Report. Driver and Vehicle Licensing Agency. Introduction. Basis of my examination. Results of my Audit

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1 REPORT OF THE COMPTROLLER AND AUDITOR GENERAL CLASS III VOTE 9 Report Driver ad Vehicle Licesig Agecy Itroductio 1 This report addresses my aual examiatio of the Motor Tax Accout prepared by the Driver ad Vehicle Licesig Agecy (the Agecy), a o-vote executive agecy of the Departmet of the Eviromet, Trasport ad the Regios (the Departmet). 2 I this report, I: set out the basis ad results of my audit (paragraphs 3 ad 4); summarise the fiacial performace of the Motor Tax Accout (paragraphs 5 to 7); describe the varyig methods of reveue collectio employed by the Agecy (paragraphs 8 to 14); cosider the implicatios of the Agecy's telephoe re-licesig pilot scheme (paragraphs 15 to 22); commet o measures to tackle evasio (paragraphs 23 to 34); ote the Agecy's progress i itroducig Graduated Vehicle Excise Duty scheme (paragraphs 35 to 51); ad cosider the issues arisig from the Agecy's implemetatio of the Vehicle System Software Project (paragraphs 52 to 92). Basis of my examiatio 3 I examie the accouts of the receipt of reveue by govermet departmets uder Sectio 2 of the Exchequer ad Audit Departmets Act These accouts are ot published ad I am ot statutorily required to certify their accuracy. However, I am required to examie them o behalf of the House of Commos i order to ascertai that adequate regulatios ad procedures have bee framed to secure a effective check o the assessmet, collectio ad proper allocatio of reveue, ad to satisfy myself that such regulatios ad procedures are beig duly carried out. I am also required to carry out such examiatios as I thik fit with respect to the correctess of sums brought to accout ad report my fidigs to the House of Commos. Results of my Audit 4 My staff have carried out test examiatios of the reveue accouts of vehicle excise duties prepared by the Agecy, ad of the sums brought to accout. As a result, I am satisfied that adequate regulatios ad procedures to assess, collect ad allocate vehicle excise duties were i place ad were duly carried out. R1

2 Fiacial Performace 5 I his March 1999 Budget speech, the Chacellor of the Exchequer aouced that from 1 Jue 1999, Private Lights Goods vehicles with a egie size ot exceedig 1100 c.c. would be subject to a reduced rate of Vehicle Excise Duty (the 'Graduated VED' iitiative). The Govermet iteded that the implemetatio of this iitiative would be tax-eutral i the fiacial year as it would be offset by icreases i other classes of duty, ad actual gross receipts decreased by oly 45 millio (0.88 per cet) to 5,045 billio. 6 The total et proceeds of vehicle excise duty for the Uited Kigdom brought to accout i the Motor Tax Accout amouted to 4,738 millio ( 4,855 millio i ), a decrease of 117 millio (2.4 per cet). This was et of refuds totallig 316 millio ( : 244 millio) paid i the year to applicats wishig to cacel the remaiig eligible period o idividual discs. Of these refuds, 49.2 millio (15.6 per cet) related to the implemetatio of Phase 1 of the Graduated VED iitiative. 7 Gross reveues remaied above the 5 billio threshold attaied for the first time i , ad have icreased by 17.3 per cet over the last five years, as show i Figure 1. 1 Vehicle Excise Duty collected by the Driver ad Vehicle Licesig Agecy, to Net Refuds 6,000 5,000 4,000 millio 3,000 2,000 1, Fiacial Year Source: Motor Tax Accout Collectio of Vehicle Excise Duty 8 The Agecy accouts for vehicle excise duty collected across the Uited Kigdom from the public by several collectio methods. I this sectio of my Report, I set out these methods ad commet o chages i collectio treds. 9 The followig table shows the amout of gross vehicle excise duty reveues collected via each method ad compares this with the previous year's figures. R2

3 2 Vehicle Excise Duty collected i ad , by method Method of Duty Collectio millio % millio % Post Office Couters Ltd 4, , Vehicle Registratio Offices Norther Irelad Automated First Registratios Fleet Operators Telephoe Re-licesig Gross Vehicle Duty 5, , Source: Motor Tax Accout Methods of collectio 10 Post Office Couters Limited has cotracted with the Agecy to provide vehicle re-licesig services to the public at approximately 4,000 post offices. Over 80 per cet of vehicle excise duty cotiues to be collected for the Agecy by this method, despite the risig popularity of electroic methods of collectio. 11 The Agecy maitais a etwork of some 40 Local Offices across Great Britai. Util recetly, these offices were kow as Vehicle Registratio Offices (VROs). They have bee reamed 'DVLA Local Offices' to reflect the wideig rage of activities that each office udertakes. Their primary role is to tackle evasio at a local level. I additio, each office has resposibilities for registerig ad taxig ew vehicles, together with a rage of other registratio ad licesig customer services. Followig recet budget chages, these offices have also take resposibility for assessig vehicles eligible for the reduced rates of duty, icludig the validatio of certificates for reduced pollutio ad for goods vehicles fitted with cocessioary wheel-plas. 12 I my report o the Agecy's accouts, I commeted o its successful itroductio of the Automated First Registratio ad Licesig scheme. This scheme eables motor dealers to register ad tax ew vehicles electroically ad has expaded sigificatly over the last three years. Reveues collected i totalled 185 millio; a icrease of some 63 millio (52 per cet) over the previous year. This represets almost 48 per cet of all ew car registratios across Great Britai durig Sice March 1997, large fleet operators have bee able to re-licese their vehicles by electroic data iterchage, removig the eed to visit a Vehicle Registratio Office or a post office. This scheme cotiues to expad rapidly, with over 400,000 vehicles beig re-licesed i this way durig Reveues durig the year from this scheme totalled 61 millio; a icrease of 22 per cet ( 11 millio) over The Agecy told me that, based o curret forecasts, it expects the umber of vehicles i the scheme to icrease to some 700,000 aually by March The Departmet's statutory resposibilities for the collectio of vehicle excise duty i Norther Irelad are udertake o its behalf by the Driver ad Vehicle Licesig Agecy Norther Irelad (DVLNI), a executive agecy of the Departmet of Eviromet (Norther Irelad). I , DVLNI collected some 120 millio of et reveues. R3

