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Hartnett feared ‘major embarrassment to the chancellor’ in revisiting Goldman tax deal

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HMRC’s former head of tax advised colleagues against revisiting a settlement with Goldman Sachs partly because of concern that the company’s reaction might cause “major embarrassment” to the chancellor and HMRC, the High Court heard yesterday.

The settlement included national insurance contributions payable as a result of the failure of an avoidance scheme.

The campaign group UK Uncut Legal Action asked the court to declare that the settlement reached in 2010 was unlawful “because it was in direct contradiction of HMRC’s own statutory duty to collect tax properly”.

The group said Dave Hartnett, then permanent secretary for tax at HMRC, met Goldman’s tax director Mike Housden on 19 November 2010 and “shook hands on a deal which allegedly let the bank off £20m tax owed”.

The group has claimed that Hartnett personally overruled legal advice, HMRC’s own guidelines and its internal review board “to avoid political embarrassment at the heart of government”.

The cost to the exchequer has been estimated at between £5bn and £8bn, but the HMRC whistleblower Osita Mba contended in evidence to the Commons public accounts committee that the settlement may have cost as much as £20m.

However, the government argued in court that the allegations were “untenable” in the light of a National Audit Office (NAO) report concluding that five tax settlements examined by Sir Andrew Park, a former High Court judge ­– including the settlement with Goldman – were “reasonable”.

Hartnett said in a witness statement presented to the court that HMRC’s High Risk Corporate Programme Board rejected the settlement because it excluded “interest on the NICs element”.

'Bad faith'

The programme board had met on 30 November 2010 while Hartnett was in India. Goldman’s head of European tax left a message for Hartnett “alleging bad faith” on the part of Christopher Davidson, financial sector leader in HMRC’s large business service. Hartnett discussed the options open to HMRC at a subsequent meeting with a fellow commissioner for HMRC, Melanie Dawes, and the chair of the programme board, Freda Chaloner.

Goldman had made it clear that it regarded the settlement as final, and would “fight any attempt by HMRC to resile from it”, Hartnett said.

“We determined that it would be in the best interests of HMRC and taxpayers generally to stick with the settlement of 19 November … We considered that the overall result of the settlement was a very good one for HMRC and for taxpayers generally. It concluded a number of issues which had been outstanding between Goldman and HMRC for many years.”

Hartnett said there were uncertainties about the NICs issue. “Melanie, Freda and I had significant doubts that if the overall settlement was reopened it would stay intact and that nothing more would happen other than interest would be added. Put differently, we feared that reopening the settlement may have had a significant financial cost to HMRC.”

There was concern that “any perception of bad faith on HMRC’s part … may lead to Goldman being more aggressive in their relationship with HMRC which could result in lower tax payments in the future”.

Goldman had recently adopted the government’s code of practice on taxation for banks, designed to encourage banks to comply with the spirit as well as the letter of the law, Hartnett said.

“Goldman had been involved in tax avoidance in the past and we regarded their adoption of the code is likely to be a valuable step in securing improved tax behaviour from them. This would have been under threat if we reneged on the settlement (they said they would withdraw from the code if HMRC reopened the settlement) …

“Additionally, and without affecting the free-standing force of our concern about the effects of Goldman’s withdrawal from the code … I was concerned that withdrawal would have embarrassed the chancellor, who had announced on 30 November 2010 that the top 15 banks including Goldman had signed up to the code.”

Hartnett added: “We believed Goldman would have issued legal proceedings challenging any decision to renege on the settlement.”

It would have been “unfortunate and embarrassing for HMRC” to get involved in a dispute which “centred on a claim that we had breached a promise”.

Hartnett emphasised that his own personal reputation played “no part” in the decision.

In an email dated 7 December 2010, also presented to the court, Hartnett told Davidson that he recalled “a significant weakness in our technical position” on interest. “Steve [Bunson, Goldman’s global head of tax] suggested that we move on interest in return for them conceding 100% of NICs. That is what we ended up doing.”

Hartnett told Davidson: “The [programme board] rejected the planned settlement of the NICs issue on the basis that interest should have been charged from 2005. You spoke to [Michael Housden at Goldman] who went off the deep end at the suggestion they should pay interest …

“The risks here are major embarrassment to the [chancellor], HMRC, the [large business service], you and me, not least if [Goldman] withdraw from the code.”

An HM Treasury spokesperson said in a statement: “These are operational matters.  Taxpayer confidentiality means that decisions are always made by HMRC without any ministerial knowledge or involvement.”

The judge is expected to make his decision in a few weeks, the Financial Times reported. Even if he finds that the deal was unlawful, the court lacks the power to quash it, the FT added.

'Horse-trading'

Anna Walker, campaigns director at UK Uncut Legal Action, said: “This case shows the lengths that the government will go to in order to preserve the public perception that government is getting tough on tax avoidance. HMRC have tried tirelessly to cover up this deal. They have stonewalled the [Commons] public accounts committee, whitewashed the NAO report, criminalised a whistle blower and have fought this legal case every step of the way.”

Ingrid Simler QC, acting for UK Uncut, told the court that this was a “black and white” avoidance case and that HMRC was “horse-trading” with Goldman on interest and NIC owed, according to economia.

James Eadie QC, acting for the government, said HMRC had accepted it had “made mistakes” at the 19 November meeting and should have obtained prior approval from the board, the FT reported, adding: “But he said UK Uncut’s allegations were ‘simply now untenable’ in the light of a probe by former judge Sir Andrew Park. His review of five settlements, including the Goldman deal, concluded they were ‘fully compatible’ with HMRC’s litigation and settlement strategy.”

Hartnett remains a member of Tax Journal's editorial board.

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