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In a letter to HMRC staff, Gray said that his resignation was the results of "a substantial operational failure in the department".

"This is not the way I would have planned to organise my departure from HMRC. I had hoped to be around for a while longer, and to have had the continuing privilege of leading HMRC towards the vision we have been developing. But I am extremely proud of what all of you in the organisation have achieved during my time as deputy chairman and chairman," he added. 

Chancellor Alistair Darling called the data loss "a matter of extreme regret". He told the House of Commons that a junior official at HMRC had supplied the National Audit Office (NAO) with a complete copy of all UK records relating to child benefit recipients twice this year.

Not encrypted 

On the first occasion, the entire child benefit database - including names and children's names, dates of birth, addresses, bank and building society account details and national insurance numbers of 25 million UK individuals - 15 million children, 10 million parents involving a total of 7.25 million families - was sent to the NAO in breach of security rules. The Audit Office returned the information in March 2007.

On the second occasion, a junior official forward the entire database again to the NAO in October. When the first disc had not appeared to have arrived, a second was simply stuck in an envelope and put in the regular mail. The discs were password protected, but not encrypted.

The packages were not recorded or registerred and failed to reach the NAO. Darling said that the information was transferred in a way that was "in clear breach with HMRC's existing procedures".

He added that an investigation had failed to locate the missing data and that a police investigation had subsequently not managed to find the two missing discs either.

The Chancellor said that the Financial Services Authority and banks had asked for a delay in the announcement of the data loss, in order to take measures to prevent fraudulent use of the data. He said that any resulting loss would be covered under the Banking Code and that individuals would not be liable for financial losses resulting from possible identity theft.

Conservative Shadow Chancellor George Osborne told Darling to "get a grip and deliver a basic level of competence".

Lost in transit

HM Revenue and Customs (HMRC) was formed on the 18 April 2005, following the merger of Inland Revenue and HM Customs and Excise Departments. Work is still continuing on an office restructuring programme.  

Earlier this month, HM Revenue and Customs admitted that 15,000 records were at risk after a CD with personal data was lost in transit by an external courier. The data included names, national insurance numbers and dates of birth of thousands of holders of Standard Life pensions.

In October the agency confirmed that a laptop computer containing tax payer data had been stolen from an employee's car. It said, however, that the laptop was protected by a complex password and encryption software.

Gray joined HM Treasury in 1969 as an economist. In the late 1970s he spent two years as a corporate planner with Booker McConnell Ltd. Between 1988 and 1990 he was Economic Affairs Private Secretary to the Prime Minister.

In 1990 he returned to the Treasury working on monetary policy, serving as a member of the EU Monetary Committee. He then became Head of Personnel and Central Services, and was also a non-executive director of Laing Management Ltd. From 1995 to 1998 he was Director of Budget and Public Finances.

In 1998 Gray joined what was then the Department of Social Security (DSS) as head of policy. He played a major role in forming the Department for Work and Pensions (DWP) through the merger of the former DSS, the Employment Service and parts of the Department for Education and Employment (DfEE). Before joining HMRC, he was Second Permanent Secretary and Managing Director, Pensions and Disability in the DWP.

In 2004, he was appointed Deputy Chairman of both HM Inland Revenue and HM Customs and Excise and was appointed Deputy Chairman of HM Revenue and Customs following the successful merger of both former departments in 2005. From 1 September 2006 Gray was appointed Acting Chairman following David Varney's resignation and this was made permanent on 27 February 2007. 

Organised crime

Andrew Hubbard, tax technical director at accounting firm Tenon said that the tax system crucially depends on the integrity of personal data and the ability of the taxpayer to have a full exchange of information with the tax authorities.

"As far as we know this incident was simply a catastrophic failure of process rather than anything malign. The fact is that organised crime has attacked the tax system in the past, for example with the tax credit system. I find it incredible that a junior official had the ability to download the whole of the child benefit database, let alone put it in the post to another government department," he added.

He said that it is absolutely right that an independent review of HMRC's IT procedures and policies has been introduced. Hubbard is convinced that the data loss will have wider ramifications for UK taxpayers and businesses. With the advent of online tax filing the perceived security of such sensitive data will be at the forefront of everybody's mind. He supports HMRC's move to use electronic means of communication wherever possible, but said that this incident will not easily be forgotten. He added that it will take a huge effort on the part of HMRC to rebuild trust.

"On a personal note I am sorry to see the departure of Paul Gray, who has behaved honourably over this incident. I regarded him as a real asset to HMRC and somebody who was prepared to engage in serious dialogue with taxpayers and their representatives. I wish him well for the future and I hope that this extraordinary incident does not derail the very necessary process of the reform and modernisation of HMRC," Hubbard said.

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Related links

• HM Revenue and Customs
• HM Treasury
• Tenon Group