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By transferring ownership or leases of around 60 per cent of its estate (591 properties) to a private contractor, Mapeley, in 2001, the Inland Revenue and HM Customs & Excise planned to reduce their running costs and had the opportunity to save up to £1.2 billion by reducing the size of the estate. However, in a report released today, the NAO concluded that the merged HM Revenue & Customs has not achieved value for money on the contract, as it had no long-term plan and has not obtained all available savings.

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The existence of the contract allowed for a smooth estates merger, following the merger of the two departments in 2005. HMRC has the flexibility to vacate up to 60 per cent of its estate over the 20 year contract, allowing it to save up to £1.2 billion. But it has not recognised the contract as a major strategic asset nor committed appropriate commercial skills to managing it. As a result, the total possible savings available now amount to £900 million. To date, the contract has cost £312 million more than originally forecast, as a result of fewer instances than forecast of vacating buildings, unrecoverable VAT payments, and changes in requirements.

To achieve savings on its estate, HMRC is now planning to vacate a significant number of its buildings by 2011. This vacations programme creates areas of specific financial pressure for Mapeley, exacerbated by the economic downturn and falling property values. HMRC does not yet have an agreed way forward with Mapeley. If Mapeley were to default on the contract, HMRC could incur significant one-off and ongoing costs.

The NAO’s 2004 report found that the Department secured a competitive price from Mapeley but warned that good risk management would be essential on the 20 year deal signed in 2001. However HMRC has generally reacted to risks and issues as they arise rather than strategically managing the contract. It lacks full visibility of all the gains and losses that Mapeley has obtained from the contract, which would be critical to inform any negotiations.

There is now a significant risk that HMRC will not achieve value for money over the rest of the contract unless it strengthens its management of the contract. There needs to be active management at Board level and HMRC needs to develop an estates strategy. HMRC should monitor overall value for money and form an effective partnership with Mapeley.

"This major contract has been significantly affected, for the contractor Mapeley in particular, by the current economic climate. Mapeley benefited when the property market was expanding but the economic downturn has made the contract more onerous. HMRC must take a significantly more astute commercial approach if it is to deliver value for money for the taxpayer."

Amyas Morse, head of the National Audit Office

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