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HMRC undertake to enhance tax settlement scrutiny

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HMRC should ensure that a clear separation exists between the negotiation and approval of large tax settlements to provide confidence to stakeholders on the appropriateness of all such settlements, the National Audit Office has recommended after auditors found that there was ‘no, or limited separation’ in three of the 27 cases they reviewed.

The department has complied with its governance arrangements for settling tax disputes with large companies ‘in a substantial majority of cases’, said Amyas Morse, head of the NAO, as his office published a report on HMRC’s 2010/11 accounts.

‘We are pleased that the NAO has endorsed our governance arrangements for large business tax settlements,’ an HMRC spokesman told Tax Journal. ‘We will further strengthen the process for assuring settlement decisions.’

He added that HMRC are ‘bringing in more money than ever before – over £468 billion during 2010/11, up by over £33 billion on the previous year’.

Dodwell: 'What is clear to tax professionals, but probably not to the public, is that determining [the "right amount of tax"] will inevitably involve negotiation involving experts at both HMRC and business'

Governance arrangements

The NAO report confirms that HMRC generally has good governance over the High Risk Corporates Programme established in 2006, said Bill Dodwell, Head of Tax Policy at Deloitte.

That programme ‘has contributed to the reduction of high value open issues and brought in a yield of £9.2 billion to March 2011’, the NAO said.

The watchdog sought to establish whether HMRC’s processes for settling tax disputes with large companies were adequate to establish ‘a sound position’ on the tax due. ‘This did not involve coming to an independent judgement on the tax liability in individual cases,’ it said.

The review found that HMRC had established sound governance arrangements for settling tax disputes, and had complied with those arrangements in ‘a substantial majority’ of cases.

Twenty-seven disputes were examined, and the NAO sought the views of major accountancy firms and six of the UK’s largest businesses on HMRC’s performance in resolving disputes.

In general, both groups welcomed the impact of the High Risk Corporates Programme in ‘allowing them to resolve long outstanding disputes within an accelerated timescale’.

Independent scrutiny

Five Commissioners of HMRC have ultimate responsibility for collecting and managing tax revenues. But the NAO observed that in three of the largest settlements examined, ‘one or both of the Commissioners signing off the settlement had also participated in the negotiations’.

In these three cases ‘there was no, or limited, separation between the negotiation and the approval of major tax settlements (though in one case there was support from independent legal counsel for the settlement)’.

The NAO added: ‘In the case where both Commissioners were involved in the negotiations, there was no independent scrutiny of the proposed settlement.

‘The Department believes that there will always be cases where Commissioners have to be involved and a clear separation will not be possible. However, in our view, this reduces the demonstrable assurance that the settlement reached is appropriate, for both external stakeholders, including other taxpayers and Parliament, and the Department’s own staff.’

Jason Collins, a Partner at the law firm McGrigors, said it was ‘alarming’ that ‘there has not been a proper separation of the HMRC people negotiating settlements with companies and the very top HMRC brass who have final sign off’.

Collins added: ‘The call for improved governance is thoroughly welcomed to counter any perception that big business and their professional advisers can resolve disputes simply because they know so-and-so in the top echelons of the organisation.’

HMRC told Tax Journal: ‘It’s only right that we deploy some of our best minds to the front line of high value tax settlements but we completely accept that there should be separate scrutiny of the process as this will provide even greater transparency for taxpayers, Parliament and the Department’s own staff.’

Litigation and Settlements Strategy

HMRC have decided to re-launch the department’s Litigation and Settlements Strategy, the NAO reported. ‘This is a sensible approach and should be done as soon as possible ... to ensure that there is a common understanding within the Department of how to apply the strategy in determining whether to settle or litigate on individual tax issues.’

‘Little transparency’

HMRC were investigating over 2,700 issues at 31 March 2011 with the largest companies, with ‘tax under consideration’ of £25.5 billion. As Tax Journal reported last week, HMRC emphasised that this estimate did not represent tax owed. Experience had shown that ‘only around half’ of the estimate of tax under consideration is tax brought into charge.

Earlier this year the Commons Public Accounts Committee said there was 'little transparency' for the taxpayer over the way tax disputes with large companies are resolved.

The Committee recognised HMRC’s obligation to ensure taxpayer confidentiality but said the department should consider ‘the scope for increasing transparency in the area of large and complex tax cases and for assuring Parliament and the public that due process in the resolution of these cases is being followed’.

The Public Accounts Committee report followed a series of protests against alleged tax avoidance by large companies. Some protests were prompted by an allegation that a £1.25 billion settlement that HMRC reached with Vodafone at the end of a long-running dispute was inadequate. The allegation was dismissed by both HMRC and Vodafone.

The NAO told Tax Journal in February that while the Vodafone settlement, along with other cases, would have been taken into account in deciding to launch its review of dispute resolution procedures, the NAO had 'long been aware' of a need to look at the control framework surrounding the settlement of investigations.


Bill DodwellA greater level of confidence

Bill Dodwell
Head of Tax Policy at Deloitte

‘The NAO report reveals what a success the High Risk Corporates programme has been. It’s interesting to see that the programme is viewed positively by large companies, HMRC and governments which encouraged its establishment in 2006 and its continuation today.

‘The NAO report usefully gives detail on how the programme works – which should give a greater level of confidence that “the right amount of tax” has been paid.

‘What is clear to tax professionals, but probably not to the public, is that determining that tax will inevitably involve negotiation involving experts at both HMRC and business. The NAO confirms that HMRC generally has good governance over the programme.’ 

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