National Audit Office refuses to sign off MoD’s accounts over £280,000 salary package of chief of defence material
A senior civil servant in the Ministry of Defence has had his £280,000 salary package questioned by a parliamentary spending watchdog in a report which also raised flaws in the department’s internal accounting.
The National Audit Office said it had refused to sign off the MoD’s much delayed accounts for 2011/12 because of its concerns and said the department had to clarify and sign off the money being paid to Bernard Gray.
As chief of defence material, Gray is responsible for the MoD’s equipment and support programmes, and figures show he receives more than any other civilian in the department.
Gray is paid a basic salary of up to £245,000 and he has a £36,000 car allowance. Recently, the MoD has also contributed a housing allowance to help him rent a flat in London.
The NAO comptroller and auditor general, Amyas Morse, said the “department has not yet obtained the required approval for the overall remuneration and benefits package”.
He added: “Consequently I am unable to give an opinion on whether the remuneration has exceeded the department’s delegated authorities.”
Any civil servant earning more than the £140,000 per annum has to have the salary endorsed by the Treasury; MoD officials said it had permission for Gray’s pay, but that there had been complications over the housing allowance.
An MoD spokesperson said: It is as yet unclear whether or not the remuneration of the CDM has exceeded the department’s delegated authorities. This is because the department is still seeking a definitive judgment from HMRC on the tax treatment of payments made for accommodation whilst working away from his permanent place of work. We are seeking approval from the chief secretary to the Treasury, which, if granted will resolve this irregularity.”
Labour’s shadow defence minister Kevan Jones said: “This salary is almost 10 times that of the average household income. The department must provide justification for this and it is worrying and damning that they have as yet been unable to do so.”
The NAO also criticised the MoD’s accounts because of continuing failures in the way the department keeps track of equipment, supplies and stores worth £10bn.
Morse said flaws in the way the MoD drew up its accounts made it impossible for him to be sure they were accurate because “the department has not maintained the records, or obtained the information required to do so.”
“The Ministry of Defence has made welcome progress in improving the way it keeps track of its inventory and capital spares,” he said. “It is still not able, however, to provide enough evidence to meet the accounting requirements for its valuation of over £10bn-worth of military equipment. It has again not followed proper accounting requirements with regards to leases. Therefore, I am qualifying my audit opinion.”
The MoD said the NAO had only failed the MoD on two matters – last year it had failed on four.
“We are making progress,” said a source. “We always said it would take us to 2016 to sort out the accounting mess left by the previous administration.”
An MoD spokesperson said: “As part of the MoD’s improved financial management, we have reduced the number of issues on which the NAO has qualified our main financial statement from four to two.
“This is a problem inherited from the previous administration and the NAO has acknowledged our continued progress in improving the management of our 1.2m lines of stocks and supplies which expected to be resolved by a new inventory system that is due to be completed by 2015.
“Work is in hand to remedy the second qualification, which relates to technical accounting requirements for contracts that may include a lease. As we have said in previous years, this is deep rooted problem that will take time to fix.”
The NAO has refused to sign off the MoD’s accounts for six consecutive years because of accounting problems.
National Audit Office says fraud and error in the welfare system remains ‘unacceptably high’
Total benefit overpayments due to fraud and error in the last financial year cost the Department for Work and Pensions £3.2bn – around 2% of the total benefit expenditure – according to the department’s annual report and accounts for 2011-12.
Amyas Morse, the comptroller and auditor general, had “qualified his audit opinion” on the department’s accounts, which have been qualified every year since 1988-89, due to the high level of fraud and error in benefit expenditure, the National Audit Office (NAO) said. However, the auditor said it acknowledged the difficulty of administering a benefits system of such complexity in a cost effective way.
Overpayments due to fraud and error in 2011-12 remained at a similar level to the figure for 2010-11, which totalled £3.3bn.
According to Morse, the department’s plans for universal credit, which involve new procedures and systems to verify identity and check entitlement before payments are made, should mark an opportunity to eliminate some of the key factors contributing to the current level of fraud and error.
The NAO also says that HMRC’s introduction of a real time information system for PAYE has the potential to significantly reduce some of the problems around verification of entitlement for benefits which have means-tested elements to their eligibility criteria.
Commenting on the accounts, Morse said: “The level of fraud and error in the welfare system remains unacceptably high. I recognise, however, the difficulty of administering in a cost-effective way a benefits system of such complexity.
“The department should use the development of universal credit as an opportunity to enhance its processes to demonstrate what a modern, effective and joined-up benefits system will look like. In refreshing its approach to reducing fraud and error, the department needs to continue to improve its understanding of the root causes of fraud and error.”
Margaret Hodge, chair of the public accounts committee, said it was “unacceptable” for a department with the biggest budget in Whitehall, to be incapable of administering its spending properly.
“The department is relying on the introduction of universal credit to get its house in order but the transition to universal credit is full of risks and the department won’t even tell us if it is on schedule,” she said.
