence has been evident in tax policy for a long period. There has been a lack of assessment of the costs and benefits of new tax proposals. Tax changes have appeared to follow short-term political imperatives and the initiatives brought forward by the Chancellor, or have followed attempts to plug tax loopholes as they emerge, no doubt on the sensible advice of the two Revenue departments, rather than being part of a coherent, long-term tax strategy.

I pray in aid the O'Donnell report, which said that

"the precise formal role of each department is"—

in other words, has been—

"ill defined."

That refers to the two Revenue departments and the Treasury. On page 99, the report also implies that at present Treasury officials—and the Treasury as a whole—may be more reactive than proactive in relation to tax policy. The report talks of ministerial policy initiatives and the co-ordination and presentation of overall tax policy—an important part of the Government's work on tax—but says little about setting a broad tax strategy. I hope that the new approach to management of such matters will leave much of the expertise in developing tax policy in the new merged department, especially in relation to anti-evasion and avoidance activity. I hope that it will also lead to a more strategic perspective in the Treasury. This is certainly an opportunity for a more strategic approach to tax policy, which many businesses would welcome. It would also bring about an obligation to be more strategic on tax policy and to simplify taxation.

As the Chartered Institute of Taxation said in its paper on the benefits of the merger for business:

"We consider that merger creates an additional need for simplicity";

not least if the staff in the new merged department are really able to interact with customers, particularly business customers, as part of a one-shop stop. In that regard, Martin Taylor, in his submission to the O'Donnell report, said that

"integration of tax administration would be more likely to succeed if backed by a Government commitment to simplification as part of the enterprise agenda".

I agree with much of what the hon. Gentleman has just said, but surely the lack of high-quality cost-benefit analysis for tax changes, the increased complexity of the system, the need for more simplicity, the obsession with tax avoidance and many other things are the responsibility of Ministers not of administrators. It is to blame administrators for decisions taken by politicians to suggest that a reorganisation of the structure can solve the problems to which he has alluded.

The hon. Gentleman is right: ultimately, Ministers have accountability for determining tax strategy and pursuing it. I am sure he is also right to say that revenue Departments and Treasury officials, if given clear and helpful advice about how Ministers want the tax system to develop, would deliver the necessary policies. However, my sense of the way things have worked in practice over recent years is that that has not actually happened, partly perhaps because much of the tax policy expertise has been in the individual revenue Departments rather than centrally. I may be naive in thinking that this reform will change that aspect of the system, but I live in hope.

As we debate the detail of the Bill, we must remember that many people outside in the real world, especially in the business world, will not be as interested in the small elements and small changes in the Bill as in what it will mean over time for the tax system as a whole. David Frost, the director general of the British Chambers of Commerce, summed up the general view of tax practitioners and business men about the British tax system when he wrote recently:

"Britain's tax system has come into being piece by piece over the years . . . often without regard to the complexity of the whole. Our tax system is already over-complicated, but each year brings new additions and alterations. Tax simplification is often identified by the government as a goal, but progress is rarely achieved."

I hope that setting up the merged department will be the opportunity for a more coherent tax strategy and that it will galvanise the Government into simplifying the tax system, because without simplification the benefits of merger will be much less than they might otherwise be.

As usual, my hon. Friend is giving a powerful speech. I fully agree with what he says about the necessity for a more co-ordinated approach to tax strategy. With that, of course, will come responsibilities for Treasury operators to accept the level of confidentiality that will be imposed on members of the Inland Revenue.

I agree with my hon. Friend. He is absolutely right to suggest that change in the location of the policy-making bodies for tax should in no way compromise taxpayer confidentiality. The Government have already given certain guarantees about that and we shall obviously be able to probe them in more detail in Committee.

I have covered the points of agreement in our approach to the Bill, so now I want to consider some of the aspects that are of greater concern to us and to pick up some of the points raised by the hon. Member for Chichester. I shall start by focusing on the Government's objectives in introducing the Bill and the problems that are likely to arise in its implementation. I share the concerns of the hon. Gentleman about whether the Government have a clear sense of the ranking of the achievements and objectives they want to secure through the Bill. At least three have been mentioned frequently: increased efficiency, reduced compliance costs for business and more effective tax gathering. Do the Government have a clear sense of the ranking of those priorities?

