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Tax disputes: NAO to scrutinise five settlements as HMRC faces legal challenge

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Sir Andrew Park, a retired judge who has been involved in many leading tax cases – including Arctic Systems and several well-known corporation tax appeals – will provide tax expertise to assist the National Audit Office in a detailed review of five of HMRC’s largest tax settlements.

The Commons Public Accounts Committee (PAC) warned on 20 December that ‘systemic issues’ surrounding HMRC’s handling of tax disputes must be addressed with ‘the utmost urgency’. A proper separation between negotiation of tax settlements and their authorisation was needed, and HMRC ‘must address issues of accountability so that Parliament and the public can be satisfied that the best value is secured’, the committee said.

In HM Revenue & Customs 2010-11 Accounts: tax disputes, the PAC said it had ‘serious concerns’ that large companies were treated more favourably than other taxpayers.  HMRC's working practices must be seen to be ‘absolutely impartial’ if the public was to have confidence in the relationship management approach adopted for large companies.

The PAC had discovered that HMRC's governance processes for large settlements were not applied consistently. ‘In one case, a mistake was not picked up until too late because the department failed to follow its own governance procedures,’ it said. This was a settlement reached with Goldman Sachs in 2010.

‘The C&AG told us that this resulted in a loss of up to £8m in interest forgone. We have since received evidence from a whistleblower that the total value of interest payable in respect of this particular settlement could be as high as £20m.’

The NAO confirmed on 21 December that Amyas Morse, the Comptroller and Auditor General (C&AG), would examine ‘the reasonableness’ of five of the largest tax settlements and would aim to report ‘the results’ of its work to the PAC in the spring.

Morse will consider, in each case, whether:

  • the settlement value was reasonable given the circumstances of the case;
  • it was consistent with HMRC’s Litigation and Settlement Strategy;
  • appropriate legal advice was sought and acted upon; and
  • HMRC followed its own procedures.

‘Damning indictment’

The PAC’s Chairman, Margaret Hodge, said the committee’s report was a ‘damning indictment of HMRC and the way its senior officials handle disputes with large corporations’.

‘We uncovered both specific and systemic failures which must be addressed,’ she said. ‘There is more than £25bn outstanding in unresolved tax bills and it is essential that there should be proper accountability to Parliament for the settlements reached by HMRC.’

HMRC has pointed out that the £25bn estimate as at 31 March 2011 represented tax ‘under consideration’ or, as the NAO put it, tax ‘potentially at stake’ – not tax actually owed. The estimate did not take account of reliefs that might be due.

The PAC welcomed the C&AG’s proposal to ‘conduct further work to consider the reasonableness of the settlements reached in the specific cases where normal governance processes were not followed’.

Judicial review

As the PAC released its report, UK Uncut Legal Action launched an application for judicial review of the Goldman Sachs settlement.

The group, ‘inspired’ by UK Uncut, said it had received a ‘dismissive’ response from HMRC to letters from the group’s lawyers Leigh Day & Co demanding that ‘the alleged sweetheart deal agreed between David Hartnett and Goldman Sachs is quashed’.

UK Uncut Legal Action said its action was supported by a number of MPs, union leaders and NGOs, and that donations of almost £14,000 had been received in two weeks in support of ‘a court case on behalf of the people’.

The solicitors are acting on no win, no fee basis. Tim Street, Director of UK Uncut Legal Action, said the support showed ‘the deep level of outrage that people feel over state sanctioned tax dodging by big business, while government destroys public services that ordinary people rely on, saying that there is no money’.

‘Assertion without foundation’

HMRC rejected the PAC’s conclusion that there were ‘systemic failures’ in the management of tax disputes. ‘The [PAC] report is based on partial information, inaccurate opinion and some misunderstanding of facts,’ it said.

‘We acknowledge that a mistake was made in one settlement and explained how this arose. We reject the suggestion that this is evidence of systemic failure. This assertion, based on untested, leaked information, is without foundation.’

A spokesman said the NAO’s July 2010 review of large business settlements showed that the department's internal processes were ‘robust’.

