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Why did HMRC’s Jim Harra challenge the Chancellor’s spending plans?

Anita Monteith and Alison Ring explain the Chancellor’s power to override normal spending rules to authorise key recovery measures.

CoverCivil servants have to ask government ministers at times whether they are sure they want to spend money on a policy. Usually this is a private conversation, the sort seen in any organisation run day-to-day by a paid executive team, but with oversight or direction being offered or decided by a board of governors, trustees or in ICAEW’s case, its Council.

Following the Chancellor’s economic statement on 8 July, it came to light that Chief Executive and Permanent Secretary to HMRC Jim Harra had written two ministerial direction letters to the Chancellor on 7 July 2020. One was for the Eat Out to Help Out Scheme and the other covered the Job Retention Bonus Scheme.

A ministerial direction letter is rare – 88 have been issued to various government departments since 1990, an average of less than three a year. The Ministry of Defence has received a fair few in the past, but for HMRC these letters are the only two in the last 30 years. Both relate to coronavirus recovery measures. It is rumoured that many more ministerial direction letters are drafted, but after discussion with the minister and a change of mind, they are not sent and so are not published!

Politicians and civil servants

A permanent secretary is usually the most senior civil servant in a department. They support the government minister heading the department, who is accountable to Parliament for the department’s actions and performance. The permanent secretary is the accounting officer for their department reporting to Parliament and is responsible for the day-to-day running of the department, including its budget.

HMRC is technically a non-ministerial department, which means that it operates at arm’s length from ministers – intended to ensure that the administration of the tax system is fair and impartial. Harra, the First Permanent Secretary and Chief Executive of HMRC, is responsible for delivering the departmental strategy and for the organisation’s performance. He leads HMRC’s Executive Committee that is responsible for running HMRC and is one of the HMRC Commissioners who are legally responsible for the department in place of a minister. In HMRC’s case the Deputy Chief Executive is also of permanent secretary rank as the Second Permanent Secretary.

Despite being a non-ministerial department, HMRC is also accountable to Parliament through HM Treasury, reporting to the Financial Secretary to the Treasury, the government minister responsible for tax policy and customs within HM Treasury.

Harra is the principal accounting officer for HMRC, which makes him personally accountable for how public money is used by HMRC and for the financial health of his department. He has to appear before the Treasury Select Committee and the Public Accounts Committee, and his political impartiality as accounting officer is an important part of his ability to do the role.

Managing public money

Chancellor Rishi Sunak has been spending considerable sums of public money on measures to help UK businesses survive the COVID-19 crisis. This has included significant amounts of business rates relief (a tax administered by local authorities and not by HMRC), but also the various employment support schemes and other measures such as deferring VAT payments (which are HMRC taxes). Naturally, Harra will have been watching these developments with interest.

The Treasury’s public finance handbook, Managing Public Money, sets the standards by which public money must be handled, including requiring that all government spending must meet the criteria of regularity, propriety, value for money and feasibility.

Accounting officers have substantial discretion in how they carry out their role, but there are occasions where a secretary of state decides to follow a course of action that the accounting officer believes does not meet at least one of the criteria required. In that case the accounting officer must seek a ministerial direction, which in effect is saying that the spending may be ultra vires and in breach of Managing Public Money without doing so.

If the minister then writes the letter, giving the direction, it means that the accounting officer is able to proceed in implementing that course of action without being concerned that they could personally be found responsible for breaching public spending rules.

Regularity, propriety, value for money and feasibility – what do these mean? If the officer is concerned about any of these, they will look for a direction to cover:

  • Regularity, which would indicate the proposal is believed to be beyond the department’s legal powers.
  • Propriety, which might suggest it doesn’t meet high standards of public conduct, such as appropriate governance or parliamentary expectations.
  • Value for money, which might suggest that money may be wasted, for example if doing something else, or doing nothing at all, would be cheaper and better.
  • Feasibility, which would apply if there is doubt about whether the proposal will achieve its intended objectives, for example if it is not possible to implement accurately, sustainably or to the intended timetable.

Ministerial directions

Departments are required to publish the existence of a direction and report it to HM Treasury, which must then inform the head of the National Audit Office who then tells the Public Accounts Committee. Although there have been only 88 since 1990, 15 of these have been issued this year (so far), authorising measures taken as a result of the pandemic.

In both instances of the HMRC ministerial directions sought by Harra, the letters refer to a “sound policy rationale” for creating each measure.

For the Job Retention Bonus Scheme, which in theory could cost as much as £9.3bn, the policy rationale stated is to provide additional support and incentives to firms to keep employees during a period of uncertainty. This is intended to reduce the number of employees being made redundant and so face the scarring impacts that can arise from unemployment. Harra states that, as the accounting officer for HMRC, he was unable to reach a conclusion that the measure meets the value for money requirement as there is uncertainty about the overall cost of the scheme and the number of jobs that would actually be protected.

In respect of the Eat Out to Help Out Scheme, which is estimated should cost around £0.5bn, the policy rationale is to protect jobs in hospitality by incentivising consumers to safely return to restaurants, cafes, etc, over the summer. HMRC’s concern in this case also relates to value for money, as the unknown element is how many people would have eaten out anyway even without this scheme. In addition, it is uncertain how efficient this measure will be in encouraging people to eat out and the potential losses that could arise, all of which contributed to HMRC’s conclusion that this measure may not provide value for money.

These are only two responses to the coronavirus pandemic, which are smaller financially than the £54bn Coronavirus Job Retention Scheme – also administered by HMRC and for which no ministerial direction was required. It would be interesting to see the calculations or workings to support this or some or all of the other HMRC COVID-19 measures, and to reflect upon their assessment in terms of Managing Public Money.

As it is, the Chancellor has written his two ministerial direction letters and instructed HMRC to go ahead and implement each of the proposals, so making himself and not the permanent secretary accountable for this element of public spending.

We are living through an unprecedented event in the modern world. The usual rules seem not to apply as, correctly, lives are being prioritised ahead of spending. But we do now know what the COVID-19 virus itself can do to our economy and we do not yet have a cure or vaccine. With many predicting a possible second wave later this year, it will be important to reflect on the cost/benefit of each of the COVID-19 support measures as soon as possible so that plans for future help can be costed and factored into the Autumn Budget.

It also seems likely that we may see a few more ministerial direction letters being exchanged before this crisis is over.

About the authors

Alison Ring is Director for the Public Sector at ICAEW and Anita Monteith is the Technical Lead and Senior Policy Adviser at the Tax Faculty