Over recent months, we have heard much from all political parties about the need to make savings in Government expenditure. Indeed, we have heard a lot from both the Government and the Conservative party about the need to make administrative savings in Government expenditure. Much of the context for the announcement of the Bill focuses on efficiency savings and job cuts but not on the possibly bigger issue raised earlier by the hon. Member for Bexleyheath and Crayford—the tax gap. Is the Chancellor giving short-term cost reduction too high a priority, or giving it too high an emphasis over more important objectives? Concern about that seems widespread not only among employees and their representatives—we should expect them to be worried about reductions in staff numbers—but also among professionals who have commented on the Bill.

Those people are right to be concerned about whether the Government's focus is simply on securing efficiency savings. After all, when the Chancellor announced the merger of Customs and Excise and the Inland Revenue in his 2004 Budget statement, he did so in the context of securing value for money, as he put it, in a section of his speech where he announced—with, I understand, no previous consultation with employee groups—a gross reduction of about 54,000 staff in the Department for Work and Pensions, Customs and Excise and the Inland Revenue. As one of the witnesses to the Select Committee said,

"any private organisation which had announced job cuts in that way would be vilified".

The hon. Gentleman is absolutely wrong to say that there was no discussion with representative bodies of the two departments before the Budget announcement. My hon. Friend the Economic Secretary and I, as the Ministers with responsibility for those departments, had long discussions with the unions on how to modernise, and how to make savings and efficiencies to move forward in those departments. On the very day that the announcements were made, we briefed them on that matter, so what the hon. Gentleman says is not true; the discussions were of long standing.

I am grateful to the Paymaster General for clarifying that point and obviously I accept her comments, but will she accept that many Inland Revenue and Customs and Excise staff learned about the plans through hearing them announced on the radio or on television or by hearing the announcement made in the House of Commons? It appeared to many people that the plans were driven by the Government's political need to face down many of the criticisms made by the Conservatives about wasteful public expenditure rather than by a focus on the best way to manage the important resource of staffing in those departments.

The hon. Gentleman is wrong again. Both departments have a good history of partnership working with the representative trade unions. As the Gershon review was being worked on—not just on the day of the Chancellor's speech—my hon. Friend the Economic Secretary and I ensured that at each point the representative bodies knew the nature of the discussions and the likely progress that would be made.

I do not want to get bogged down on that particular point. Having discussed the issue with local representatives of the Inland Revenue offices in my area, I can tell the Paymaster General that they seem to feel strongly about the way in which the announcement was made, and the Government should be acutely aware of that in terms of taking staff on board for a strategy that will mean considerable change.

To return to the Government's presentation of the matter, on 23 November, the Gracious Speech announced the merger in the context of

"reducing bureaucracy and the costs of Government".

In other words, the focus was very much on efficiency, costs and the staffing savings that could be made rather than on the tax gap—the point raised by the hon. Member for Bexleyheath and Crayford earlier.

As earlier exchanges in the debate showed, and the hon. Member for Chichester highlighted, there is considerable uncertainty about what the economics of the merger are. I hope that the Economic Secretary will be able to clarify an important point about the £507 million savings when he sums up the debate. My understanding is that the savings of £507 million over the spending review period relate to the total reduction in staff numbers, now set at 12,500 jobs net—16,000 jobs gross—rather than the 3,200 job cuts that relate specifically to the merger of the departments. I should think that 3,200 job cuts equate roughly to savings of £75 million or £100 million a year, cumulating upwards over a period of time as the cuts take place. I do not see how the Government can get to a figure of £507 million over the spending review period, unless they are doing what the Paymaster General earlier criticised the hon. Member for Isle of Wight (Mr. Turner) for doing—conflating the general Gershon savings with the impact of the merger savings.

We also know from the Government's regulatory impact assessment—thin though that is on the monetary costs and benefits of the merger—that certain costs will arise as a consequence of the merger. The Government put those costs at £75 million for the two years 2004–05 and 2005–06. Presumably, that is just a small portion of the costs that will arise as a consequence of the merger, particularly given that the figure relates to two years and that not much expenditure will be incurred in the first year, 2004–05.

Standing back, as the hon. Member for Chichester sought to do, and assessing whether the Government will make any such efficiency saving at all over the period of the spending review and, indeed, over the rest of the decade, I have considerable scepticism about whether any net saving will be made from the merger. When the Economic Secretary replies to the debate, I would welcome any clarification on whether he expects any net saving during either the period of the spending review or the rest of the decade from the merger.

