HC 1531 Public Accounts CommitteeFurther written evidence from Osita MBA

IN THE MATTER OF THE PUBLIC INTEREST DISCLOSURE ACT 1998

HM REVENUE & CUSTOMS’ PROCEDURES FOR SETTLING TAX DISPUTES

Part One: Introduction

Background

1.1 The power to levy taxes is one manifestation of the sovereignty of Parliament. The Bill of Rights provides that no charge on the subject shall be levied by pretence of prerogative without the consent of Parliament (2 Will. and Mar. (. 2), art. 4). Thus since 1689 Parliament has exercised the power to impose taxes and duties and has charged the Revenue authorities with their collection. The produce of their exertions is paid into the Consolidated Fund, which is at the disposal of Parliament for any purposes that Parliament thinks fit. The Revenue authorities are therefore primarily accountable to Parliament for the discharge of their core function of raising the revenue required to fund public services. In Commissioners of Inland Revenue v National Federation of Self-Employed and Small Businesses Ltd - 54 TC 503, at 551 (the Fleet Street Casuals case), Lawton LJ noted that “ever since the Middle Ages general complaints about the burden of taxation and the misconduct of tax gatherers have been put before the High Court of Parliament, as it used to be called”.

1.2 The scope of the Inland Revenue’s care and management power was discussed extensively when the case reached the House of Lords - Commissioners of Inland Revenue v National Federation of Self-Employed and Small Businesses Ltd (1981) 55 TC 133. Lord Diplock described the power (at page 163) as “a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge, the highest net return that is practicable having regard to the staff available to them and the cost of collection”, and added that “if it were established that the Board were proposing to exercise or to refrain from exercising its powers not for reasons of ‘good management’ but for some extraneous or ulterior reason, that action or inaction of the Board would be ultra vires and would be a proper matter for judicial review if it were brought to the attention of the court by an applicant with “a sufficient interest” in having the Board compelled to observe the law”.

1.3 Lord Diplock also noted (at page 163) that the scope of taxpayer confidentiality is limited to “information about individual taxpayers’ affairs that has been obtained in the course of their duties in making assessments and collecting the taxes”. Therefore, it does not necessarily permit HMRC to withhold information about its official conduct (which is protected by Official Secrets legislation that applies to all other Departments) from Parliament and the public “for reasons of taxpayer confidentiality”.

Functions of Commissioners and Officers of HMRC

1.4 Her Majesty’s Revenue & Customs (HMRC) was created by the Commissioners for Revenue and Customs Act 2005 (CRCA) by the merger of the former Inland Revenue and Customs and Excise. It is a non-Ministerial department and thus different from most other government departments, which work under the direct day-to-day control of a minister. The Queen appoints Commissioners for HMRC by Letters Patent (section 1(1) CRCA), and in exercising their functions, the Commissioners act on behalf of the Crown (section 1(4) CRCA). This means that ministers have no direct involvement in taxpayers’ affairs.

1.5 The Commissioners are responsible for the collection and management of revenue (taxes, duties and national insurance contributions) for which the Commissioners of the predecessor departments (Inland Revenue and Customs and Excise) were responsible before their merging into the new HMRC in 2005 (section 5(1)(a)(b) CRCA). The Commissioners are also responsible for the payment and management of tax credits for which the Commissioners of Inland Revenue were responsible before the merger (section 5(1)(c) CRCA). Section 51(3) CRCA provides specifically that this reference to responsibility for collection and management of revenue has the same meaning as references to responsibility for care and management of revenue in previous enactments (such as those interpreted in the Fleet Street Casuals case).

1.6 The Commissioners also exercise all other functions of the Commissioners of the predecessor departments (section 5(2) CRCA) and may do anything which they think necessary or expedient in connection with the exercise of their functions, or incidental or conducive to the exercise of their functions (section 9 CRCA). The Commissioners appoint staff, known as officers of HMRC (section 2(1) CRCA). An officer of HMRC shall comply with directions of the Commissioners (whether he is exercising a function conferred on officers of HMRC or exercising a function on behalf of the Commissioners) (section 2(3) CRCA). All the statutory functions of the officers of the two predecessor departments now vest in officers of HMRC (sections 6 and 7 CRCA).

1.7 There are currently six Commissioners: Dame Lesley Strathie DCB, Chief Executive and Permanent Secretary; Dave Hartnett CB, Permanent Secretary for Tax; Melanie Dawes, Director General Business Tax; Mike Eland CB, Director General Enforcement and Compliance; Steve Lamey, Director General Benefits and Credits; and Bernadette Kenny. The Commissioners meet formally and make decisions within HMRC’s Board and Executive Committee (ExCom). ExCom is the executive decision making body for HMRC. The Committee exercises the Commissioners’ statutory powers and oversees the breadth of HMRC’s work.

Permanent Secretary for Tax

1.8 HMRC is headed by a non-executive Chairman, Mr Mike Clasper CBE; the Permanent Secretary and Chief Executive, Dame Lesley Strathie; and the Permanent Secretary for Tax, Mr Dave Hartnett. Mr Clasper “leads the Board, which provides strategic leadership, approves business plans, monitors performance and ensures the highest standards of corporate governance”. Ms Strathie was appointed Chief Executive and Permanent Secretary at HMRC on 13 October 2008:

“As HMRC’s Chief Executive and Permanent Secretary, Ms Strathie is responsible for providing leadership and direction to the Department. She runs all aspects of HMRC’s business, ensuring delivery of the strategic objectives and driving continuous improvement. She is a Commissioner and a Member of HMRC’s Board and ExCom. As the Principal Accounting Officer (PAO), she is accountable to Parliament for the Department’s expenditure and performance”.

1.9 Mr Hartnett has been a Commissioner of HMRC since the 2005 merger, having held a similar position previously as a Member of the Board of Inland Revenue. When Mr Paul Gray resigned as Chairman of HMRC following the loss of the Child Benefit database on 20 November 2007 Mr Hartnett became Acting Chairman. Following the appointed of Mr Mike Clasper as non-executive Chairman and Dame Lesley Strathie as Chief Executive, Mr Hartnett was appointed to a new post of Permanent Secretary for Tax on 13 October 2008. In this capacity, “he works to the Chief Executive and is the senior tax professional in HM Revenue & Customs (HMRC) and is the Deputy Chief Executive”. A biography on the website highlights his extensive experience in tax:

“Dave joined the Inland Revenue in 1976. He spent nearly ten years on investigation work before, in 1991, becoming Director of Claims Branch then Financial Intermediaries and Claims Office dealing with schemes for tax relief and deduction at source, non residents and trusts. In 1996, he moved to lead the technical teams on personal taxation then, in 1998, he was appointed Director of Capital and Savings.