‘HMRC agrees that public confidence in processes is important and, as HMRC has already informed the PAC, HMRC proposes to make further improvements to governance and to increase transparency about the work with large business. HMRC also welcomes the further review that the NAO is to carry out as an opportunity to confirm this and clear up the concerns about forgone millions,’ he added.

Morse suggested at a PAC hearing in October that revenue of between £5m and £8m would have been lost due to the mistake, which resulted in no interest being charged on national insurance contributions payable by Goldman Sachs following the failure of an avoidance scheme.

Morse said he would enlist tax expertise to support further work on tax disputes and would report to MPs in ‘private session’. HMRC’s Permanent Secretary for Tax, Dave Hartnett, had apologised to MPs for the mistake. HMRC was ready to talk in confidence and would support the NAO in its work, Hartnett said.

Public interest disclosure

The PAC report said that the committee had received ‘evidence from a whistleblower that the total value of interest payable in respect of this particular settlement could be as high as £20m’.

Detailed written evidence provided by Osita Mba, a solicitor who worked in the HMRC legal team dealing with the Goldman Sachs litigation until he was transferred to another legal team in November 2010, was published on the Parliament website along with Dave Hartnett’s written evidence.

Mba presented his evidence as a disclosure under the Public Interest Disclosure Act 1998, claiming that Hartnett had settled the Goldman Sachs case unlawfully.

Mba submitted that late payment interest of £10.8m had already accrued by October 2005, and estimated that the settlement reached at the end of 2010 ‘would be expected to be at least the unpaid NIC (£23.2m) plus interest (about £20m as at the end of [2010]) and an appropriate [penalty]’.

Large business strategy

Hodge said: ‘Parliament and the public have legitimate concerns that large companies are being treated more favourably than ordinary taxpayers, whether they be small businesses or hard-working families.’

Responding to the PAC report, HMRC said: ‘HMRC treats all taxpayers even-handedly, supporting the majority who comply with their duty to pay their taxes, and cracking down hard on evaders, avoiders and fraudsters.

‘It is wrong to suggest that HMRC officials are too lenient on large businesses. Large businesses pay around 60% of total UK tax receipts, and account for more than half of the £13.9bn additional compliance revenues that we brought in last year.

‘Large business tax settlements are a vital part of how HMRC secures tax revenues for the country and without them Britain’s public finances would be seriously damaged. HMRC's large business strategy is now being adopted by other tax administrations around the world.’

£25.5bn ‘under consideration’

The PAC’s summary noted that at 31 March, 2011 HMRC was seeking to resolve ‘tax issues valued at over £25bn with large companies, some of which involved disputes over outstanding tax’. Hodge said there was ‘more than £25bn outstanding in unresolved tax bills’.

As Tax Journal reported last July, HMRC had emphasised that the £25.5bn estimate represented tax ‘under consideration’ rather than tax owed or unpaid. The estimate was, HMRC said, a tool to help Large Business Service managers to better direct resources. Officers were encouraged to ‘be expansive in their initial estimate rather than limiting themselves’.

In its report of 8 July the NAO said: ‘At 31 March 2011, the Department was investigating over 2,700 issues with the largest companies, with potential tax at stake of £25.5 billion.’

In response to a freedom of information request, HMRC had said this ‘initial’ estimate did not take into account ‘any reliefs or allowances that might be due, or the full facts or any legal issues’. HMRC added that in many cases it becomes clear during the course of an enquiry that there is no further liability at all. Experience showed that, when officers look across all relevant issues under enquiry, ‘only around half of the estimate of tax under consideration is tax brought into charge’.

However, announcing the PAC report on 20 December, Hodge said there was ‘more than £25 billion outstanding in unresolved tax bills’.

Two days later, a Daily Universal Register item in The Times reported that the protest group UK Uncut was taking HMRC to court over ‘its decision to allow £25 billion of tax to go uncollected from large companies’. There was no such decision, and the legal challenge mounted by UK Uncut Legal Action relates to the Goldman Sachs settlement alone.