My confidence in the Government's lack of clarity about such things is reinforced by the O'Donnell report, which says on page 63, in section 3.99:

"when Jobcentre Plus was created the benefit of providing a unified contact point . . . in terms of efficiencies, job outcomes, and reductions in fraud and error, were projected to equal the investment cost within seven to eight years."

In other words, it may be well into the next decade before any net annual saving is made from the merger of the Departments.

Does it really matter whether the Chancellor of the Exchequer and the Gracious Speech are rather over-hyping the potential to make efficiency savings, while the Government quietly, sensibly and rather elusively indicate in their own assessments that there may not be any net saving? I am not sure whether that is simply an issue of presentation, about which we should not concern ourselves. If the Government in presenting the merger and its justification put a great premium on the possible staff and efficiency savings and the Government are competing with other parties in the run-up to the general election to promise reductions in civil service numbers, a great deal of pressure could be put on the new department to make savings in staff numbers that might not be borne out by the sensible economies that the department would implement if left to its own devices.

That point marries with the point made by the hon. Member for Bexleyheath and Crayford, and it was made very effectively in an article in The Tax Journal by John Davidson of Baker Tilly on 19 April 2004, where he says:

"If the motivation for the merger is to save money and to cut jobs, it could be to the long-term detriment of the Revenue and the taxpayer. It will save a large sum of money. At the average salary cost, the loss of 10,500 will give a saving of £267 million. This, however, is just 0.08 per cent. of the revenue raised by the two departments".

In the year that he cited, that revenue was £338 billion, and I think that I heard the Paymaster General say earlier that it was rising to £400 billion over the period that we are considering. The article continues:

"If job cuts cause a 0.1 per cent. loss of revenue, the savings"—

even those excluding the cost of the merger—

"will not have been worthwhile."

The importance of the contribution made by the hon. Member for Bexleyheath and Crayford is underlined by the similar point that Martin Taylor makes in his contribution to Gus O'Donnell's report. He says:

"the reduction of the tax gap is far the bigger prize, and should be the priority rather than costs . . . this should be made clear to the new management, who should not be judged primarily on the attainment of secondary objectives."

That is exactly right, and the Paymaster General very helpfully and honestly acknowledged—she need not look worried when I say that—in her earlier comments that the 3,200 staff reduction figure from the merger is itself a guess.

The Inland Revenue officials who gave evidence to the Treasury Sub-Committee, which is chaired by the hon. Member for Sevenoaks (Mr. Fallon), were clear that the 3,200 figure was taken from guestimates of previous changes, including those in the Department for Work and Pensions. So it could be that the 3,200 figure is unlikely to be delivered and that Mr. Varney could find himself working to promises that he has given to the Government to deliver staff reductions that he would not want to bear out in practice. I hope that when the Economy Secretary replies to the debate, he will give us a clear undertaking that he and the Paymaster General will advise the chairman to focus on reducing the tax gap and compliance costs and only to reduce staff numbers when the Government can be sure that doing so will not damage those two other objectives.

I take some hope from David Varney's contribution to Gus O'Donnell's report, where he wrote:

"It will be a challenge to keep a long-term focus on the effectiveness prizes and not fall prey to the temptation to substitute short-term cost reduction objectives."

David Varney knows very well what the priorities are, and I hope that the Economic Secretary and the Paymaster General will strongly support him in ensuring that those are the priorities. I wonder therefore whether the Economic Secretary could give us more information about those very important issues that relate to the merger's economic costs and benefits. Will he give us a time scale for the reduction of 3,200 jobs in the merger; or is that figure so uncertain that no time scale can be offered?

Will the Economic Secretary be absolutely clear with us about whether the £500 million savings relate to the merger or to the Gershon savings? Can the Government give us any guestimates of what the net savings will be from the merger over this spending review period, let alone any further round? Can the Economic Secretary give us any indication of whether there will be any net saving over the spending review period?

Will any of the 3,200 job losses result from outsourcing in the two departments? I understand that Customs and Excise and the Inland Revenue have different arrangements governing the extent to which they outsource work. I am sure that the Economic Secretary would not want any pressure to be put on the new department artificially to reduce job numbers by outsourcing, rather than doing what is in its best economic interests. In particular, is there any plan to outsource the debt collection facility of the combined department?