He led the 2000 quinquennial review of the Valuation Office Agency before joining the Board of Inland Revenue as Director General (Policy and Technical). Following the merger of the Inland Revenue and Customs and Excise, he became HMRC’s Director General for Customer Contact and Compliance Strategy and then Director General for Business.

Dave led the development of the rules requiring disclosure of schemes of tax avoidance and the OECD Study of Tax Intermediaries. He was also one of the Commissioners who set up the Joint International Tax Shelter Information Centre (JITSIC). He has had an interest in compliance and enforcement throughout his career and established the High Risk Corporate Programme for addressing compliance issues in big business”. (emphasis supplied)

1.10 Thus “as Permanent Secretary for Tax”, Mr Hartnett has joint delegated authority (with any other Commissioner) to exercise Commissioners discretionary powers under section 5 of the CRCA “for the collection and management of revenue” (which includes the power to forego the collection of taxes and duties in appropriate cases). Significantly, “as Permanent Secretary for Tax”, Mr Hartnett also has the sole delegated authority to exercise the Commissioners’ discretionary powers under section 18 of the CRCA to disclose information “for the purposes of a function of the Revenue and Customs’ (which includes disclosures relating to settlements he has been involved in).

1.11 First, Mr Hartnett’s de facto control of the High Risk Corporate Programme vests him effectively with the Commissioners’ collection and management powers (including the power to forego the collection of tax) as far as the largest and complex cases are concerned. Under the Programme, the Commissioners (including Mr Hartnett) are, in theory, normally only directly involved in signing off the settlement of the largest tax disputes. However, the Comptroller and Auditor General of the National Audit Office (C&AG) found in his recent review that in two of the four largest settlements they examined “one of the Commissioners approving the settlements had participated in the negotiations and, in another case, both Commissioners had done so”.

1.12 In August last year Mr Hartnett reportedly informed the Financial Times (Vanessa Houlder, “Tax officials to soften stance on avoidance” August 19 2010) that HMRC will adopt a less combative approach to resolving tax disputes with businesses. According to the report:

Dave Hartnett ...said there had been examples of officials being too “tough” in disputes over tax assessments. “HMRC is packed full of very intelligent people, but we are sometimes too black-and-white about the law”, he told the Financial Times. ....

The Revenue said it would not return to old practices of offering “package deals” to multiple tax avoiders, which was blamed for encouraging rampant tax avoidance in the early years of the 1990s. Mr Hartnett said: “If it is a strong case, we will fight to the death”.

But he said its litigation strategy, introduced in 2007, had sometimes been misunderstood. “I think we got it a bit wrong in the way we explained it to our people. They thought it was a great sword of justice”.

1.13 In a subsequent speech Mr Hartnett reiterated his approach to resolving tax disputes (Simon Parry, Daily Mail, 12 December 2010): “In my opinion, winning tax disputes at all costs is no way forward in the modern world. We are committed to handling disputes in a non-confrontational way and collaborating with customers wherever possible”.

1.14 In spite of the fact that the Civil Service Code states (in paragraph 7): “you must not accept gifts or hospitality or receive other benefits from anyone which might reasonably be seen to compromise your personal judgment or integrity”, it emerged in June 2010 that Mr Hartnett was “the most wined and dined mandarin in Whitehall” after the Bureau of Investigative Journalism (a not-for-profit body based at City University London) revealed that he accepted corporate hospitality 107 times between 2007 and 2009, mostly from the biggest business organisations and their advisers.

1.15 On 25 July 2008 and 19 May 2009 Mr Hartnett had lunch and dinner respectively with officials of Goldman Sachs. On 22 October 2007, he recorded a “Drinks Reception” by the Hundred Group of Finance Directors of the UK FTSE-100 (currently chaired by Vodafone’s chief financial officer who took over from the Finance Director of Prudential). Most prominent amongst his hosts were the “big four” accountancy firms that specialise in assisting big business and high net worth individuals to avoid tax, with whose representatives he sat down 27 times. He ate with KPMG 10 times and went to one company reception. He also accepted hospitality from PricewaterhouseCoopers (Goldman Sachs’ advisers in the matter reported below) 7 times; Ernst & Young four times and Deloitte (Vodafone’s advisers in the controversial CFC settlement) three times. It has also been disclosed in a response to a Parliamentary Question that Mr Hartnett has met the Chairman of the UK Board of Partners at Deloitte on 48 occasions since 1 January 2006.

1.16 In response to the report HMRC explained that, “The relationships that Dave has forged have enabled HMRC to transform its relationships with business and other taxpayers. This has made a significant contribution to the increased tax yield HMRC has achieved in the period”. The Department specifically denied Mr Hartnett had received too much hospitality from the accountancy firms by asserting that: “If you are a jockey, you have got to get on to the racecourse”.

1.17 In his first presidential speech at the Chartered Institute of Taxation’s Annual General Meeting on 17 May 2011, the President, Mr Anthony Thomas (a specialist in the taxation aspects of smaller business and the professions), denounced the “special relationship” between HMRC and the professional bodies as a “myth”, asserted that “the trust between the professional community and HMRC is at risk”, and stated that his “discussions with members suggest that the relationship between HMRC and members of the has never been worse”. He then criticised the perceived preferential treatment accorded to the large businesses and their advisers in comparison to small and medium-sized businesses and their advisers:

“We need to return to that ‘healthy tension’ between HMRC and the tax profession which existed 10–20 years ago: no special relationships; no cosy conferences; no favours, deals and understandings; no inside tracks and private access. Instead, there was straightforward dealing; openness and frankness with honest broking and above all a genuine willingness to work together with total transparency and integrity. ... The job of civil servants is, and always has been, to apply the rule of law in an even-handed manner.