4 Telephoe re-licesig pilot scheme 15 Durig , the Agecy udertook a pilot scheme, i partership with oe isurace compay ad oe motor maufacturer, to offer re-licesig over the telephoe for vehicles uder three years old. Fudig for this scheme was made available uder the Ivest to Save programme, ad total reveues amouted to 613,000. A similar pilot scheme was also implemeted by DVLNI for Norther Irelad. The pilot commeced i September 1999 ad was iteded origially to operate util July However, lower tha expected take-up levels led to the extesio of the pilot ad the service remais available. Operatio of the scheme 16 The registered keeper is required to provide evidece that he or she is isured to drive a vehicle before it ca be relicesed. The parter isurace compay was able to offer a select group of keepers who had purchased the parter maufacturer's vehicles. These vehicles had bee first registered, taxed ad isured uder the maufacturer's ow arragemets with the isurace compay. 17 I early discussios with the Agecy, the isurace compay idicated that it expected to attract a 70 per cet reewal rate withi the selected group of customers. The Agecy estimated that, of these, aroud half would avail themselves of the telephoe re-licesig facility. 18 I practice, the take-up level has bee much lower tha the origial forecasts. Oly 4,360 vehicle excise disks were issued uder the pilot scheme to 31 August The Agecy told me that this was maily because the isurace compay's forecast of reewal levels proved optimistic, although aroud 50 per cet of those reewig their polices did ideed opt for telephoe re-licesig. 19 For the pilot scheme to be practical, the Agecy offered debit ad credit card paymet facilities. The baks ad credit card compaies charge a levy for use of these cards ad this surcharge was absorbed by the Agecy as it would be illegal to pass this o to the customer. Whilst the surcharge for the pilot scheme totalled oly some 5,000, the Agecy has estimated that if all idividual vehicle-keepers opted to use this method of paymet, the total aual surcharge would be up to 50 millio. Evaluatio of the pilot scheme 20 The pilot scheme has bee evaluated by the Agecy's project maagemet team. A customer service satisfactio questioaire set to pilot scheme participats revealed that over 98 per cet of respodets were satisfied or very satisfied ad would wat to use the service agai. The evaluatio report recommeded the cotiuatio of the pilot beyod its origial ed date ad a expasio of the potetial customer base. The Agecy told me that the parter isurace compay iteds to brig a further 53,500 potetial telephoe relicesig customers withi the scope of the exteded pilot by December Negotiatios with other isurace compaies to idetify ew scheme parters are cotiuig. R4 21 The Agecy told me that it believes a successful future itroductio atioally of telephoe re-licesig will deped o the timely ad complete delivery of two major computer projects curretly uderway. These projects are developmet of a atioal MOT database by the Vehicle Ispectorate (due to

5 become available i March 2002) ad a ew database of vehicle isuraces beig costructed by the Associatio of British Isurers (due to become operatioal durig the summer of 2001). 22 These developmets will ope the optio of telephoe re-licesig to keepers of vehicles over three years old, ad would also create the possibility of Iteret re-licesig. The Agecy also told me that it cosiders the extesio of the scheme atio-wide will have a positive effect o levels of vehicle excise duty evasio ad also o other categories of vehicle-related crime. Measures to Combat Evasio 23 This sectio of my report looks at the icidece of vehicle excise duty evasio, the measures that have bee itroduced to combat evasio, estimates of reveue lost through evasio ad amouts recovered through eforcemet activities. 24 Evasio of Vehicle Excise Duty remais a problem that the Agecy cotiues to take very seriously. A full roadside survey coverig all vehicle groups for both Great Britai ad Norther Irelad was coducted i Jue 1999, ad the results published i February The survey results showed that evaders are travellig shorter distaces ad less frequetly. The Agecy told me that it has cocluded from this that evaders may be becomig icreasigly wary of the Agecy's eforcemet efforts ad as a result less prepared to take the risk of travellig ulicesed. Levels of evasio 25 The evasio level i Great Britai was estimated i the latest roadside survey to be some 3.9 per cet, a improvemet o the 4.1 per cet level estimated i the 1994 survey. The reveue lost i Great Britai durig due to vehicle excise duty evasio is estimated by the Agecy to be aroud 97 millio ( 116 millio i ). This comprises a gross evasio loss of 183 millio ( 195 millio i ), offset by some 86 millio ( 79 millio i ) recovered through eforcemet activities. 26 The latest estimate for evasio i Norther Irelad is 9.6 per cet, which is a improvemet from the previous reported level of 10.1 per cet. The estimated cosequet loss of reveue i was some 13.7 millio ( : 11 millio). 27 As oted i paragraph 7, total Vehicle Excise Duty reveues have icreased by some 17.3 per cet i the last five years. This is due, i part, to a 11 per cet growth i the vehicle populatio ad a icrease i the rates of duty over that period. However, the Agecy told me that the icrease i reveues is also partly attributable to the icreasig impact of various schemes that they have itroduced to combat evasio. R5

