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HMRC faces an enormous challenge in moving to a new contracting model by 2017 and appears overly complacent given the scale of the transformation required according to the Public Accounts Committee's report published on Tuesday 27 January 2014.

• Report: Managing and replacing the Aspire contract
• Report: Managing and replacing the Aspire contract (PDF 177KB)
• Inquiry: Managing and replacing the Aspire contract
• Public Accounts Committee

Richard Bacon MP yesterday said:

"The Aspire contract between HMRC and Capgemini is the Government’s largest technology contract, which has cost some £7.9 billion over the last ten years and generated profits for the suppliers of some £1.2 billion, while enabling the collection each year of the Government’s tax revenue, amounting to over £500 billion in 2013-2014.

HMRC faces an enormous challenge in moving to a new contracting model by 2017, with many short-duration contracts with multiple suppliers, and appears complacent given the scale of the transformation required.

Moreover, HMRC’s record in managing IT contractors gives us little confidence that HMRC can successfully achieve this transition or that it can manage the proposed model effectively to maximise value for money.

The Aspire contract has provided stable systems to support the collection of taxes. The provision of all government services depends on the continued stability of tax collection, which yielded more than £500 billion in the last completed financial year and, on the same trend, would be expected to yield around £5 trillion over the next ten years. There are substantial risks to tax collection if the transition fails, which would create havoc with the public finances.

It is surprising that HMRC is still unable to assess properly the value and risks attached to a long-term contract such as Aspire and is therefore unable to evaluate this approach against newer Government approaches to limit the value, length and structure of ICT contracts.

Although HMRC decided three years ago to move in principle to a new contracting model it still does not have a detailed business case for the change.

HMRC says it hopes to publish the business case in the spring, which will leave only two years to engage the market, recruit the skills, and procure and manage the transition of the services it will need before the existing contract expires in 2017.

HMRC expects the new arrangements to reduce its running costs by 25%. However, the Department still cannot estimate the cost of this change, in terms of moving staff, equipment and office space; it could not even provide the Committee with a range.

We do not believe that the Cabinet Office’s ‘red lines’ on IT procurement, such as its restriction on any IT contracts over £100 million, are realistic in a business as large as HMRC’s, or that transformation on this scale is achievable by July 2017.

HMRC and the Cabinet Office should jointly agree key milestones and warning flags leading up to the end of the contract in June 2017, with contingency plans that manage the risks to the stability of the tax collection system and the risks to value for money should these milestones be missed."

Richard Bacon was speaking as the Committee published its 30th Report of this Session which - on the basis of evidence from Lin Homer, Permanent Secretary, HM Revenue and Customs, Mark Dearnley, Chief Digital and Information Officer, HM Revenue and Customs, Andrew Levitt, Chief Executive Officer Aspire, Capgemini and Liam Maxwell, Government Chief Technology Officer – examined managing and replacing the Aspire contract.

Most of HM Revenue and Customs’ (HMRC’s) major tax collection systems are provided under one contract, the Aspire contract. While this has provided stability over the last ten years HMRC has not managed the costs of the contract well. It has cost some £7.9 billion over this period and generated profits for the suppliers of some £1.2 billion. When the current contract ends in 2017 HMRC intends, in accordance with government IT procurement policy, to move from the current single contract to a new model with many short-duration contracts with multiple suppliers. However, HMRC has made little progress in defining its needs and has still not presented a business case to government.

Once funding is agreed, it will have only two years to recruit the skills and procure the services it will need. Moreover, HMRC’s record in managing the Aspire contract and other IT contractors gives us little confidence that HMRC can successfully achieve this transition or that it can manage the proposed model effectively to maximise value for money. HMRC also demonstrates little appreciation of the scale of the challenge it faces or the substantial risks to tax collection if the transition fails. Failure to collect taxes efficiently would create havoc with the public finances.

The Aspire contract between HMRC and Capgemini is the government’s largest technology contract accounting for 84% of HMRC’s total spend on information and communications technology (ICT). HMRC let this contract in 2004 for ten years, but extended it in 2007 for a further 3 years to 2017. The main sub-contractors under the contract are Fujitsu and Accenture. The Aspire contractors maintain and, where necessary, replace ICT hardware and software and carry out new technology projects.

The Aspire contract has delivered certainty and continuity over the past decade but it is frustrating that HMRC is still unable to properly assess the value and risks attached to a long-term contract of this nature and therefore unable to evaluate this approach against current Government approaches. The Aspire contract conflicts with current government policy on how departments should buy technology. In 2010, the Cabinet Office announced that long-term contracts with a prime supplier do not deliver optimal levels of innovation, value for money or pace of change. In 2014, the Cabinet Office announced new rules to limit the value, length and structure of ICT contracts. These state that no contract should exceed £100 million; that no single supplier should provide both services and systems integration to the same area of government; and that existing contracts should not be extended without a compelling case. This is based on the view that smaller contracts should allow many more companies to bid, including SMEs, and provide an increase in competition which is expected to drive down costs. HMRC has agreed to move to the new model for commissioning and providing this ICT infrastructure without challenging the view of the potential impact these changes could have on the accuracy and timeliness of collecting tax revenue.