1.18 Secondly, in regard to the information disclosure powers, according to HMRC, “Mr Hartnett, as Permanent Secretary for Tax, has the delegated authority on behalf of ExCom to decide on issues of disclosure of information”. These powers have been used recently to withhold information about the controversial Vodafone and Goldman Sachs settlements entered into by Mr Hartnett from Select Committees of the House of Commons, “for reasons of taxpayer confidentiality”.

1.19 However, Commissioners’ powers under section 18 of the CRCA to disclose information “for the purposes of a function of the Revenue and Customs” include any disclosure the Commissioners “think necessary or expedient in connection with the exercise of their functions, or incidental or conducive to the exercise of their functions”. Thus they clearly authorise the disclosure of any information held by HMRC (including taxpayer confidential information) to Parliament and the public for the purposes of improving the accountability and transparency of the settlement of large and complex tax cases by HMRC.

Internal Governance of HMRC

1.20 It would be recalled the Chief Executive Ms Strathie informed the PAC on 16 November 2010 (Q215) that she is “not a tax specialist”, and on 18 January 2011 the Financial Times (Sue Cameron) reported that:

“Officials are agog at news that Dame Lesley Strathie, ultimate boss of HMRC, has appointed Carol Bristow – a director-level tax expert – as her personal aide. (Not even Sir Gus O’Donnell, the cabinet secretary, has such a senior personal assistant.) How can Dame Lesley justify it when the civil service faces 25% cuts? Says one insider: ‘It’s because she’s finding it so hard to cope with the furore over Dave Hartnett’”.

1.21 Similarly, HMRC’s General Counsel and Solicitor, Mr Anthony Inglese, who “is responsible for all legal services to HMRC and for corporate governance”. According to an official biography:

Anthony trained and worked as a lawyer in the Home Office. He became Head Lawyer at the Office of Fair Trading in 1991; then Head Lawyer at the Ministry of Defence in 1995; and in 1997 he was appointed Deputy Treasury Solicitor. From 2002 he was Solicitor to the Department of Trade and Industry (later the Department for Business, Enterprise and Regulatory Reform) before coming to HM Revenue & Customs in March 2008.

1.22 There were two very experienced tax lawyers at the director level (SCS2) at the time of Mr Inglese’s arrival. One has since left HMRC while the other was effectively demoted to an SCS1 role in Solicitor’s Office. In their place Mr Inglese has recruited three directors (SCS2) none of whom is a tax lawyer. Mr Inglese and the three directors constitute the Senior Management Team of HMRC’s Solicitor’s Office. Mr Inglese believes that public sector lawyers should be generalists. He was quoted by the The Lawyer magazine (10 August 2009): “That’s the craft of the government lawyer ... You don’t stay in the same area and specialise ever more deeply. You move around, broadening and deepening your knowledge of the essential bits of law you need as a government solicitor”.

1.23 The recent report of the C&AG’s review of HMRC’s processes for settlement of large disputes noted (in paragraph 2.35) “some differences of view within the Department on the implications of the Wilkinson judgement on the Commissioners’ ability to exercise these powers to resolve tax disputes” and reported (in paragraph 2.36) that:

“In one case, we identified that Commissioners had been asked to exercise their collection and management powers on the basis of oral advice from the Department’s Solicitor’s Office. In our view, in the particular circumstances of this case, it would have been helpful to have secured confirmation of that advice in writing to provide a clearer audit trail”.

1.24 It would be recalled that when Mr Hartnett appeared before the TSC on 16 March 1011 and was asked by the MP for Hereford and South Herefordshire (Q150): “do you think the continued public controversy over the Vodafone case has damaged HMRC?”, he responded:

“Maybe a little, Mr Norman. Can I preface what I want to say by saying that, before coming here today, I spoke at length to our lawyers because in the past we have normally, under taxpayer confidentiality legal strictures on us, refused to say anything about a particular taxpayer. I thought it might be helpful today if I could say something about the mistakes and misconceptions that are out there, because they are significant. I have legal advice that enables me to answer those questions, but I cannot answer detailed questions about the actual tax liability.

1.25 However on 12 September 2010 the very same MP for Hereford and South Herefordshire put it to selfsame Mr Hartnett [Q699] that: “There has been a deal done with Goldman, I think I am right in saying, in which they were –” but Mr Hartnett interrupted him with this remark which directly contradicts his evidence of 16 March:

“I am really sorry, but I cannot talk at all about a specific taxpayer. To make sure I could not do that, twice in the last 10 days, I have been to see our most senior lawyers to see whether there was anything I could say about the newspaper reports on this, and they have said no”.

External Governance of HMRC

1.26 The Comptroller and Auditor General (C&AG) of the National Audit Office (NAO) that audits HMRC’s approximately £450 billion of revenues, plays a critical role in ensuring the accountability and transparency of HMRC to Parliament and the public. Section 1 of the National Audits Act 1983 (NAA) provides for the appointment and status of the C&AG. Section 2(2) provides that: “the Comptroller and Auditor General shall by virtue of his office be an officer of the House of Commons”. Section 1(3) provides that: “subject to any duty imposed on him by statute, the Comptroller and Auditor General shall have complete discretion in the discharge of his functions and, in particular, in determining whether to carry out any examination under Part II of this Act and as to the manner in which any such examination is carried out; but in determining whether to carry out any such examination he shall take into account any proposals made by the Committee of Public Accounts”.

1.27 Section 6 of the NAA authorises the C&AG to carry out an examination into the economy, efficiency and effectiveness with which HMRC has used their resources in discharging their functions while section 8 of the NAA gives the C&AG a right of access at all reasonable times to all such documents and information held by HMRC as the C&AG may reasonably require for carrying out this examination. Furthermore, section 2 of the Exchequer and Audit Departments Act 1921 (E&ADA), authorises the C&AG to examine the accounts of the receipt of revenue by HMRC on behalf of the House of Commons in order to ensure an effective check on the assessment and collection of revenue. Section 8 of the Government Resources and Accounts Act 2000 provides the C&AG with a right of access to documents and information relating to HMRC’s accounts for the purpose of conducting this examination.