“The department has got to get a grip on fraud and error now. Despite its assurances to my committee, it has not done so and it must do better.”
The DWP’s new benefit system universal credit is scheduled to go live in the north-west in April 2013, six months ahead of the national roll out in October 2013. The system, which aims to simplify the way people claim benefits, is set to be the government’s first ‘digital by default’ service.
Report says half of homes are scheduled to be built in 2015 – the scheme’s final year – and there is no room for manoeuvre
Government plans to build up to 80,000 properties under the affordable homes programme are at risk of significant failures, according to a National Audit Office (NAO) report released on Wednesday.
Nearly a fifth of contracts with housing providers are not yet signed; more than half the homes will not be delivered until 2015, the final year of the programme; and some providers are concerned they may not be able to charge rents at 80% of the market rate as originally agreed.
Amyas Morse, the comptroller and auditor general, said the plans leave little room for manoeuvre.
“There are key risks including the fact that more than half of the homes are planned for the final year, with no room for slippage,” he said.
“The final judgment on the success of the programme will depend on how well these risks can be managed between now and 2015.”
In 2010, the Department for Communities and Local Government announced the affordable homes programme, expected to contribute 80,000 homes through affordable rent and affordable home ownership.
Housing associations, local authorities and private companies set up by councils have set themselves up as “housing providers”, according to the report.
Unlike previous programmes, landlords will be able to charge up to 80% of market rates as rent while financing a greater proportion of the cost of new homes themselves through increased borrowing.
The programme increases the risks that providers must manage, including increased borrowing and exposure to the housing market, and dealing with the impact of changes to the benefits system.
Housing providers are finding it increasingly difficult to raise finance for capital investment, the report concludes.
“Some have had to offer additional collateral, generally in the form of assets rather than cash, to lenders because of using financial derivatives to reduce their interest rate risk.
“A survey by Baker Tilly in 2012 found that 63% of registered providers who responded are now considering alternative funding other than traditional banking sources, the most popular being corporate bonds,” the report states.
Providers will be entitled to charge higher rents to make up for a cut in the grants to build each home. The report found that over 30 years, this change will result in increased costs to the public purse, through rising housing benefit costs, of £1.4bn, or £17,500 per home.
Margaret Hodge, the chair of the public accounts committee, which will examine the NAO report on Monday, said the government was refusing to explain how many tenants would be affected by the decision to scrap target rent guidelines.
“The department has scrapped the target rent guidelines for this programme, leaving vulnerable tenants increasingly dependent on housing benefits and increasing the welfare bill by £1.4bn,” she said.
“The department has refused to be transparent about just how many tenants will be affected and by how much.
“My committee will want officials to regularly and transparently update their assessment of the costs and benefits of the programme so that we can hold them to account for the social and financial consequences of their decisions, particularly in light of changes to the welfare system.”
National Audit Office finds tax officials failed to seek proper legal advice while negotiating settlements with large companies
Tax officials failed to follow their own strict rules whilst negotiating deals which allowed corporations to withhold billions of pounds in tax, according to a report from the Parliament’s official auditors.
The National Audit Office has found that HM Revenue and Customs (HMRC) did not seek proper legal advice, involve its own specialists or even take notes whilst negotiating settlements with large companies.
But despite these failings uncovered by the former High Court tax judge Sir Andrew Park, the NAO has concluded that five negotiated settlements which were the subject of the report were “reasonable” and fair to the public purse.
The report follows the news that the campaign group UK Uncut had won permission from the high court to have a “sweetheart” deal between HMRC and the banking giant Goldman Sachs judicially reviewed for its legality.
In his ruling Justice Peregrine Simon said the matter was “plainly in the public interest” and that any judicial review of the deal which saw Goldman Sachs let off a £10m interest bill, would be separate to an anticipated NAO investigation on maladministration and bad practice.
Acting for UK Uncut Legal Action, Ingrid Simler QC, said customs officials had given the multinational bank favourable treatment in a settlement of a tax dispute. Arguing that the deal should be quashed by the courts, she said: “The issues in this case are of great importance both to taxpayers and HMRC as well.”
The report’s findings may concern many ordinary taxpayers. Last year, it was alleged that companies such as Vodafone were not required to pay tax bills of up to £7bn following negotiations with Revenue and Customs while others such as Goldman Sachs have been let off up to £20m.
Margaret Hodge, the chair of the public accounts committee, said that questions still remain over why officials bypassed the proper processes whilst praising whistleblowers from HMRC who disclosed the deals in the first place.
“With billions of pounds of tax at stake it is extremely worrying that the department [HMRC] failed to involve its own specialists in the final negotiations and follow its own rules by settling for less than it could have won in litigation. These deals have sent a message that it’s one rule for big business and another rule for everyone else.
“Given the department’s failures in these cases, the whistleblowers were absolutely right to be concerned,” she said.
