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Large tax settlements were ‘reasonable’ but HMRC governance must improve, says NAO

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There should be no need for external reviews to provide assurances that HMRC’s tax settlements with large businesses are appropriate, the National Audit Office said as it concluded that five settlements examined by a former High Court judge were ‘reasonable’.

The NAO said today that the overall outcome of the settlements for the Exchequer was ‘good’, but its concerns about the processes by which the settlements were reached were confirmed.

‘There is a strong case for improving the processes for reaching these settlements, particularly separation of roles in negotiating and authorising settlements,’ it said, adding that HMRC had accepted this and was changing its governance arrangements.

Margaret Hodge, chairman of the Commons Public Accounts Committee, said: ‘If the final settlements in these cases were reasonable ... questions still remain over why officials by-passed the proper processes.’

NAO: Sir Andrew Park concluded that HMRC was ‘right not to reopen the settlement’


New governance arrangements

    HMRC welcomed the NAO report. ‘We have always maintained that the settlements represented good value for the UK, by making sure that large businesses play by the rules in often complex international transactions,’ a spokesman said.

‘In February we announced new governance arrangements for significant tax disputes, to provide greater transparency, scrutiny and accountability, and we are currently appointing a new Tax Assurance Commissioner, to ensure a clear separation between those who negotiate and approve settlements.’

Bill Dodwell, Head of Tax Policy at Deloitte, said: ‘HMRC’s commitment to giving more transparency to its decision making in settlements will be welcome but at all times this needs to be balanced against the need for taxpayer confidentiality, without which many companies will be reluctant to share highly sensitive commercial information [as] they have done in reaching many of the settlements covered in this report.’

Goldman Sachs

The five settlements reviewed by Sir Andrew Park are understood to include recent settlements with Goldman Sachs and Vodafone which, according to critics, were agreed at a substantial loss to the Exchequer.

Yesterday the High Court ruled that UK Uncut Legal Action could ask the court to declare that an agreement struck between HMRC and Goldman Sachs in 2010 – alleged to have cost the Exchequer between £5m and £20m, see Related articles below – was unlawful. HMRC said it would ‘strongly contest UK Uncut’s application’, and welcomed ‘the opportunity to demonstrate that we acted legally’.

‘Sir Andrew Park noted that several things went wrong in the process by which the settlement was agreed’

National Audit Office

Goldman and Vodafone were not identified in the five case summaries featured in the NAO report Settling large tax disputes. But the Financial Times today noted that, without naming Goldman as the taxpayer, the NAO said Sir Andrew Park concluded that an agreement not to charge interest on NICs payable by Goldman – in respect of share options awarded by an employee benefit trust – was ‘a deliberate decision that made sense in the context of reaching a settlement on all the issues under consideration’.

The NAO said the retired judge, who was involved in many leading tax cases, accepted in relation to ‘Company E’ that HMRC officials ‘may genuinely have believed that there was a [legal] barrier’ to charging interest.

‘Sir Andrew Park noted that several things went wrong in the process by which the settlement was agreed,’ the NAO said. ‘Despite the significant procedural issues, [his] conclusion is that the overall settlement reached was reasonable considering all the circumstances. Had the only issue been settling the employer’s NICs liability and charging related interest, he would not have viewed the settlement as a reasonable one. However, when the settlement is viewed as one settlement covering six issues, including the interest issue, it was reasonable.’

The NAO added: ‘Once the issue of interest is seen as separate from the issue of whether the liability is due, it can be viewed as part of a wider settlement like any other tax issue. Viewed in this way, a concession on interest may be what led company E to settle the other issues.

‘In this scenario, the overall amount agreed under the settlement might have been higher than if the Department had demanded the interest. This would have been either because company E would not have agreed to settle the other issues, or because it would have conceded fewer of them. Therefore, it could have been reasonable not to charge interest because otherwise a settlement may not have been reached, or if it had, it would have been of a lower value.

‘However, if the employer’s NICs issue had been the only tax issue in dispute, it would have been very difficult for the Department to justify a settlement whereby company E paid the NICs without interest, considering [a] settlement five years earlier with 20 other companies.’

HMRC took advice from its Solicitor’s Office on whether the agreement reached at the meeting was binding or should be reopened. ‘The advice was that it was legally permissible for the Department to either ask company E to pay interest, or for the Department not to,’ the NAO reported.

Sir Andrew Park ’s view was that if HMRC had reopened the settlement ‘there may well have been legal proceedings’. He concluded that HMRC was ‘right not to reopen the settlement’.


The NAO said the tax settlements were complex and there was ‘no clear answer’ as to what represented the ‘right’ tax liability.

Dodwell noted that the NAO report highlighted the complexity of the issues involved in long-running international tax matters. ‘[The report] shows the value of HMRC’s decision to set up the Large Business Service and appoint customer relationship managers to manage the tax affairs of the UK’s larger corporate groups,’ he said. ‘The new unit and the process of working much more closely with businesses does not let issues get out of hand – and provides the Exchequer and business with greater certainty.’

Chris Oates, head of tax controversy and dispute resolution at Ernst & Young, said the NAO’s assessment would give comfort and ‘greater certainty to taxpayers that agreed settlements will not be revisited’.

He added: ‘We also welcome the recognition that there are, in most tax cases, a range of “right answers” and that collaborative resolution of disputes is a useful tool for settling long running and complex issues. This gives support for those taxpayers looking to achieve settlement with HMRC through any of the available Alternative Dispute Resolution routes.

‘It is also clear that a number of technical arguments that HMRC has been willing to argue in the past are unlikely to have been resolved in their favour if the issue had gone to litigation. Therefore taxpayers with strong technical arguments should continue to press ahead with them, where appropriate.’