1.28 In March this year, I informed the C&AG that due process was not followed by Mr Hartnett in reaching the Goldman Sachs settlement, and that accrued interest was not recovered from the company. The C&AG refused to investigate the matter, maintaining that he had “taken on board the concerns raised in [my] letter as part of [his] review of HMRC’s procedures for resolving tax disputes on which [he] will be reporting in July as part of the Report on the Department’s accounts”. In the event, the report (HM Revenue & Customs 2010-11 Accounts: Report by the Comptroller and Auditor General (7 July 2011)) disclosed (in paragraph 2.6) that the C&AG’s review only “considered whether the Department’s processes were adequate to establish a sound position on the amount of tax due” but “did not involve coming to an independent judgement on the tax liability in individual cases”.

1.29 Yet, the review was triggered by what the TSC described as “allegations ... made in the press that cases have been settled inappropriately for a lower yield than might have otherwise been achieved”. Clearly, the C&AG’s power under the afore-mentioned section 1(3) of NAA 1983 authorised the NAO to come to an independent judgement on the tax liability in the sample of cases they examined in order to assure Parliament and the public that cases were not settled by HMRC for a lower yield than might have otherwise been achieved.

1.30 The C&AG acknowledged the public and Parliamentary disquiet surrounding the processes but claimed (in paragraph 2.29) that “legal restraints over taxpayer confidentiality mean that the details of these cases cannot be released subsequently”. The C&AG referred to section 18 of the Commissioners for Revenue and Customs Act 2005 (which applies to HMRC) as the authority for this contention. However, section 182 of Finance Act 1989 (which applies to the C&AG and his staff in the NAO) authorised the NAO to disclose in their report any relevant information provided to them by HMRC in order to assure Parliament and the public that large and complex tax cases were not settled for a lower yield than might have otherwise been achieved by HMRC.

1.31 It is important to remember that while the PAC and the TSC have unqualified powers to “send for persons, papers and records” relevant to their terms of reference, in light of the C&AG’s specific information and investigatory powers, his resources (some 880 NAO staff) and his statutory role as “an officer of the House of Commons” the Committees can expect to rely to a considerable extent on the C&AG rather than on their own general oversight powers. Moreover, as a public official conferred with statutory discretion, the C&AG is subject to parliamentary accountability and to judicial review on normal principles.

The Cabinet Secretary

1.32 It would be recalled that Sir Gus O’Donnell, as then Permanent Secretary to the Treasury, led the review that recommended the establishment of a new single revenue department, integrating Customs and the Revenue. Chapter 6 of his report [G. O’Donnell, Financing Britain’s Future: Review of the Revenue Departments, Cm 6163, HM Treasury, 2004] recommended “Clearer Accountability” in these terms:

Clearer Accountability to Parliament

6.37 For Parliament, there would be better clarity about who should be held accountable for which decision. As a result of this clarity, there will be a better opportunity to hold the relevant person to account.

6.38 In addition to appearances before the PAC, the Executive Chairman should be available to appear before the Treasury Select Committee (and other Select Committees as necessary) to account for decisions that his or her department has taken in exercise of their statutory duties.... Ministers and Treasury officials will be primarily accountable for policy.

1.33 These policy objectives are given full effect by the information disclosure provisions of the CRCA. Furthermore, the Cabinet Secretary has ownership of the Departmental Evidence and Response to Select Committees (known as the “Osmotherly Rules”). Although the guidance has not been approved by Parliament and has no parliamentary status, Select Committees have from time to time commented on its provisions. The current guidance notes that “Select Committees have a crucial role in ensuring the full and proper accountability of the Executive to Parliament” and that “Ministers have emphasised that, when officials represent them before Select Committees, they should be as forthcoming and helpful as they can in providing information relevant to Committee inquiries”. It then went to state, amongst other things, that:

53. The central principle to be followed is that it is the duty of officials to be as helpful as possible to Select Committees. Officials should be as forthcoming as they can in providing information, whether in writing or in oral evidence, to a Select Committee. Any withholding of information should be decided in accordance with the law and care should be taken to ensure that no information is withheld which would not be exempted if a parallel request were made under the FOI Act. ...

67. Although the powers of Select Committees to send for “persons, papers and records” relating to their field of enquiry are unqualified, there are certain long-standing conventions on the provision of information which have been observed in practice by successive administrations on grounds of public policy.

68. The Government is committed to being as open and as helpful as possible with Select Committees. The presumption is that requests for information from Select Committees will be agreed to. Where a Department feels that it cannot meet a Committee’s request for information, it should make clear its reasons for doing so, if appropriate in terms similar to those in the Freedom of Information Act (without resorting to explicit reference to the Act itself or to section numbers). If the problem lies with disclosing information in open evidence sessions or in memoranda submitted for publication, Departments will wish to consider whether the information requested could be provided on a confidential basis.

1.34 As explained below, HMRC has refused to comply with the above-stated “Osmotherly Rules” and “Clearer Accountability” objectives in recent evidence and submissions to the PAC and the TSC, despite the fact that the former Chair of the PAC brought the matter to the attention of the Cabinet Secretary in March 2009.

Part Two: The Goldman Sachs Settlement

2.1 On 7 March 2011, I made a public interest disclosure to the C&AG, the Chair of the PAC, and the Chairman of the TSC, indicating that around the time Dame Strathie told the PAC (in relation to Vodafone) that “it would be absolutely wrong to suggest in any way that the permanent secretary for tax did some deal in private”, said Permanent Secretary for Tax, Mr Hartnett, did a deal in private with a multinational company, which I can now identify as Goldman Sachs.

HMRC’s Criminal Investigation Policy

2.2 The former Chancellor of the Exchequer, Dennis Healey, explained memorably that “the difference between tax avoidance and tax evasion is the thickness of a prison wall”. As Lord Templeman put it in an article - ‘Tax and the taxpayer’, (2001) Law Quarterly Review 575, at 587 - “The tax evader commits a criminal offence punishable with prison, penalties and fines. The tax avoider commits no offence and only risks failure to avoid the tax”.

2.3 However, there is a vast grey area between pure avoidance and pure evasion, and as the then Director of the Inland Revenue Compliance Division noted in 1997:

“if an ‘avoidance’ scheme relies on misrepresentation ... or concealment of the full facts, then avoidance is a misnomer; the scheme would be more accurately described as fraud”.

