In an effort to establish value for money for taxpayers, the House of Commons Public Accounts Committee (PAC) has called for independent scrutiny of HMRC’s high value settlements with large corporates.
It also recommended that HMRC has more than one Board member who actually understands tax. Two more were appointed before Christmas.
These conclusions, which don't sound that exciting at face value, were reached in the PAC’s 61st report published in December 2011. It's the report's findings that will shock taxpayers.
What's the fuss?
The PAC’s recommendations stem from its review into the way that HMRC has settled some high value deals. It has ongoing disputes worth over £25 billion. The PAC tried to investigate settlements made with Goldman Sachs, Vodaphone and two other unknown companies. The allegations were that these companies received special treatment and the resultant “sweetheart deals” are not value for money to the UK’s taxpayers.
The deals
The PAC appears to know about four deals with large corporates:
- Goldman Sachs was let off £8 million to £20 million in interest.
- Vodaphone was let off at least £1.5 billion (according to its accounts) and possibly up to £5 billion or a great deal more if on-going allegations by Private Eye have substance. Vodaphone was also given a time to pay agreement lasting 5 years despite having substantial assets and continuing to pay dividends to shareholders.
- Another company was given 10 years to settle its tax debts.
- Details of other corporates are unknown to the public.
Under cross examination by the PAC it emerged that Dave Hartnett, HMRC’s Permanent Secretary had bypassed HMRC’s governance procedures, negotiated settlements without taking legal advice or a second opinion.
In the case of the Goldman Sach’s settlement, Hartnett let the company of some £8 million to £20 million in interest payments and then refused to correct the error. An action described by HMRC’s solicitor Anthony Inglese QC as “unconscionable”. Hartnett denied any personal accountability for the error.
Hartnett angered the PAC by lying to both it and the Treasure Select Committee in telling them that he had no involvement in Goldman’s tax affairs. He also claimed to be the only Commissioner with a “deep knowledge of tax” so if the Commissioners had to agree a major tax deal, he was the only one qualified to do so. A situation that led to him agreeing his own deals.
Hartnett also changed his story about when he discussed the matter with Inglese and remarkably for an ex-investigator kept no notes of his meeting with Goldman.
In the case of Vodaphone, the PAC declared as “entirely unacceptable” both Hartnett’s and Inglese’s refusal to answer their questions. Both claimed that taxpayer confidentiality overrode their duty to the UK’s parliament.
The PAC was also very concerned that Hartnett had managed to attend some 107 lunches and had numerous undisclosed meetings with large corporates which all served to weaken HMRC’s governance procedures.
What after?
All the deals were only exposed due to the investigative efforts of journalists at Private Eye and the Guardian, a fact publicly acknowledged by Margaret Hodge, chairman of the PAC in the media.
In an interview for the Times, last weekend, Ms Hodge said of the PAC’s enquiry into HMRC:
“What I can’t stand is people who come and think they can pull the wool over our eyes. We will single-mindedly pursue them.”
“They tried to cover it up and they still are. All the way through I felt I was up against the Establishment. I couldn't get legal advice, we were told to lay off, we were told that we should trust civil servants. Even when I tried to see a minister I was told that I couldn't meet him without the official.”
“Its outrageous, what is going on. This isn’t about trivial amounts but billions. There is a huge systemic issue which I don’t think is yet accepted about who does the deals and how they are authorised.”
Where now?
It has been agreed that the Comptroller and Auditor General will conduct independent scrutiny of some past cases for the PAC. Two new Commissioners with tax know-how were appointed to HMRC’s board in December.
HMRC will ensure that there is a system for independent review of large deals.
This is all some way off from HMRC’s upper management being subject to independent scrutiny. It appears that Ms Hodge, like many in the tax profession would prefer HMRC to have greater ministerial control.
Abridged summary of the PAC’s key findings
- HMRC’s decision to withhold information on settlements with large corporates from the PAC is entirely unacceptable
- There is a culture of lack of accountability at the top of HMRC.
- At 31 March 2011 HM Revenue & Customs (the Department) was seeking to resolve tax issues valued at over £25 billion with large companies
- The PAC has serious concerns about how the Department handled some cases involving large settlements. It has identified – Goldman Sachs, Vodaphone and two others not publicly identified.