The report was ordered after the public accounts committee questioned the way Goldman Sachs was let off up to £20m in tax on a handshake with the permanent secretary for tax, Dave Hartnett.
An HMRC solicitor turned whistleblower, Osita Mba, contacted the NAO and two parliamentary committees about the deals last year.
“There should have been independent review of large settlements, and separation of roles in negotiating and approving settlements. We also confirmed that [HMRC] did not always keep notes of key meetings, including meetings at which settlement terms were agreed in principle with taxpayers,” the review read.
Mba worked in the personal tax litigation team that dealt with the Goldman Sachs tax issue. He wrote to Amyas Morse, the auditor general of the National Audit Office, in March 2011 outlining his concerns over the deal.
Hartnett discussed the allegation with the Treasury select committee in September and said the Goldman settlement had been reached properly.
In October, Mba sent a detailed submission to Hodge and Andrew Tyrie, the chairman of the Treasury committee, claiming that Hartnett had misled them over his role in the Goldman Sachs deal.
The public accounts committee subsequently accused Hartnett and senior members of staff of misleading them and hiding behind “client confidentiality” to avoid revealing details of the Goldman tax deal.
The report will attract criticism for failing to identify the companies involved to ensure “taxpayer confidentiality”. Other details such as the size of the settlements, the number of deals where appropriate legal action was sought or on how many of these deals notes were not taken have also been withheld.
One member of the committee said: “The NAO has bent over backwards not to disclose anything about these deals that might create more anger from the general public about how big business is treated by the taxmen. But the public has a right to know, at the very least, the amounts of money involved in each case”
Amyas Morse, the head of the NAO, said that he examined Park’s reports on the five cases and concluded that the settlements were reasonable but failed to apply the right processes. “It was not appropriate to set up governance arrangements specific to certain cases or to fail to apply processes correctly. Poor communication with staff also undermined confidence in the settlements.”
An HMRC spokesman said that the department welcomed the report: “In February we announced new governance arrangements for significant tax disputes, to provide greater transparency, scrutiny and accountability, and we are currently appointing a new tax assurance commissioner, to ensure a clear separation between those who negotiate and approve settlements,” he said.
National Audit Office raises questions about Treasury decision to split the Newcastle-based bank in two in 2009
Taxpayers face losses of at least £2bn on the continued state ownership of Northern Rock, the National Audit Office (NAO) has concluded as it raises questions about the decision by the Treasury to split the Newcastle-based bank in two in 2009.
The lender was split into Northern Rock plc, which resumed lending and was sold to Virgin Money at the start of this year, and Northern Rock Asset Management, the “bad bank” which remains in public hands.
The NAO agrees the sale to Virgin was the best way to prevent more losses and concludes that UK Financial Investments (UKFI), which controlled Northern Rock from 2010, had handled the sales process well.
But it said the Treasury, when Labour’s Alistair Darling was chancellor, “would have benefited from more effective arrangements for internal challenge of its plans in 2009″ to split the bank up.
Under the terms agreed with the European Commission to split the bank, at least 50% of Northern Rock plc had to be sold by a by a “confidential deadline” of 31 December 2013, the NAO said.
But while the spending watchdog points out that the Treasury did not consider alternatives to splitting Northern Rock, it acknowledges that decision to create a new mortgage lender was taken at a time when lending was falling and that the rejuvenated lender provided 22% of all net lending on mortgages during 2010-11.
It said: “The alternative of selling the deposits and closing down the business was, however, unlikely to have been significantly better in financial terms and would not have delivered mortgage lending.”
Amyas Morse, the auditor general, said: “Amidst the serious economic turmoil of 2009, it was a reasonable to create Northern Rock plc to support mortgage lending. No alternative was likely to have been significantly better, but the Treasury committed itself before looking in detail at the possible consequences for the taxpayer.
“A sale of Northern Rock plc at the earliest opportunity was the best option to minimise losses on the £1.4bn of public money invested in the bank.”
However, he said the continued state ownership of the “bad” bank would present costs for the taxpayer: “Most of the former Northern Rock’s assets will be in public ownership for many years to come and there could be a net cost for the taxpayer of some £2bn by the time these assets are finally wound down.”
This is based on assumptions that a private investor would demand a higher return on its investment of the 3.5% to 4.5% which UKFI has assumed would be a return for the Treasury.
“Applying a higher discount rate of 6% a year to the cash flows implies that there may be a net present cost for the taxpayer of some £2bn by the time the assets are fully wound down,” the NAO report says.
Margaret Hodge, the MP who chairs of the public accounts committee, said: “Given the scale of the crisis, we are fortunate that the net present cost to the taxpayer is potentially not more than £2bn. But this is perhaps more by luck than good judgement.
“Although forced to act swiftly at a time of great financial instability, the Treasury took a big risk with taxpayers’ money by going ahead with the decision to split the bank without undertaking due diligence or carrying out a proper analysis of the potential consequences for the taxpayer.”