2.4 The Commissioners’ powers of collection and management of revenue extends to the prosecution (through the Revenue and Customs Prosecutions Office (RCPO) of taxpayers suspected of fraud or evasion in relation to all of the taxes, charges and duties within those powers. The wide range of offences available for this purpose include statutory offences such as false accounting (section 17 Theft Act 1968), fraudulent evasion of income tax (section 144 Finance Act 2000), fraudulent evasion of national insurance contributions (section 114 Social Security Administration Act 1992), and fraudulent evasion of VAT and furnishing false information (section 72 Value Added Tax Act 1994). HMRC’s main weapon for dealing with serious tax evasion is the common law offence of cheating, which applies equally to all of the taxes, charges and duties within the collection and management of HMRC, because of its harsher penalties (the maximum penalty on conviction is life imprisonment and/or an unlimited fine, in addition to the confiscation of the benefit of the tax evasion).

2.5 However, in exercise of their collection and management discretion, the Commissioners have adopted a published HMRC Criminal Investigation Policy. It provides, amongst other things, that:

“It is HMRC’s policy to deal with fraud by use of the cost effective Civil Investigation of Fraud (CIF) procedures, wherever appropriate. Criminal Investigation will be reserved for cases where HMRC needs to send a strong deterrent message or where the conduct involved is such that only a criminal sanction is appropriate.

However, HMRC reserves complete discretion to conduct a criminal investigation in any case and to carry out these investigations across a range of offences and in all the areas for which the Commissioners of HMRC have responsibility”.

2.6 Since 1st September 2005, Civil Investigations under by HMRC have been conducted in accordance with the principles set out in of Practice 9 (COP 9) and of Practice 8 (COP 8). The vast majority of cases of serious tax fraud are dealt with by HMRC under its COP, which offers complete immunity from criminal prosecution so long as further false statements are not made as part of the investigation. COP 8 applies to all civil investigations where the procedures in COP 9 are not used.

2.7 Where a taxpayer seeks to take advantage of an avoidance scheme designed to reduce a tax liability, the matter will be investigated under COP 8. Thus the investigation is undertaken with a view to the financial recovery of any tax, plus interest accrued and penalties that may be due. Civil investigation powers are more limited than the criminal investigation powers. Significantly, HMRC cannot obtain information from trust, companies, banks and other third parties located offshore during a civil investigation. However, it is only where evidence of serious fraud is discovered during the course of a COP 8 investigation that the matter may be dealt with under COP 9 or otherwise referred for criminal investigation.

2.8 Thus despite the fact that the Criminal Investigation Policy states, among other things, that HMRC will consider criminal prosecution in cases of tax fraud where documents are falsified or facts misrepresented in the course of an avoidance scheme so as to enhance its credibility, the effect of the above stated application of the policy is that large companies will not be investigated for evasion, even if they have used an “avoidance” scheme that relies on misrepresentation or concealment of the full facts and would be more accurately described as fraud or evasion.

2.9 However, it does not appear that this was fully explained to the TSC on 16th March 2011 when Mr Clasper asserted that “there is obviously going to be some case somewhere in the world where this is not true, but [UK] companies will not evade”, in support of Mr Hartnett’s evidence that he “cannot remember ... seeing a case of evasion in very big business in the recent past”. Furthermore, Mr Hartnett told the TSC on that occasion that “every time we settle an issue ... we look at the penalty position and if necessary we take legal advice; sometimes external legal advice”, and on 12th September 2011 he further stated: “Our people will have looked incredibly carefully at every case that we have litigated and won that involves avoidance, or that we have settled, to determine whether the law allows a penalty to be taken”.

2.10 The Goldman Sachs settlement appears to contradict these assertions, and is set out in considerable detail to illustrate the point.

Summary of the Goldman Sachs Case

2.11 A highly artificial structure was established by Coopers and Lybrand (now PricewaterhouseCoopers) for the sole purpose of enabling Goldman Sachs to avoid National Insurance Contributions (NICs) on annual bonuses paid to its high net worth employees in London. Two subsidiaries of the Goldman group were involved in the scheme - Goldman Sachs Services Limited (“GSSL”) which provides the service of supplying staff to Goldman Sachs International (“GSI”) and other affiliated entities. GSSL’s principal office address is in the British Virgin Islands and its partner-directors are said to have been resident in New York where its fundamental management is said to have been exercised. GSSL was the formal employer of staff who worked for GSI, although GSI funded GSSL’s payments to its employees.

2.12 HMRC’s Statement of Case to the Tribunal describes the avoidance scheme in these terms:

The payments in question were made under an “off-the-shelf” scheme (“the Scheme”) which Goldman Sachs International acquired for the sole purpose of avoiding NIC liabilities on the annual discretionary cash bonuses that were paid to the employees concerned in the years in question. The Scheme is one version of an arrangement under which the employer packages employees’ annual discretionary cash bonuses in a way that ensures that employees receive their cash bonuses precisely as promised (which the employer, given the nature of its business, must of necessity pay) but in a form that is supposed to avoid any liability to NICs.

In summary this version of the arrangement was designed to work along the following lines—

(a)The employer establishes an employee benefit trust (“EBT”) and the EBT incorporates a company (“EBT Co”);

(b)EBT Co issues one penny redeemable shares to the EBT and the EBT awards employees options over a fixed number of those shares (adjustable downwards) exercisable for one penny per share;

(c)The employer determines the amount of each employee’s annual cash bonus, EBT Co redeems the shares that are not required to deliver the bonus and EBT reduces the number of shares under option to take account of this;

(d)The employer contributes the annual cash bonus pool to the EBT and the EBT contributes the annual cash bonus pool to EBT Co for the benefit of the holders of the redeemable shares;

(e)The employees exercise their options (using employer provided funds);

(f)EBT Co uses the annual cash bonus pool to redeem its shares and employees receive their cash bonus on the usual bonus payment date.