- Goldman Sach were let off interest of between £8 million and £30 million. Vodphone was let off anything up to £4 billion and given five years to settle. In some cases companies were given up to 10 years to repay tax debts.
- HMRC’s Commissioners stand accused of bypassing governance arrangements in some cases the same officials not only negotiated but also approved settlements.
- Matters were made matters worse for HMRC when Dave Hartnett and HMRC’s council Anthony Inglese tried to avoid scrutiny of these settlements. Their answers were described as “imprecise, inconsistent and potentially misleading”.
- HMRC insisted on keeping confidential the details of specific settlements with large companies, leaving the PAC to rely on details obtained via the press and individual company accounts.
- HMRC’s decision (as this is policy and not the law) to withhold details from the PAC reduces transparency and makes it impossible for Parliament to hold Commissioners to account. This situation is entirely unacceptable.
- The PAC is concerned that whistleblowers using the provisions of the Public Interest Disclosure Act 1998 face threats of dismissal for providing important and relevant information.
- Independent scrutiny of large settlements is needed. Two new Commissioners with tax expertise, and plans to introduce a new assessor role to permit independent review of large settlements before they are finalised.
- The Cabinet Secretary assured the PAC that proposals would be submitted to the Public Accounts Committee by Christmas.
- The PAC welcomed these measures, but they will not by themselves guarantee independent scrutiny.
- HMRC has left itself open to suspicion that its relationships with large companies are too cosy. Dave Hartnett had 107 lunches over a two year period
The PAC welcomes the Comptroller and Auditor General’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, and to report on whether proper legal advice was secured in a timely manner and that HMRC complied with its own published procedures and protocols.
PAC report - extract
Conclusions and recommendations
1. The Department’s refusal to disclose taxpayer information prevents proper scrutiny of the process for reaching tax settlements with large companies.
We accept there is a need for confidentiality to protect taxpayers, but this must not be used as a cloak to protect the Department from scrutiny. It is absurd that we have been forced to rely on information in the media to find out about cases that raise concerns, and of course we only know about cases on which information has been published in the media. The Department was not able to point to an absolute statutory bar on disclosure of information about specific cases. Its withholding of information is in fact a policy decision taken by Commissioners. This approach fails to give proper regard to HMRC’s duty to assist the Public Accounts Committee in examining whether or not the Department is giving best value for money. There is less justification for keeping tax information about large corporations confidential than information about individuals. The Department must set out in greater detail its policy reasons for not disclosing information about specific corporate taxpayers. It must explain the circumstances in which it would consider disclosure and it must set out how it will fulfil its statutory obligations to account for its actions to Parliament.
2. The evidence of the Department’s senior officials fails to give us any confidence in the way large settlements are reached.
The Permanent Secretary for Tax and the Department’s General Counsel and Solicitor failed to answer our questions about specific cases in a spirit of openness. Some of the evidence they provided about the exact order of events, the extent of the Permanent Secretary for Tax’s personal involvement in negotiations and whether legal advice was sought and acted upon was imprecise, inconsistent and potentially misleading. Furthermore, the Permanent Secretary for Tax was less than clear and consistent in the evidence he first gave to the Treasury Select Committee and then to the Public Accounts Committee.Accounting Officers are accountable to this Committee and we expect precise, open and comprehensive answers to our questions. Any failure to do so is a failure to perform a core responsibility and should be treated as such by the Cabinet Secretary.
3. The Department chose to depart from normal governance procedures in several cases, which allowed Commissioners to sign off on settlements that they themselves negotiated.
HMRC execute hugely important functions on behalf of the taxpayer and the Government. It is absolutely necessary that the officials responsible for and engaged in this work should have the necessary skills, qualifications and experience to fulfil these vital roles. For four of the largest settlements examined by the Comptroller and Auditor General, the processes applied did not recognise the importance of clear separation between those negotiating and those approving settlements, and we are not convinced of the soundness of decisions made by Commissioners in these cases. The Department has since put in place new governance arrangements that seek to separate the negotiation and authorization roles. The recent appointment of two new Commissioners widens the pool of Commissioners who have the expertise to make an informed judgement in signing off settlements. However, this does not in itself guarantee there will be effective separation of roles or proper accountability for decisions reached, not least because the two new Commissioners are existing members of the Department’s senior team.