6 28 The various sources of eforcemet reveues are show i Figure 3 below: 3 Reveues geerated from Couter-Evasio Measures, ad (Great Britai ad Norther Irelad) Out of Court Settlemets Iduced Re-Licesig Pealties ad Fies Total millio Source: Driver ad Vehicle Licesig Agecy Year Expasio of measures to combat evasio 29 I my report o the accouts, I referred to the extesio of the Agecy's wheel-clampig scheme atio-wide. For the year , there were twelve permaet teams i operatio, together with two mobile teams operatig i areas where 'blitz' campaigs were held. The private sector cotractor targets key areas ad locates ulicesed vehicles parked o public highways. Followig wheel-clampig, the vehicle ower has to pay a fee for the release of the vehicle, ad also purchase a valid tax disc. Aside from the reveues specifically geerated by this measure, a otable effect of the scheme has bee the iduced re-licesig evidet withi each geographic area durig the period whe the well-publicised scheme is i operatio. 30 Twety- six wheel-clampig / Vehicle Excise Duty eforcemet campaigs with idividual police forces took place i As a result, aroud 21,000 vehicles were clamped/impouded. Over 7,000 of these were released o paymet of fees ad 10,000 disposed of maily by crushig. At 31 March 2000, the remaiig 4,000 vehicles were withi the "awaitig authorisatio to crush" period, which is betwee 5 ad 7 weeks. I additio, the Agecy has calculated that over 62,000 motorists volutarily re-licesed their vehicles durig the year as a direct result of the campaig, geeratig 8.8 millio i additioal reveue ad a further 0.7 millio from fees ad pealties. 31 The Agecy told me that it is cotiuig to idetify ways of reducig levels of vehicle excise duty evasio. Oe pilot scheme plaed to commece durig is a trial of Automatic Number Plate Readers (ANPR) to gather evidece of ulicesed vehicles o public roads, with a atio-wide operatio plaed for sprig A further iitiative ivolves fourtee police forces, who are usig their ow ANPR systems i roadside checks to detect ulicesed vehicles by comparig umber plates agaist a ulicesed vehicle database. R6

7 Extra Statutory paymets 32 Prior to 1 February 1998, a keeper did ot have to otify the Agecy if they chose ot to reew a vehicle licece. This made it easier to evade vehicle excise duty. Uder the ew Statutory Off-Road Notificatio Regulatios, if a ew licece is ot take out to ru cosecutively, the keeper must make a statutory declaratio that the vehicle is beig take off-road for the utaxed period. Similarly, if a keeper applies for a refud because the vehicle is beig take off-road, he or she must also make a statutory declaratio. Failure to make such a declaratio is a offece that is followed up by the Agecy. 33 I my report o the accouts, I oted that the Agecy had idetified some cases where applicats for refuds had take their vehicle off-road but mistakely failed to make the required declaratio. As a cosequece, o refud of vehicle excise duty was payable uder the ew regulatios. The Departmet cocluded that, i such cases, the iadvertet failure to make a declaratio should ot preclude the vehicle ower from receivig the appropriate refud of duty. However, uder the regulatios, the Agecy did ot possess powers to make refud paymets i the absece of a siged declaratio ad therefore sought Treasury approval to make extra-statutory paymets i these cases. The Treasury grated a 4 millio aual delegatio to the Agecy for such paymets, with the proviso that suitable legislative cover must be sought by the Agecy to rectify the positio at the earliest opportuity. 34 The Agecy's iformatio systems are uable to idetify separately all refuds made i this way. However the Agecy has estimated, from a statistical extrapolatio of a sample of all refuds, that approximately 120,000 extrastatutory paymets were made durig , totallig some 3.9 millio. I am satisfied that the results of this statistical aalysis provide a fair represetatio of the volume ad total value of the extra-statutory paymets made durig Graduated Vehicle Excise Duty Itroductio of the Iitiative 35 I his budget of 9 March 1999, the Chacellor aouced a package of measures to reform vehicle excise duty. Oe key feature of this was the itroductio of Graduated Vehicle Excise Duty (the 'Graduated VED' iitiative) for vehicles i the Private Light Goods tax class. 36 The Graduated VED iitiative was implemeted i two phases. Uder phase 1, from Jue 1999 the level of duty charged was determied by referece to a vehicle's egie size. The ew two-baded system itroduced the followig charges: 4 Phase 1 Graduated Vehicle Excise Duty levels Vehicle type 12-moth licece 6-moth licece ( ) ( ) Egie size ot exceedig 1100cc Egie size exceedig 1100cc Source: Driver ad Vehicle Licesig Agecy R7