The absolute certainty of these arrangements is that employees end up with the same cash in hand as they would have received had the employer just determined and paid the employees’ annual discretionary cash bonuses in an ordinary manner. Indeed, it would be disastrous for the employer’s business if the arrangements involved any risk that this would not be the result. Each and every step is planned in advance and executed to a timetable with pre-scripted documents designed to produce that result. The only risk for employees is if they fail to play their part by signing and returning the various pieces of paper with which they are presented at particular stages of the process. In that case they may just have to be paid their bonus in a more straightforward manner.

The employer then claims, based on an understanding of the House of Lords’ decision in Abbott v Philbin [1961] AC 352, that the arrangements avoid any liability to NICs because the employees’ annual “bonus” is an option of no value and the cash that the employees receive are not emolument or earnings derived from their employment but the redemption proceeds of shares that initially had no value but which were subsequently enhanced in value to deliver the cash bonus that employees were always promised.

2.13 The matter was dealt with under COP 8. HMRC’s published Anti-Avoidance Strategy (AAS) aims “to persuade our customers not to attempt to engage in avoidance by ... optimising our operational response to avoidance; and changing the economics of avoidance to make it less attractive so that the expected costs, difficulties and risks of attempting avoidance outweigh the expected potential gains”. The strategy also emphasises a strategic approach in litigating avoidance cases. Thus between 2002 and 2005, HMRC selected certain test cases (involving 22 employers that used the same scheme) which it litigated.

2.14 With specific reference to Goldman Sachs, on 12 December 2002, HMRC issued notices of decisions in respect of the NICs liability which it said was due from GSI. On 13 December 2002, GSI appealed those decisions. On 10th December 2003, HMRC commenced proceedings in the Central London County Court seeking repayment of some £30.81 million of unpaid NICs and interest. The reason for commencing County Court proceedings, whilst the appeal was outstanding, was because HMRC is bound in the collection of arrears of NICs by the Limitation Act 1980. On 4 February 2004, the proceedings against GSI were adjourned pending the determination of the appeal.

ExCom Settlements of 2005

2.15 In 2005, HMRC’s Executive Committee (ExCom), which included Mr Hartnett, approved terms for the settlement of all the pending litigation. Thus in October 2005, HMRC wrote to the Managing Director of GSI, Mr Housden, stating that the terms of a negotiated settlement that HMRC would find acceptable are: (a) payment of 100% of the NICs outstanding (£23.2 million) and (b) non-payment of the late payment interest accrued on the NICs (£10.8 million as at 31st October 2005). The letter informed Mr Housden that “this is an offer that is being made to all participants” and warned that “for the avoidance of doubt, please note that should litigation be necessary to resolve matters then interest will continue to accrue on the principal NIC debt”. Significantly, it also stated that:

“The payment of 100% of the NIC would mean that HM Revenue & Customs would not seek to invoke the decision in Macdonald v. Dextra Accessories Ltd ([2005] UKHL 47) in respect of the contributions made to the trust, thereby giving a full corporate tax deduction for those amounts. In addition a full deduction, as a trading expense, would be given in the corporate accounts for the NIC paid”.

2.16 In other words, GSI could have accepted the offer without paying anything if it had paid sufficient corporation tax, income tax and NICs for the relevant tax year, as it would have been entitled to a full rebate for the £23.2 million. All the other 21 companies that used the scheme accepted HMRC’s terms of settlement but GSI rejected the offer and appealed to the Special Commissions (now First-Tier Tribunal) instead.

2.17 Thus the appeal was pending when HMRC published its Litigation and Settlement Strategy (LSS) in June 2007. The LSS sets out HMRC’s approach for bringing tax disputes to a conclusion, whether by agreement with the taxpayer, or by litigation. In particular, it focuses on the relevant factors for HMRC when deciding whether to agree a settlement on the issues in question or to proceed to litigation. The LSS complements the AAS as a part of an overall strategy by HMRC to close the “tax gap”. The tax gap appears predominantly through non-compliance – be it innocent mistake, systemic failures, negligence, planned avoidance or fraud. The use of litigation and a more robust approach to settlement of disputes (with or without the use of penalties) can penalise in its own right and so help to reduce the incidence of such behaviours.

2.18 The biggest shift in approach under the LSS is that HMRC must now consider litigation in cases where the taxpayer will not agree to settle for an amount which HMRC considers it could achieve through litigation, in particular in “all-or-nothing” cases where the taxpayer will not agree to pay 100% of the tax. This contrasts with the previous position (under which the 2005 ExCom settlements were reached) where the Inland Revenue, in particular, was prepared to discount the tax in dispute so as to recognise litigation. Instead, the LSS states that “where we have a strong case we should seek full value from settlement or take the matter to litigation”. Thus if more than twenty users of a NICs avoidance scheme have paid “full value from settlement”, HMRC was justified to take the view that it had a strong case against GSI. Moreover, the LSS emphasises (in paragraph 16): “in avoidance cases if our legal advice is strong, do not accept settlements for less than 100% of the tax and interest due”.

2.19 Consequently, HMRC’s position was that there was no question of settling with GSI. As HMRC had already settled with twenty one other taxpayers in 2005, to settle with GSI a few years after would not only be inconsistent with the terms it offered those taxpayers but could be a breach of the Department’s statutory obligation to treat all taxpayers fairly in the exercise of its collection and management powers and an infringement of the terms of the LSS.

Judgment of the Upper Tribunal

2.20 The appeal brought by GSI on 13 December 2002 was activated by GSI and GSSL in November 2008 by their request for a listing. On 9 December 2008, GSI and GSSL they made a joint application in the restored appeal for a direction concerning a preliminary hearing. Mr David Goldberg QC (instructed by Freshfields Bruckhaus Deringer LLP) acted on behalf of both GSI and GSSL while Mr Malcolm Gammie QC (instructed by General Counsel and Solicitor to HMRC) acted for HMRC.

2.21 In its initial decisions HMRC assumed without further analysis that GSI was the secondary contributor. GSI initially took no point on that. In fact it was GSSL’s and GSI’s position that the operation of these transactions did not give rise to any liability to make NIC contributions. But in December 2008 GSI sought a preliminary issue which was “whether GSI is the secondary contributor in respect of employees of GSSL for the purposes of the 1992 Act and the 1978 Regulations”. The preliminary hearing was sought on the basis that its determination should be dispositive of appeals in relation to tax years 1997 and 1998 and largely dispositive of the appeal in relation to tax year 1999. The reason for this was that the GSI employees were transferred from GSSL to GSI, meaning there would be a period in the tax year ending 1999 when the question of GSI’s liability would have still to be determined.