The Department must ensure that its revised procedures to separate out the roles of those involved in settling tax disputes are applied to all cases without exception. The Department should report back to us, as promised by the Cabinet Secretary, before Christmas.
4. Governance procedures have lacked the independence and transparency needed to provide sufficient assurance to Parliament.
Tax settlements with large companies are inevitably complex and involve the exercise of judgement. Parliament needs assurance that these settlements are appropriate and good value for the taxpayer. We welcome the Department’s proposals to introduce an independent assessor, or assessors, to sit alongside Commissioners, who would carry out independent review of settlement proposals. Appropriate rules need to be established which will ensure that all settlements over £100m are assessed independently and that a random sample of those over £10m are assessed independency each year. It is important that the new role is demonstrably independent and increases accountability to Parliament, and should be established in statute. For speed, we accept that the role should be set up in shadow form, but it should be formalised in legislation as quickly as possible. Independent assessors should report annually to Parliament on their work, perhaps in a statement contained in the Department’s annual report and accounts. This should include aggregate information on the cases in which they were involved and a report on any settlements where they have identified concerns.
5. The Department’s failure to comply with its own processes resulted in a substantial amount of money being lost to the Exchequer.
In one case, a mistake was not picked up until too late because the Department failed to follow its own governance procedures. The C&AG told us that this resulted in a loss of up to £8 million 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 £20 million. When the error was eventually picked up, the Department decided it would not reopen negotiations. We are astonished that in this case the decision to settle was taken without legal advice and that the Department did not even take the most basic step of making its own note of meetings with the company concerned, relying instead on the record kept by the company. The Department must ensure that it has applied all relevant governance checks to each settlement before finalising them with taxpayers. It must also consult legal advisors before settling cases in litigation and make sure it keeps its own accurate and complete records of key meetings with companies. We remain concerned that the decision was taken not to reopen this case when the ‘mistake’ was uncovered, and we were not given good reasons for HMRC not reopening this case.
6. Those at the top of the Department have not taken personal responsibility for serious errors.
The failure to apply proper governance processes is the latest in a series of errors made by the Department in recent years, including the debacle over PAYE and tax credits. There appears to be little or no sense of personal accountability when things go wrong. It is right that an individual was held accountable for his role in the mistake that led to the loss of interest on a tax liability, but there also needs to be stringent accountability at the top of the Department for designing and operating a system in which such mistakes could occur. We expect leaders to take responsibility for both systemic issues and for specific mistakes, for which they are accountable.
7. The Department has left itself open to suspicion that its relationships with large companies are too cosy.
The Permanent Secretary for Tax attended a significant number of informal meetings over lunch and dinner with large companies with whom HMRC was settling complex tax disputes, when formal HMRC minutes were not necessarily taken. We were told this was part of the Department’s overall approach to relationship management. We accept that senior tax officials need to be accessible to major stakeholders and we welcome the fact that details of hospitality are published, but this information is only meaningful if supported by transparency about the Permanent Secretary for Tax’s involvement in settling disputes with these companies. It appears that when deciding whether or not to accept hospitality, not enough attention was paid to the risk that a conflict of interest might be perceived. The Department must exercise better judgement over how it manages its relationships with large companies, to ensure it avoids the perception of conflicts of interest.
8. The Department is not being even handed in its treatment of taxpayers.
It is unfair that large companies can settle their tax disputes with the advice of professionals at less than the full amount due and that they have been allowed up to 10 years to pay their tax liabilities, while small businesses and individuals on tax credits are not allowed similar leeway. The Department has promised to look into the treatment of these groups of taxpayers in terms of its fairness and reasonableness. It should report back to us on any actions taken to address the wider policy or process issues identified as a result of its examination.
Links
The full report can be accessed below:
The PAC's 61st Report: HMRC accounts 2010/11 Tax Disputes
The PAC's other publications can be accessed here