8 37 Uder phase 2 of the iitiative, a graduated chargig regime for ew cars based primarily o their emissios of carbo dioxide (CO 2 ) was aouced i September This formed part of the Govermet's policy to reduce CO 2 emissios from cars ad improve local air quality. Further reforms to the VED system were aouced i the Chacellor's March 2000 Budget ad November 2000 pre-budget Report. Implemetatio of Phase 1 38 The two-bad system with the egie size threshold of 1100 c.c. affects some 1.8 millio vehicles i the Private Light Goods class. The reduced rate applied to ew liceces take out from 1 Jue Uder the ormal rules, vehicle keepers were etitled to surreder their existig liceces for a refud of the uexpired period, ad also to take out a ew licece at the lower rate from 1 Jue To avoid the icoveiece to the public of havig to apply for two separate trasactios, ad the extra operatig costs to the Agecy, two special systems were itroduced which had the effect of providig the fiacial beefit through a sigle trasactio. Oe system was available oly to fleet operators, whilst the other was available to all other vehicle keepers affected by the two-bad assessmet of duty. For Norther Irelad, DVLNI carried out its ow trawl of vehicle records. All drivers i the Provice received direct refuds, as DVLNI chose ot to adopt the combied refud ad re-licesig form-based system used by the Agecy. Fleet Operators 40 Fleet operators received from the Agecy a paymet equal to the differece betwee the old ad ew rates, o the uexpired portio of their existig liceces. The Agecy told me that this process offered a efficiet, automated way of providig the et beefit of the ew rates to compaies operatig large umbers of vehicles ofte distributed across the coutry. No-fleet vehicle keepers 41 The Agecy iitiated a special oe-off exercise to give idividual keepers of small cars the opportuity, if they wished, to take out a ew licece at the reduced rate from 1 Jue 1999 ad to off-set the purchase cost by the value of the uexpired period o their existig disk. The Agecy regarded this sychroised approach to the refud ad re-licesig activities as the optimal meas of effectig the iitiative, give the time available. 42 The Agecy told me that if it had ot offered this sychroised service, the expected substatial icrease i public demad for refuds ad the issue of ew liceces would have created severe operatioal problems for the Agecy. Ay sigificat time delays i processig refud applicatios would have created public impatiece ad led to the besiegig of the Agecy's telephoe equiry poits. 43 This special scheme was volutary, ad vehicle keepers were free to apply for refuds uder the ormal rules, if they wished to do so. The Agecy cotracted with Post Office Service Couters Limited to udertake the refud / re-licesig service o the Agecy's behalf, icludig the provisio of a telephoe help-lie to allow couter clerks to check egie size where relicesig applicats did ot have their registratio documets. The Post Office had ever before hadled refuds of Vehicle Excise Duty, ad this process ivolved both a refud R8

9 ad a re-licese at o-stadard values i oe simultaeous trasactio. The additioal charge for this arragemet was equivalet to aroud two week's worth of the Post Office's stadard cotract with the Agecy. 44 A key iitial task for the Agecy was to carry out a exercise to check ad, where ecessary, correct the egie sizes for vehicles show i the record. To prevet further problems i the future, the Agecy has sice itroduced a 'blockig' process, whereby otificatios of chages i egie size are ot accepted without supportig documetary evidece - particularly for claimed reductios i egie size. The ecessary legislatio to require keepers to produce such evidece was eacted i the Fiace Act I May 1999 some 1.6 millio V901 applicatio forms were issued, followig a secod sca of the record to idetify recetly otified chages of keeper ad/or address. This was accompaied by extesive advertisig i atioal ad regioal press, o radio ad the iteret. Nevertheless, the Agecy recogised that its idetificatio procedures could ot be etirely error-proof, ad waited for idividual keepers to appeal if they believed they should have bee icluded i the refud system. Such appeals, from vehicle keepers claimig owership of vehicles with egie sizes below the threshold, were few i umber. The majority came from owers of vehicles who believed from dealer advertisemets that they had purchased vehicles with egie sizes below 1100c.c, whereas the accurate egie size exceeded the threshold. For some models the margi of excess was very small. For example, over 750,000 '1.1 litre' Ford Fiestas have bee sold i Great Britai, but which have a actual egie size of 1,117 c.c. Results of the Phase 1 implemetatio 46 The two systems used by the Agecy met with differig degrees of success. The Fleet scheme was well received by users ad received public praise from the relevat trade associatios. However, the system used for private keepers was subject to criticism: Despite the Agecy's public iformatio campaig, there remaied cosiderable public misuderstadig over the operatio of the scheme ad the value of the refud. May members of the public expected to receive a moetary refud, rather tha havig to icur the costs of a ew six or twelve-moth licece, albeit that this cost was abated by the value of the refud; ad May members of the public foud the specially desiged form cofusig ad difficult to uderstad. 47 Partly as a result of these factors, the evetual take-up rate for the o-fleet scheme, aroud 50 per cet of the eligible populatio, was relatively low. The Agecy told me that a higher proportio of those who opted to take up the refud offer had a log expiry period o their existig licece. These keepers were cosequetly able to obtai a ew licece for little, if ay, moetary outlay. Raisig of the two bad threshold level 48 The Chacellor of the Exchequer aouced i March 2000 that the threshold level for reduced duty would be raised from 1100 c.c. to 1200 c.c. from March This will icrease from 1.8 millio to some 4 millio the populatio of vehicles that will be taxed at the lower rate. This equates to approximately 20 per cet of the total vehicle populatio. The Agecy told me that it does ot expect the problem that arose with large umbers of vehicles margially exceedig the 1100 c.c. limit to recur at the higher threshold. R9