2.22 Under the Social Security Contributions and Benefits Act 1992, where earnings are paid, both a primary and a secondary NIC are payable. The primary contribution is the liability of the earner but the secondary contribution is the liability of “the secondary contributor”. Section 7 of the Act explains who the “secondary contributor” is. In relation to employed earners who work under the general control or management of a person other than their immediate employer, there are detailed regulations in The Social Security (Categorisation of Earners) Regulations 1978 to enable the “contributor” to be identified.

2.23 By considering the 1978 Regulations and reading across to the provisions which they incorporate or to which they refer, the question that emerged was whether for the purposes of those regulations GSSL was a “foreign employer”. If GSSL was a “foreign employer”, then the person who was liable to contribute would be GSI as the “host” employer. The issue of whether GSSL was a “foreign employer” is answered by reference to Regulation 119(1)(b) of The Social Security (Contributions) Regulations, which identifies the question as being whether the employer is “resident or present in Great Britain when such contributions become payable or then has a place of business in Great Britain”. If GSSL, the actual employer, was not “present” within the terms of Regulation 119, then the person liable to pay the contributions was GSI as the host employer. If GSSL, the actual employer, was present, then it was liable to pay the contributions. There is one qualification to that broad statement, relating to the GSI employees. In relation to them, there can be no dispute that GSI was liable to pay any contribution because, from June 1999, the GSI employees were employed by GSI.

2.24 The issue of whether GSSL was present in Great Britain, (and so meaning that it and not GSI was the contributor), is entirely distinct from the question of whether the scheme worked. If it was established by the preliminary issue that GSSL was the secondary contributor, then the question of liability of GSI (ie whether the scheme worked) would only arise in relation to the GSI employees for the nine months following June 1999. That liability represents only about 25% of the total liability to NIC sought to be imposed by HMRC. The effect of the Limitation Act is that HMRC could no longer issue decisions against GSSL in 2009 if GSSL rather than GSI was the secondary contributor. Mr Goldberg QC for GSI and GSSL stated that at that level, namely £10 million instead of £40 million in rough figures, the claim was likely to be settled.

2.25 Therefore if there was a preliminary issue about the identity of the contributor then there was bound to be a saving in costs because the issues that would eventually have to be determined by the tribunal would be narrower or, alternatively, will in fact be resolved. In the First-tier Tribunal, Dr Avery Jones refused to order a preliminary issue but in the Upper Tribunal, Mr Justice Norris, sitting in private in London on 21 October 2009 allowed GSI’s and GSSL’s appeal and directed the determination of the preliminary issue by a freshly constituted First-tier Tribunal: see Goldman Sachs International & Goldman Sachs Services Limited v HMRC [2009] UKUT 290 (TCC).

Judgment of the First-tier Tribunal

2.26 The preliminary issue was heard by Judge David Williams at a public sitting on 17 and 18 December 2009 and the judgment - Goldman Sachs International v HMRC [TC00507] – was published on published on 26 April 2010. As the title of the case shows, GSSL was removed as a party to the appeal. It was not represented before Judge Williams and did not give evidence to him. Instead GSI contended that GSSL was in the jurisdiction and so it, GSI, could not be host employer. HMRC challenged this on the ground that GSSL was not within the jurisdiction as a secondary contributor and that GSI, which was in the jurisdiction, was liable for the secondary contributions as host employer.

2.27 Perhaps, as a result of the artificiality of this approach to litigation by Goldman Sachs, Judge Williams considered it necessary to “make a further reservation about the evidence before” him. He said (at paragraph 14):

I do not know the precise relationship between GSI and GSSL. They are clearly both linked within the Goldman Sachs group or groups of companies in some way, but I have not been given evidence of the nature of that link. I assume that neither of these two bodies controls the other, but the evidence is that they are clearly closely linked in some other way. In the absence of any agreed facts or specific evidence, I assume that for the purpose of this decision that GSSL is a third party and that GSI and GSSL cannot be regarded as the alter ego or alternate personality of each other.

2.28 The learned judge then pointed out (in paragraph 54) that “the only submissions for GSSL on the record in these proceedings are that it did not have a place of business in Great Britain at any time relevant to these appeals”, and asked: “has GSI shown, on the balance of probabilities, that GSSL was wrong in that submission?” Rejecting Mr Goldberg’s argument that there is a more subtle point here (ie that GSSL “can have a place of business for these purposes but not for other purposes”), Judge Williams stated:

55. I do not think this point needs extended analysis in the context of this preliminary issue. There is no specific definition of “place of business” in the 1979 Regulations or the enabling Act. It is a question essentially of fact, though it may be examined in the context of other legislation dealing with places of business. And I do not need to digress into the interesting issue of whether there is a difference between someone “establishing” a place of business in the jurisdiction and someone “having” a place of business here. Nor do I need to reflect on the discussion by Mr Goldberg QC about the meaning of “place of business” however established. This is because in my view the way the case was put to this tribunal, and to the Upper Tribunal before this provisional issue came for decision and when GSSL was party to the hearings, is such that, applying the balance of probabilities to the evidence and the submissions of the parties including GSSL, the answer is clear.

2.29 Judge Williams then found that GSSL did not have a place of business in Great Britain at any time relevant to these appeals (that is, between 1997 and 2000). He stated as follows:

57. First and foremost, this is what GSSL, as a party to the proceedings, told both this tribunal at an earlier hearing and the Upper Tribunal at the hearing that gave rise to this preliminary question. As it is no longer a party to these proceedings I must put weight on this.

58. Second, this is what the company secretary of GSSL, writing as such on GSSL notepaper from the British Virgin Islands in 1991 told Companies House. It did so to cancel its previous registration of a place of business in Great Britain. Companies House was specifically told that it was to take the letter “to be notice of the company’s ceasing to have a place of business in Great Britain” as from the date of the letter, 31 July 1991. This was pursuant to section 696(4) of the Companies Act. That has not been reversed. GSSL remains unregistered. Again, weight should be put on that statement, and the absence of any revocation of that statement, to the central authority dealing with such registrations.