On the number of total employees, is the Economic Secretary confident that both departments are able to carry out their current work, particularly with tax credits, which have caused a lot of problems recently, not least because of the huge backlogs at the call centre. Is the Economic Secretary confident that, despite the job losses, the combined department will be able to introduce the new proposals on child trust funds?

The hon. Member for Chichester is right to draw attention to the fact that the job numbers at the Inland Revenue and in the combined department appear to have increased quite a lot since 1997–98, but the O'Donnell report makes it clear that all the increase in job numbers at the combined department is a consequence of additional burdens imposed on the department in relation to issues such as tax credit, while the underlying number of staff who carry out the work that was done before 1997 has fallen slightly. We want to ensure that the staff are there to do those important jobs, particularly in relation to tax credits on which the lowest income people in the country depend.

I want to probe the Government's thinking on a couple of other issues. Following the concern about the lack of clarity about costs and staffing, the second issue is the Government's expected improvement in compliance-related activity. It was clear from Gus O'Donnell's evidence to the Treasury Committee that even the Government accept that there is currently a huge tax gap in the United Kingdom. Mr. O'Donnell's evidence indicated that that gap was likely to be around 8 to 10 per cent. of revenues, which is in the order of magnitude of £30 billion or £40 billion.

It is unusual for such an estimate to be volunteered by a senior Government official because the Government tend to be sensitive about acknowledging the extent of the problem of tax evasion and tax avoidance. Given that that figure has been put into the public domain and that Mr. O'Donnell was willing to acknowledge that the figure for uncollected VAT alone is estimated by the Government as 12 per cent.—£12 billion a year that would be collected if people adhered to the letter of the tax law—I am interested to know whether they anticipate that the tax gap will be closed in any way by the merger of the two departments.

I should have liked the Paymaster General to say more about the detail of how the Government plan to close that enormous tax gap, which after all is the central purpose of the two departments. We can talk as long as we want about improving service to customers, but, as the right hon. Member for Wells (Mr. Heathcoat-Amory) pointed out robustly in the evidence taken by the Select Committee, ultimately the purpose of the departments is to collect revenue for the Government's public services and other priorities. If £30 billion or £40 billion is going missing, it needs to be a high priority for the new department to tackle.

On compliance, the new department must focus on those entities who are in the black economy, and who are probably avoiding contact with both Customs and Excise and the Inland Revenue, rather than simply focusing all efforts on the largely compliant group of businesses and taxpayers, which could be easier targets for it. Have the Government recently estimated the compliance cost to business, one of the recommendations by the Treasury Committee in its report in 2000? Will there be an opportunity, either now or in the year ahead, to estimate the savings to business from the reduction in compliance activity? Has the Economic Secretary considered whether the tax system, in particular the business tax system, can be simplified to reduce the compliance burdens on business?

The hon. Gentleman mentions the 2000 report. I chaired the Sub-Committee that produced it. Does he accept, both in the context of efficiency and the tax take, that part of the answer to his question depends on whether the Inland Revenue or Customs takes the lead in the merger? One of the things that we encountered was that Customs was a much less effective and efficient organisation than the Inland Revenue.

I am grateful to the hon. Gentleman for that. He speaks with great expertise, having chaired that particular inquiry. One thing that came out of the inquiry as it related to simplification was that merging the two departments, with their different histories, traditions and knowledge base, would work only if the individuals in the combined department can handle the complexity of the tax system. That requires the Government to ensure that the tax system is simplified.

We could no doubt speak for some time about the problems with IT systems throughout government. The hon. Member for Chichester referred to those. That will also be an enormous challenge for the new department, potentially at a huge cost, which was mentioned a number of times in evidence taken by the Treasury Committee.

To sum up, there is an enormous job to be done if the planned merger is to realise the promised benefits. This small Bill is a first and rather simple step down the route towards a merged department. We shall scrutinise the detail in Committee, but its delivery and implementation will determine whether, in the years to come, it is a great triumph or a terrible disaster. The way in which it is implemented, and the way in which Treasury Ministers and those in the new department lead the merger, will have a massive impact on whether it is a success or failure.

We are glad that the Treasury Committee has undertaken to continue to monitor the merger. We will also watch it closely. The Government have our support for the Bill as a whole, but only if they allow managers to focus on the big potential prizes, and not if the process is driven simply by their short-term political imperatives or the need to outbid the Conservative party in cutting back on the jobs of those people who work in the public services.