10 Implemetatio of Phase 2 49 Phase 2 of the Graduated VED iitiative will also come ito effect i March This will result i the taxatio of vehicles beig assessed o two etirely differet bases. For existig vehicles, the curret two-tier duty rates will remai applicable, but for all ew vehicles registered after 1 March 2001, the level of vehicle emissios becomes the determiat of duty. There will be o opportuity for vehicle owers to move betwee the bases of assessmet. 50 Uder phase 2, a taxatio matrix of four bads ad three fuel differetials is itroduced. Diesel vehicles will be levied at the highest duty rates, with vehicles usig alterative fuels beig charged the lowest rate. Petrol vehicles will be charged at various rates betwee these two extremes. Figure 5 below shows the levels of duty ad the categories of vehicle to which they will apply. 5 Levels of aual Vehicle Excise Duty payable o ew passeger cars from 1 March 2001 Duty Bad Duty Bad Duty Bad Duty Bad A B C D CO 2 Emissio Figure (g/km)* Up to Over 185 Diesel Car Petrol Car Alterative Fuel Car * g/km = grammes of CO 2 emitted per kilometre travelled. Source: DVLA Iformatio leaflet umber - INS I will examie the Agecy's hadlig of the implemetatio of Phase 2 of the Graduated VED iitiative, ad the further measures aouced by the Chacellor i his November 2000 pre-budget Report, as part of my audit of the accouts. I particular, I will ascertai whether the procedures ad regulatios adopted by the Agecy to maage this radical chage i the system of taxatio cotiue to provide for the effective assessmet, collectio ad allocatio of vehicle excise duty. Vehicle System Software Project Itroductio 52 For may years, the Agecy has operated two large databases cotaiig driver details ad vehicle details respectively. These systems provide the corerstoe of the Agecy's operatios i udertakig its statutory resposibilities for the registratio ad licesig of drivers ad vehicles. The origial vehicles database, called 'Legacy', came ito service durig the mid-1970s. 53 I 1996, the Agecy carried out a wholesale review of its computer systems for milleium compatibility. The 'Legacy' vehicles system was oe of those idetified as a potetial cause for cocer by this review. Very few people still possessed ay expertise i the, by ow obsolete, laguage used to create the database ad the cost of maitaiig the system was becomig icreasigly expesive. The Agecy idetified that there was a serious risk of system breakdow. R10 54 At the same time, the Agecy was lookig to itroduce ew iitiatives to aid eforcemet of vehicle excise duty. Sice the Vehicle Excise ad Registratio Act - Road Vehicle (Registratio ad Licesig) Regulatios 1971, which provided for the issue of registratio documets by the Agecy, there had bee

11 little legislative chage that impacted directly o the data to be recorded withi the vehicles database. However, ew iitiatives such as the Statutory Off Road Notificatio (paragraphs refer), were placig additioal demads o the fuctioality of the system. 55 The Agecy busiess case submitted to Treasury i Jue 1996 sought to demostrate that a replacemet system would make such chages cheaper ad easier to implemet tha merely adaptig the existig database. The Treasury approved this busiess case o 31 July Stage I - scope ad cofirmatio of requiremets 56 The IT divisio of the Agecy (kow as DVOIT) was sold to Electroic Data Systems Ltd (EDS) i The Agecy's iitial cotract with EDS icluded a 'Services Provisio Agreemet' which was to ru util 30 Jue 1999, with a optio for the Agecy to exted this for a further eightee moths util 31 December I additio, the Agecy was cotractually boud uder the terms of the Agreemet to employ EDS for all developmet work o both the vehicle ad driver systems durig this period. 57 O receivig Treasury approval, the Agecy therefore commissioed EDS to prepare a detailed scope ad costig for the ew system, based o the comprehesive user requiremet that the Agecy had draw up. 58 EDS proposed that the Agecy commissio EDS to desig, build ad operate a ew Vehicles Licesig ad Registratio System, ad at the same time exercise the optio for extedig the existig Services Provisio Agreemet. The Agecy agreed to this proposal i Jauary The cotract for the ew Vehicle System Software (VSS) project was for a fixed price of 4,998,880. This price icluded a risk cotigecy elemet of 414,000 agaist 83 specified potetial risks, ay of which would require remedial work to resolve. The agreed list of risks was desiged to cover all evetualities, ad specifically icluded the risks that a two year developmet period would be isufficiet ad that 'Coolge' (the program developmet laguage proposed by EDS) skills ad traiig might prove iadequate. 60 EDS told me that it did ot appreciate the extet to which these risks would materialise at the outset, ad that the amout of fiacial cover icluded for risk cotigecy proved to be sigificatly lower tha required. However, these additioal costs were bore by EDS rather tha the Agecy. 61 The plaed target date for implemetatio of the full, re-egieered VSS system was 1 October I the evet of project slippage, EDS estimated that the cost of extedig the life of the 'Legacy' system from October 1998 to October 1999 would be 350,000. The Agecy gave fial approval to the project i Jauary Stage II - desig, build ad implemetatio 62 The Agecy sought the advice of exteral cosultats o a appropriate maagemet structure to adopt for the VSS project. As a result, the Agecy established a Project Board which icluded the Agecy's Director of Operatios ad Director of Developmet, together with represetatio from EDS. Geerally, this board met o a mothly basis. It was supported by a project team of Agecy staff that met fortightly with EDS for a checkpoit meetig that assessed progress agaist plas ad ay emergig issues. R11