Conclusions and recommendations

HMRC faces an enormous challenge in moving to a new contracting model by 2017 and appears overly complacent given the scale of the transformation required. Although HMRC decided three years ago to move in principle to a new contracting model it still does not have a detailed business case for the change although this was originally expected before July 2014. HMRC says it hopes to publish the business case next spring, which will leave only two years to engage the market, recruit the skills, and procure and manage the transition of the services it will need before the existing contract expires in 2017. The Department is confident it can meet the 2017 deadline although some of the key milestones may shift. The Department expects the new arrangements to reduce its running costs by 25%. However, HMRC still cannot estimate the cost of this change, in terms of moving staff, equipment and office space; it could not even provide the Committee with a range. Cabinet Office in its evidence accepted that it would be better to delay the project and negotiate an extension to the expensive Aspire contract than risk a failure in tax collection. Cabinet Office accepted the need for a contingency plan, but HMRC appeared not to do so.

Recommendation: HMRC needs to move quickly to develop a coherent business case, setting out the commercial and operational model it intends to put in place to replace the Aspire contract. This should include a robust transition plan and budget.

The end of the Aspire contract and the move to replace it with many more contracts and suppliers puts both the service HMRC provides to customers and tax collection at risk. Although expensive, the Aspire contract has provided stable systems to support the collection of taxes, over £500 billion in 2013-14. A failure of HMRC’s ICT could put at risk the timely and accurate collection of tax, potentially resulting in reduced revenue. This was illustrated by difficulties in a project to centralise HMRC’s PAYE and National Insurance databases. In this case failings by HMRC when it engaged a supplier outside the Aspire contract resulted in nearly £1 billion of tax foregone. HMRC is aware of the risks involved in replacing the Aspire contract but it has not quantified them.

Recommendation: As part of its business case, HMRC should identify the key risks to tax collection and customer service, both during transition and once operating its new model, and develop a strategy to mitigate them.

HMRC has been outmanoeuvred by suppliers at key moments in the Aspire contract, hindering its ability to get long term value for money. The contract, which cost £7.9 billion from July 2004 to March 2014, has generated a combined profit for Capgemini and Fujitsu of £1.2 billion, equivalent to 16% of the contract value paid to these suppliers. HMRC considers the contract to have been expensive, and pressure to find cost savings in the short-term led it to trade away important value for money controls. For example, in a series of disastrous concessions, HMRC conceded its rights to withdraw activities from Aspire, to benchmark the contract prices against the market to determine whether they were reasonable. It also gave up its right to share in any excess profits. In 2007, HMRC negotiated a three-year extension to the Aspire contract just three years after the contract was let, extending the end of the contract from 2014 to 2017. The Department has still not renegotiated the terms of the contract in line with a memorandum of agreement it signed in 2012 designed to separate Capgemini’s role in service provision from its role as service integrator and introduce more competition.

Recommendation: HMRC should develop a clear view of how the new model will support its long term vision for tax collection. It should take a consistent, whole-life approach to costs and benefits in both its commercial negotiations and in its management of contracts, so that the long-term objectives are both clearly articulated and properly supported.

HMRC’s experience in managing multiple ICT suppliers, the essential ingredient of the new approach, is limited. HMRC anticipates meeting its future ICT requirements with a ‘mixed economy’ of small and large suppliers. However, since 2006-07, some 84% of HMRC’s ICT spend has been through a single supplier under the Aspire contract. While HMRC has tried to compete more work outside the Aspire contract, it has tendered only £22 million a year since 2012, some 3% of the annual amount paid under Aspire. Getting the skills to manage multiple suppliers, and to design and integrate technology, is a pre-requisite for the success of the proposed change. HMRC believes that it is an attractive employer for ICT specialists due to the scale of its digital ambitions and it plans to expand programmes to recruit graduates and apprentices. So far HMRC has recruited some new staff at senior and operational levels but it has yet to recruit staff for many critical technical and commercial roles despite there being less than 3 years before full implementation has to be achieved. The constraints on public sector pay have been a factor in other departments having failed to recruit and retain the technical and commercial skills they need and HMRC will face similar constraints. 

Recommendation: HMRC must produce a realistic plan setting out how it will recruit the necessary commercial, technical and operational skills in a market which is likely to be overheated, and act with pace to implement it.

The consequences of this transition failing are severe and HMRC and the Cabinet Office are jointly accountable for managing the risks to tax revenue and value for money. An extension to Aspire could prove costly: as well as paying more for technology than it otherwise would due to the absence of competitive pressures, HMRC risks delaying its plans to improve efficiency and customer service by modernising and digitising its tax collection processes and overcoming the limitations of its legacy systems. Even more importantly, problems with transition, or inadequate management of the new model, could put the amount of tax collected at risk.

Recommendation: HMRC and the Cabinet Office should jointly agree key milestones and warning flags leading up to the end of the contract in June 2017, with contingency plans that manage the risks to value for money should these milestones be missed. HMRC should provide a note to this Committee by the end of February 2015 setting out what plans, including contingencies, it has put in place to manage the transition.

We are not convinced that the Cabinet Office’s ‘red lines’ on IT procurement, such as its restriction on any IT contracts over £100 million, are realistic in a business as large as HMRC’s, or that transformation on this scale is achievable by July 2017. Although progress has been slow, the Cabinet Office is confident that HMRC’s plans are the right approach and show a good understanding of the risks HMRC needs to address. The Cabinet Office maintains that its ‘red lines’ on IT procurement will be applied pragmatically if HMRC cannot comply with them fully. Having mandated the new approach to buying technology, the Cabinet Office shares responsibility with HMRC for its implementation and accepts accountability for the success of this transformation.

Recommendation: The Cabinet Office needs to help HMRC build the commercial and technical capability it needs, playing a strong coordinating role for government by working with suppliers and managing the market. It should offer support to HMRC where it can, but also provide challenge and ensure that HMRC is actively managing the risks to tax collection.

Further information

• National Audit Office report: Managing and replacing the Aspire contract
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