I am sorry that I missed the first part of the speech of my right hon. Friend the Paymaster General, but I heard the other speeches, and very good they were too. I compliment in particular my hon. Friend the Member for Bexleyheath and Crayford (Mr. Beard), whose speech was excellent.

My concern is whether the Bill will close the tax gap or have the opposite effect. Given Labour's commitment to public services, anything that brings in more revenue to the Government is important. Some commentators have suggested that the Chancellor has a bit of a revenue gap. I would not necessarily argue that, but if he has, the extra revenue will help in the coming years.

There is also talk of staff cuts. I have close relations with the civil service union, the Public and Commercial Services Union, which is worried about employment. Its members are dedicated public servants who are committed to the broad common good. The union wants the new department to do its job properly and wants it to be properly resourced.

I hope that the new arrangements for prosecutions will also help to close the tax gap. If prosecutions are more effective, that will encourage those who are evading or avoiding tax to pay their taxes, as all good citizens should, so that we have more to spend on essential public services. However, the staff cuts worry me.

I have some anecdotes of my experiences. Three or four years ago, I took it on myself to visit our local VAT inspectorate. I was impressed with what I saw. It was explained that had it got more staff, it could collect more revenue. The rough estimate was that every additional VAT inspector collected five or six times his salary in VAT every year. I wrote to Treasury Ministers, suggesting that we should have more inspectors because we could clearly bring in far more to the Exchequer than the cost of their salaries, which would be a good thing in every way. I got a bland reply, mentioning staff costs. I am afraid that I did not get a positive response.

I also took it on myself a little while ago to visit customs officers at Luton airport. Again, the same story. They were doing a good job of catching people who were involved in smuggling drugs in particular. They wanted more staff so that they could do an effective job because they were stretched. Again, I wrote off, saying the same thing.

PCS members and officers tell me that the same is true of personal and business taxation. With more tax officers specialising in those fields, they could collect more revenue, at a multiple of their salaries, so more staff rather than less would be good. It may be that other staff who are not inspectors and who are not directly concerned with tax collection could have their jobs modernised with IT systems or whatever, but inspectors can collect many times their own salaries. I ask my hon. Friend the Economic Secretary to give that serious thought.

I also had the experience—again, this is an anecdote, although I am sure the experience is not uncommon—of returning from the continent 15 years ago. As one does when returning from holiday in France, I had a certain amount of wine in my car.

For your own use.

Very much so.

The limits at the time were less than they are now, and I had rather more than the limit. Trying to be a good citizen, that night I drove through the red line, which said "Something to Declare". Everyone else was going through the green line, which said "Nothing to Declare". There was no one present at the red line, so I got out of my car and had to walk a considerable distance. I looked about 20 ft upwards to find the only customs officer on duty, who was waving people through the green line. I said, "Excuse me." He said, "What do you want?" I said, "I would like to pay my duty, please. I have a certain amount of wine above the limit." The officer was astonished. I had written out what I had bought and where I had bought it. I even had those documents that are called factures, which people are supposed to have when they transfer wine across France.

I wanted to do the right thing. I did not wish to be prosecuted. As I have said, there was only one customs officer on duty. That suggested to me that Customs was under-resourced. It may have been that all the other officers were off sick or that Customs was not efficiently organised, but that was not my impression. My impression was that one man had been left at the port all night to wave the people through the green route. I am sure that things are better now than they were then. I am talking of 14 years ago when a public expenditure-cutting Conservative Government were in office, not a proper Labour Government who would know that we have to fund public services properly.

I assure my hon. Friend that I, as a solicitor, always tried to be scrupulously honest in the same regard. I had the same experience as my hon. Friend, but there were three customs officers on duty.

It was obviously a larger port or a good day. I do not know.

It was Dover.

It was a larger port. I was at a small port.

I have the greatest admiration for Customs and Excise officers and for income tax officers. I have never found any fault with the Inland Revenue. I only wish that my ability to complete my tax form was half as good as the Inland Revenue's in checking it. Customs and Excise does a splendid job. It is vital to ensure that the Government get their revenue, which they can spend on public services and salaries for all our public servants. We must ensure that that revenue is collected.