12 63 The Project Board idetified at a early stage that the timetable for completig this project was tight. It agreed to take a firm lie agaist all but the most ecessary requests for chages to the origial user requiremet. I all, 80 chage cotrol otes were prepared over the developmet period, ad some of these were subsequetly withdraw or superseded. Although some of these chages are still to be delivered, the additioal cost to the Agecy is expected to be aroud 120,000. This icludes the cost of additioal equipmet ad programmig costs, ad represets a 2.4 per cet icrease to the origial fixed cotract price. EDS told me that the timescale for evaluatig ad approvig each chage, ad i particular the itroductio of Graduated VED, had a major impact o the project timescale. EDS also cosidered that both they ad the Agecy could have processed chage requests i a more timely maer. 64 A phased implemetatio of the ew system was plaed, ad the first live trasactio was processed through VSS i Jauary From this date, the 'Legacy' ad VSS databases were operatig i tadem. Differet trasactios were processed through each of the systems, ad ightly recociliatios were performed. The two systems were ot directly compatible ad EDS therefore had to establish a process for esurig that both databases were cotiuously up to date. This was achieved by idetifyig ad extractig ightly the chages made to each system durig each day's operatio, comparig the two systems ad the makig the appropriate updates. Durig this trasitioal period, the 'Legacy' system was used as the master database for both equiry ad output / pritig purposes. 65 Progress o the ew VSS system was ot as fast as expected, although it was ot util August 1998 that EDS ackowledged that it would ot be possible to meet the plaed fial 'cut over' date of 1 October As a result, the Agecy ad EDS therefore had to activate the cotigecy procedure to allow the 'Legacy' system to cotiue i operatio for a further twelve moths. The additioal costs of this procedure were met by EDS, who told me that the slow progress was due to the system provig more complex tha aticipated, the lower tha expected productivity achieved from the use of 'Coolge', ad the legth of time required to approve system requiremets. 'Cut over' to the ew system 66 'Cut over' was the term employed for the fial implemetatio of the VSS system. At this poit, VSS would become the master database ad 'Legacy' would be decommissioed. The 'cut over' date slipped from October 1998, at first to March 1999, ad the to the ed of August Followig the itroductio of the Graduated VED iitiative i the March 1999 Budget, further sigificat adjustmets were required to the ew system. This pushed the 'cut over' date back oe further moth to 1 October This degree of slippage caused cosiderable alarm withi the Agecy, as it kew that the 'Legacy' system could ot be made milleium-compliat ay further. 67 The Project Board met o 23 September 1999 to decide whether to proceed with the pla for 'cut over' o the weeked of 2-3 October However, the Project Board kew that there were still some key trasactio types that had yet to be fully or successfully tested o the ew system: R12 refuds of duty; cherished trasfers, for which the ew process had bee totally re-writte, with the aim of cuttig the trasactio processig time from three days to oe day; fleets licesig;

13 the processig of retured (bouced) cheques; o-lie amedmets to records; ad a cosiderable amout of the iformatio provided to exteral customers. I additio, the testig of the disaster recovery actio pla had ot bee completed, ad EDS had yet to prepare a ew Service Provisio Agreemet. 68 The Project Board accordigly decided to postpoe 'cut over' for two weeks, aimig for the weeked of October The timig of the trasitio was sesitive because the Automated First Registratio ad Licesig system would have to be take temporarily off-lie, durig which time motor dealers would be uable to register ew vehicles. Thus the ed of a moth would ot have bee coveiet to these users. The Police Natioal Computer (PNC) operators also eeded to coduct their ow system testig o the 'cut over' day, to verify that the ew liks were operatig effectively. 69 The Project Board met agai o 13 October 1999 to cofirm 'cut over' for the comig weeked. However, the project maager advised the Project Board to postpoe for a further three weeks, because there were still uresolved problems with the processig of refud trasactios ad with the data supplied to the Police Natioal Computer. The Project Board agreed to meet agai o Friday 15 October to make a fial decisio, thereby allowig a further two workig days for EDS to resolve some of the key outstadig issues. 70 At this ext Project Board meetig, EDS advised that the 'Legacy' system might ot cotiue to fuctio adequately ito November 1999, as milleium compliace failures would the start to emerge. As a result, the Project Board decided to go ahead with 'cut over' durig the weeked of October Durig the summer ad autum of 1999, the Agecy had draw up cotigecy plas i case the VSS ad 'Legacy' systems both failed. These fallback measures largely relied o maual processig of trasactios, ad would have required sigificat additioal resources (up to 400 temporary staff). It swiftly became apparet that the Agecy would be uable to recruit at this level, ad that such resource demads could probably oly be met by offerig overtime to existig staff throughout the Agecy. There was clearly o guaratee that the Agecy would have bee able to hadle the volume of work maually ad, at the very least, there would ievitably have bee a serious disruptio of customer services. Post implemetatio 72 I the period immediately followig the cut over, the Agecy ad EDS implemeted a system of rigorous cotrols to moitor the performace of the VSS system. For example, the Agecy withheld customer outputs for two to three days, to avoid the eed for later recovery actio if errors were subsequetly idetified. The volumes of data iput to VSS were restricted, to esure the system was ot overloaded, ad the Agecy implemeted a procedure to check all paper output from the system maually. I additio, EDS udertook regular scas of the system to detect potetial failures. Durig the first full week of operatio, the 'Legacy' system was decommissioed, ad VSS became the Agecy's master vehicles database. 73 The 'cut over' i October 1999 was udoubtedly a high risk strategy, but oe which the Agecy had little optio but to follow because of the istability of the 'Legacy' system. Sice implemetatio VSS has, for the most part, operated R13

