Senior management at HM Revenue & Customs has failed to inject pace, confidence and dynamism into the department, an influential report has found.

The Capability Review, which has already seen senior management changes implemented, found a department that is set to meet its efficiency savings but is short on seven of its ten service-level targets.

Sir Gus O’Donnell, head of the civil service, said HMRC was on track to cut 12,500 full-time posts and has met its Gershon efficiency target of reducing annual running costs by at least £507m, both by March 2008, and relocating posts out of London and the southeast by April.

But HMRC is behind on cutting VAT losses and recovering direct tax and national insurance underpayments. The taxman is also falling behind on online tax filing figures, despite the success of the self assessment system.

Middle managers, meanwhile, are unclear about senior management’s vision for the department’s future. Only 17% of middle managers think senior management is effective at leadership according to the review.

Only 41% of staff are confident in the department’s management. ‘The department needs to address a disconnect… about the ability of HMRC to set direction,’ says the report. A restructuring of management lines and responsibilities is required, it adds. The role of former CIO Steve Lamey, now COO, must be clarified and the board should have separate roles for a chief executive and non-exec chairman.

A complicated ‘matrix-management’ structure at the department ­ introduced by former chairman Sir David Varney ­ and extensive use of sub-committees has ‘diffused accountability’, leading to an increase in risk of errors being made further down the organisation. The matrix structure has been criticised by tax insiders since its introduction.

In response to the report, the taxman claims it is already on the case of turning itself around.

‘We will now create a simpler structure so that everyone understands who is responsible for what,’ says acting HMRC chairman Dave Hartnett. ‘This will start with an immediate review of the responsibilities of the top team and quickly move to the rest of the department.’

The executive committee has begun clarifying its role and hopes to simplify HMRC’s committee structure by February. Senior executives have already taken on new core respondsibilities.

The department has ‘significant analytical capability’ and needs to use it to better effect to measure its performance more effectively, Hartnett added. This process should be completed by November.