I am concerned about the failure to collect taxes. The failure to bridge the gap means that there is effectively a culture of petty criminality among people who are finding ways of avoiding or evading paying tax. That is particularly the case when importing cigarettes, other forms of tobacco and alcohol from the continent of Europe. That is not a good thing. We are a law-abiding society and I think that people like to obey the law. If we fail to police the taxation system and Customs and Excise properly, over time, we will allow that culture of petty criminality to develop.

Allowing vast amounts of tobacco and alcohol to enter the country, illegally or legally at cheaper prices than would be charged in the UK, runs counter to the Government's public health agenda. We should maintain the price of cigarettes and, I suggest, alcohol at the levels that we think are appropriate in Britain. That is a way of constraining people from excessive consumption. We think that the continent has got it wrong—I do, anyway. If it is serious about dealing with alcohol and smoking, it should introduce higher prices. Alcohol prices, as a proportion of disposable income, are now half what they were in the 1970s. Floods of alcohol are coming in from the continent that are not effectively policed or constrained.

The money that is lost by failing to collect duties and taxes on those items is of fundamental importance to the Government. I want the Government to spend money on many other things. For example, free long-term care for the elderly could easily be financed just by collecting the tax on tobacco that is coming in from the continent illegally.

That is an equation that I make frequently. I hope that the Government will take the point seriously. I hope also that the Bill will make a big difference in closing this tax gap. I hope that the Government will not use the measure only as a means of cutting the numbers of civil servants in the Departments, especially as the civil servants that we are talking about, above all, are the ones who collect money. They do not spend money. Their salaries are as nothing compared with the amount of money that they bring in. If we need more of them to collect more money to narrow the tax gap, we should appoint more of them. I hope that the Government will take a positive view of these fine and honourable public servants and not look to every opportunity to cut their numbers.

There have been numerous problems with IT systems in the public sector. Is it not time that we looked to have more in-house IT systems rather than relying on what are clearly unreliable private companies? The contracts have gone wrong on so many occasions. Surely it is time that we looked seriously at an in-house public sector IT facility or brought in-house as much as we can of IT systems and services.

I hope that the Government do not seek to outsource any of the services that are undertaken by the Inland Revenue and Customs and Excise. Above all, we need people in these services who have a sense of dedication to the public sector and who believe in and feel that public service ethic. They are people on whom we depend for the civilised society in which we live. It would be a mistake to push them into the profit-making sector. I hope that they will be kept as directly employed public servants and that they will continue to collect the £30 billion or £40 billion that we have heard about so that we can have more to spend on the health service, education and all the other fine public services.

The House will be impressed by the integrity of the hon. Member for Luton, North (Mr. Hopkins), given his vignette about his return from France. He spoilt it only slightly by suggesting that under a Conservative Government there were fewer customs officers on duty. It is true that, under the Conservative Government, duty was much lower than it is now.

The hon. Gentleman made some important points about jobs, to which I shall return. It is important that Ministers address seriously the argument that the PCS has advanced. It has been put to the Treasury Sub-Committee. I am grateful for the kind words that have been said about the report of the Sub-Committee, which I have the honour to chair. The Committee, as my hon. Friend the Member for West Worcestershire (Sir Michael Spicer) reminded us, has been on this track for some time. It was in 1999, when he chaired the Committee, that it first recommended that a feasibility study should begin of the prospects of merging these two great and historic Departments. It was a year later, after taking evidence about other countries that had merged the two services successfully, and notably Canada, that the Sub-Committee made its final report in April 2000, recommending a full merger between the two Departments.

That recommendation was rejected by the Government, as has been said. One of the things that puzzled the Sub-Committee when we came to consider the merger again was why the Government had changed their mind. It is important for the Government to declare why they have now accepted the recommendation.

I was alarmed by the permanent secretary's reply when he was asked why he had changed his mind. He pointed to the record of other bits of Whitehall being merged. He pointed to the emergence of the Department for Work and Pensions. I do not think that it is necessarily the case that the functions carried out by that Department are demonstrably better carried out now than they were when they were distributed among other Departments.

Secondly, the permanent secretary suggested that the creation of the Financial Services Authority, which had taken on the functions of a number of different regulators, had also encouraged the Government to think again. I am not sure about that parallel either. Regulators are much smaller than the bodies that we are now considering.

My hon. Friend is making a strong point about the Government changing their mind. Perhaps an even stronger point is that we have had a change of Ministers between the two decisions. I think that the Paymaster General was in office at the time.