14 relatively successfully ad EDS told me that it cosidered the adopted approach to have bee justified. However, a umber of serious problems have arise durig the first year of operatio: Refuds of vehicle excise duty remai the most problematic trasactios, ad I commet further o these at paragraph 78; Durig the Christmas 1999 period, there were istaces of corrupt data beig dowloaded to the Police Natioal Computer. There was o evidece of ay wrogful arrests or of legal actio based o this icorrect data, but these failures did create a risk of such occurreces. EDS was able to resolve this problem i Jauary 2000; A failure i maual pritig procedures resulted i the VSS system geeratig duplicate registratio marks for issue to motor dealers, although this error was discovered by the Agecy's iteral maual cotrols before ay dealers had bee otified of the marks. However, this failure almost resulted i the issue of 100,000 duplicate registratio marks, which would have caused a eormous admiistrative problem as well as posig a sigificat risk to eforcemet activities; Agecy staff idetified oe vehicle more tha 20 years old, for which o history was cotaied withi VSS before October A detailed sca of the 60 millio records o the system showed that this failure to migrate data from 'Legacy' was limited to uder 100 vehicles, ad the Agecy were able to recreate the vehicle histories for these from back-up log tapes; the Agecy sells aoymised data, providig certai statistical details, to a umber of commercial orgaisatios. However, i the period immediately followig implemetatio of VSS i October 1999, the data ofte proved to be corrupt or eve udeliverable. This resulted i complaits from the customer base, ad resulted i the Agecy havig to forgo total icome of some 20,000 which would ormally have bee due from these orgaisatios over several moths i Sprig EDS told me that this loss of icome, although regrettable, was ot covered uder the terms of its agreemet with the Agecy; The Secretary of State for the Eviromet, Trasport ad the Regios uses trasport statistics extracted from the Agecy's vehicles database to iform certai policy decisios. These statistics were ot available immediately after 'cut over' from VSS, ad this situatio was ot rectified util Summer Post-implemetatio 'Trouble Reports' 74 Whe Agecy operators or testers idetified a error or failure withi the ew VSS system, the project team raised a 'trouble report' for EDS to actio. Immediately followig the cut over i October 1999, the umber of trouble reports grew rapidly to over 600 separate items. I lie with its ormal procedures, EDS had cut the umber of system testers ad developmet staff workig o the project oce VSS had bee implemeted ad, as the problems started to mout, the Agecy wrote to EDS several times expressig cocers over low staffig levels. EDS told me that it had retaied more staff tha aticipated ad retaied key cotractors for three moths followig implemetatio. R14 75 By April 2000, some six moths after VSS became the master database, the outstadig trouble reports still umbered over 300. Whilst approximately 50 of these items related to cosmetic issues such as scree layout, the majority cocered fudametal failures or errors withi the operatio of the system. This led to the Agecy categorisig trouble reports ad specifically highlightig the top 25 items for EDS to correct.

15 76 I order for the project to be deemed complete, ad therefore for EDS to be able to claim the fial istalmet paymet, the Agecy required the umber of outstadig trouble reports to be o more tha 100, ad for oe of these to be critical to the effective operatio of VSS. By the begiig of September 2000, the umber of trouble reports still stood at aroud 120. EDS was able to reduce this figure to the 100 target, whilst also clearig all the critical 'top priority' trouble reports ad other outstadig project deliverables by mid-october By this date, the Agecy ad EDS were able to coclude a 'Closure Protocol ad Agreemet', which also icluded measures for reducig the trouble reports to 50 by December The followig figure shows the progress sice 'cut over' i clearig outstadig trouble reports: 6 Number of trouble reports post implemetatio Number of Reports October 1999 November December Jauary 2000 February March April May Jue July August September October Source: Project Board Miutes Processig of refuds of vehicle duty 78 A vehicle keeper ca apply for a refud of vehicle excise duty by surrederig a curret tax disc. The refud paid correspods to the umber of complete moths remaiig o the life of the disc. If a disc has bee lost or stole, the the keeper ca still obtai a refud o applicatio, but a admiistratio charge is levied (the appropriate legislatio 1 requires a ew disc to be issued, for which a fee is chargeable. The refud is the techically offset agaist this replacemet disc). 79 I order to prevet fraudulet claims for refuds, for example whe a vehicle is stole, the Agecy withholds paymet of the refud for a set period to establish that o other activity occurs for that record (for example, police otificatio of a stole vehicle). This withholdig of paymet is kow as 'recyclig'. 80 The Agecy origially plaed for the refud trasactio type to migrate from 'Legacy' to VSS at a early stage, but this proved problematic. Durig the testig stage the process was ot operatig properly, although EDS made sigificat progress i the fial week before cut over. Nevertheless, this 1 Vehicle Excise ad Registratio Act R15

16 trasactio type has bee plagued by difficulties sice goig live, ad Agecy operatioal staff have had to istall their ow set of cumbersome maual checks. 81 I the period October to December 1999, the VSS system did ot release some paymets for refud trasactios, as a fault i the program resulted i it ot releasig some 'recyclig' trasactios. Whe this issue was resolved i Jauary 2000, a backlog of some 100,000 refuds had built up. The system has oly the capacity to process 30,000 refuds per workig day, ad it automatically prioritises ew paymets ahead of the backlog trasactios. This resulted i customer complaits, ad the Agecy had to iitiate a maual paymet procedure to clear the backlog, buildig i appropriate safeguards to prevet duplicate paymets. 82 A separate VSS system fault caused some refud paymets to be made to a icorrect payee or set to a icorrect address, because the system was iterrogatig the mai file record rather tha the specific details give by customers o their refud applicatios. This error was brought to the Agecy's attetio by a commercial customer, who received a uexpected refud. However, the Agecy has ot bee able to idetify how may more icorrect paymets were made i this way. 83 A further failure i the refud system resulted i Heavy Goods Vehicle keepers receivig icorrect amouts, agai because the system calculated the amout due based o historical data cotaied i the mai file record rather tha curret weight ad wheel base plas. This error was discovered whe a customer iformed the Agecy that he had bee overpaid. The Agecy cofirmed to me that this fault has sice bee corrected, ad o further istaces have bee reported. It is uable, however, to establish with certaity the total value ad volume of icorrect refud paymets made. 84 I February 2000, the Agecy idetified that the refud trasactio process also cotaied a 'Year 2000' fault. The system would ot issue refuds for discs with a expiry date i Jauary 2001, because it recogised dates i 2001 as 1901 ad the trasactios therefore failed a key test that the expiry date should be after the applicatio date. The refud trasactio process had ot bee icluded withi the otherwise rigorous milleium compliace testig of the system because it had ot bee ready at the time of testig. However, EDS was able to rectify this programmig bug before customer service was adversely affected. Costs of the VSS Project 85 The 1996 EDS project proposal provided for seve quarterly paymets from March 1997 to the plaed implemetatio date of October 1998, based o EDS deliverig agaist agreed project 'milestoes'. The first six milestoes were reached by Jue 1998, by which poit some 85 per cet of the moies due i respect of those milestoes had bee paid to EDS. The Agecy was retaiig almost 560,000 agaist udelivered products or fuctios. Shortly after this, EDS told the Agecy that it could ot meet the October 1998 completio target. Although further progress was made i deliverig the project, the Agecy did ot make a further paymet to EDS util March R16 86 However i August 1998, whe it became clear that the VSS system would ot be delivered to the origial schedule, the Agecy iformed EDS that the fial paymet would be withheld util completio, ad that o ruig cost paymets would be made util the system had bee fully operatioal for oe moth.

17 87 The Agecy paid a further istalmet of system developmet costs totallig 350,000 i March 1999, ad aother paymet of 300,000 i March This left a remaiig outstadig balace of some 200,000, which was paid o closure of the project i October This equated to a 4 per cet retetio elemet agaist the total cotract price. 88 The VSS project has lasted four years, although 73 per cet of the fixed price cotract was paid durig the first eightee moths. The milestoes that EDS was workig to allowed the compay to claim paymets whe processes had bee documeted, as well as whe they became fully operatioal, ad so EDS was etitled to draw dow further stage paymets despite the project ruig icreasigly behid the origial timetable. 89 Despite the difficulties experieced with this project, the Agecy has maaged to avoid spirallig project costs by preparig a detailed user requiremet at the outset, cocludig a fixed price cotract ad keepig subsequet chages to a miimum. The Agecy also egotiated reductios i ruig costs with EDS to reflect the Agecy's additioal costs icurred by the project delays. As a result, the Agecy's latest estimate of total project costs, icludig both capital sped ad the Agecy's ow ruig costs, is 11.1 millio. This compares to the busiess case estimate of 10.5 millio, ad represets a 6 per cet oversped. EDS told me that it cosidered that certai areas of the user requiremet produced at the outset were ot fully comprehesive, ad it believed that this had udoubtedly cotributed to the delays, cost uder-estimate ad volume of trouble reports that affected the overall success of the VSS project. Project Closure 90 The VSS project fially closed i mid-october 2000, whe the project team was disbaded ad the fial istalmet of the cotract was paid by the Agecy to EDS. The project had lasted four years, twice the origial timescale, although the direct cost to the Agecy has remaied withi the limit set withi the Treasury-approved busiess case. The Agecy ad EDS discussed the requiremets for project closure followig 'cut over' i October 1999 ad agreed, i two Agecy letters to EDS i February ad March 2000, the followig coditios for closure: A agreed detailed Service Provisio Agreemet must be i place, specifyig EDS's resposibilities for the upkeep of VSS, ad settig out the ruig costs chargeable to the Agecy; Satisfactory completio of the "top priority" trouble reports, ad those of "mid-priority". I practice, this would leave aroud 100 outstadig trouble reports, relatig maily to cosmetic chages which could be addressed post-closure withi the terms of the Service Provisio Agreemet; Delivery of all products that impacted o exteral customers. This particularly related to the adequate provisio of aoymised data for resale; Completio of all system documetatio. The EDS cotract expires i March 2002, at which poit the cotract for the maiteace ad operatio of the Agecy's iformatio techology systems will be re-tedered. If a differet cotractor were to be appoited, it would require this documetatio to allow it to fulfil its resposibilities; R17

18 A successful resolutio to the ogoig commercial discussios regardig VSS fiaces sice April 2000, ad the issue of post-vss developmet costs. A key feature of the VSS proposal prepared for the Agecy by EDS i Jauary 1997 was a estimated 30 per cet potetial reductio i the full cost of a rage of typical vehicle system chages, agaist the developmet costs associated with the predecessor 'Legacy' system. The Agecy told me that i reality for some other projects their developmet costs have seemed higher tha expected. EDS is coductig a review with its software supplier to see where further productivity improvemets ca be made, ad told me that its origial estimate of a potetial 30 per cet savig was a cautious commitmet desiged ot to create urealistic expectatios withi the Agecy. EDS had also proposed to move away from the existig maiframe system, but techical difficulties have meat that this must still be used for pritig VSS outputs. Thus, at preset, two systems are ow required rather tha oe. 91 I additio to the above issues, work remais to be performed o testig the Disaster Recovery Pla. Although limited testig was udertake prior to the 'cut over', o further progress was made by EDS util early October 2000 whe a further limited test was carried out. The results of this test are awaited by the Agecy from EDS. The Agecy told me that i the loger term EDS accepts the absolute requiremet for a full-scale Disaster Recovery Pla for the etirety of the Agecy's Vehicle ad Driver systems, ad is plaig to do so i October Give the umber of failures ad problems ecoutered sice implemetatio, I cosider that the Agecy should complete testig of the Disaster Recovery Pla urgetly. 92 The Agecy told me that it iteded to draw up a project evaluatio report by mid-november 2000, aalysig the overall beefits delivered, the lessos leared ad the costs icurred. The Agecy's iteral audit uit plas to carry out a formal Post Implemetatio Review six moths after project closure, to evaluate the successes of the VSS project ad to idetify lessos for future Agecy projects. I ited to moitor the outcome of this review as part of my future audit work. Joh Bour Natioal Audit Office Comptroller ad Auditor Geeral Buckigham Palace Road Victoria 20 December 2000 Lodo SW1W 9SP R18