59. Third, that was confirmed by Mr Housden, writing on GSI notepaper as a GSI executive director, to the Inland Revenue Large Business Office on 13 April 1999. His letter was in reply to a letter from an inspector asserting that GSSL had a permanent establishment in the United Kingdom and that therefore consideration should be given to applying the US-UK double tax agreement to its profits. Mr Housden’s reply stated:

“GSSL is not considered to have a place of business in London as it does not make “sales” in the UK but only incurs expenses.

You state that GSSL has a fully staffed office in London (and nowhere else). In fact GSSL has no office in London at all.

GSSL does not provide services in the UK but provides services to the UK …

GSSL does employ a large number of people located in the UK. Such persons do not undertake any business activity for GSSL, their work is performed for GSI and associated entities.

Where local regulations in the country where GSSL employees work so require, GSSL endeavours to comply with any wage withholding and social security obligations. This they do with help of GS New York or the local country affiliates”.

Mr Housden confirmed this again the following year, writing on GSI notepaper to HM Inspector of Taxes Large Business Office on 8 May 2000 in a letter headed “GSSL Year ended 30 November 1999”:

“As you are aware, this company [GSSL] is not registered to conduct business in the UK and does not in fact conduct a business in the UK. Historically, the fundamental management of GSSL has been exercised in and from the United States. Accordingly, the company is not required to file accounts with Companies House in the UK”.

Mr Goldberg QC argued that this was a letter for corporation tax purposes only. I do not read either of these letters that way. I read them as making a series of clear, unambiguous, considered statements in the present tense to explain why the GSSL accounts were not available at Companies House or otherwise to the public or to enquirers in Britain and why GSI did not regard GSSL as within the jurisdiction of United Kingdom corporation tax. The letters also indicate the advantages to GS of that arrangement. I also note that in writing these letters Mr Housden, who I am told was a GSSL director at the time, was not writing in that capacity or on GSSL notepaper or from a GSSL address. He was writing in his capacity at GSI. That is of course consistent with the statements made in the letter that there was no British address for GSSL. That also appears consistent with an agreement between GSSL and GSI that I note below under which Mr Housden had been seconded as an employee to GSI. In addition, they had agreed that the functions in which he worked with regard to employees were being undertaken by GSI for GSSL.

60. Taken together, I put considerable weight on those issues. I would be most reluctant to decide that GSSL was in breach of statutory obligations in its withdrawal or non-renewal of that registration without cogent evidence that this was so when it has itself asserted that its non-renewal of registration was the correct course of action. And I would be most reluctant to find that Mr Housden had misrepresented GSSL’s position to HMRC. I do not accept without evidence that deregistration and subsequent representations of this sort would be made by such a company without all necessary advice and consideration. I also consider it important that there is a clear explanation – unrelated to tax liabilities - why that action was taken. It was not part of a tax avoidance scheme. For example, such evidence as I have seen suggests GSSL made no taxable profits. It was, along with the registration of the company in the British Virgin Islands, a way of keeping information about the GS accounts and payroll out of the public domain and confidential.

61. Fourth, I have had no evidence or submission from GSSL to say that it was wrong in taking that position either in that letter of earlier in these proceedings.

62. Fifth, GSI raised this possibility only in the hearing before me and has not, so far as I can see, raised it on any previous occasion either when appealing against the original section 8 decisions or in the subsequent correspondence. Nor do I know that GSSL is actually aware of this stance by GSI. In addition, when HMRC first took action against GSI about these liabilities, GSI did not raise this point or pass the matter on to GSSL but itself accepted receipt of the appropriate notices.

63. Sixth, there is nothing in the witness statements of the witness for GSI or in the cross-examination of that witness that asserts or clearly implies that GSSL had a place of business in Great Britain.

64. I therefore reject on the facts Mr Goldberg’s second argument that I could find that GSSL did have a place of business in Great Britain at the relevant times. In doing so I do not consider I need examine any of the authorities about what a “place of business” might mean.

2.30 Over the two days of hearing, Judge Williams (in his own words at paragraph 2) “heard the evidence of one witness for GSI and was given limited documentary evidence”. He then elaborated on this evidence in paragraph 5 of his judgment thus:

The evidence before me came from two sources. The first consisted of two witness statements and oral evidence of an individual witness who was not working in the relevant area of the GS group at the times relevant to these appeals but became responsible for some of them after that time, together with an assemblage of documents. The second was correspondence between the parties to the main appeals.

2.31 Significantly, Mr Housden, who featured prominently in the previous evidence about GSSL, did not give evidence on this occasion despite being present in London. Judge Williams’ conclusions on the evidence and submissions by Goldman Sachs are as follows:

Was GSSL present?

79. In what way was GSSL present? The starting points of comparison have been set out above. It had deregistered from Companies House and did not in that sense have an address for service. It was not liable to United Kingdom corporation tax. It had no place of business in the United Kingdom.

Employees and the payroll function ...

82. The question is whether GSSL was present because it was conducting activities through its employees in the United Kingdom. If it was profiting from such services (and I have no evidence that it did) then it was not paying tax in the United Kingdom on such profit. Rather, its relationship with its employees was restricted because it had passed the benefit of their service to other companies in the GS group – in particular GSI.

83. At a late stage in this appeal GSI produced, through its witness, a short Services Agreement, signed and dated 3 October 1988, between GSSL and GSI. The agreement recites that GSSL seconds to GSI and affiliated companies pursuant to a Secondment Agreement concerning certain employees. The agreement then records that:

“GSI shall provide payroll, benefit, and related administrative services in respect of the employment of the Employees and shall be responsible for the provision of all remuneration, benefits, and perquisites to each Employee”.

The agreement goes on to provide that GSSL will reimburse GSI for these payments and all administrative expenses.

84. So the functions ... about NI contribution collection and statutory payments, were in fact undertaken in the United Kingdom by GSI from the date of that agreement. Mr Goldberg QC was unable to offer evidence about the termination of this agreement, and the witness clearly had no evidence to assist. I therefore take that agreement to be in effect at the times relevant to this appeal. That is also consistent with the point made by Mr Gammie QC that the notepaper used for correspondence by Mr Housden, and more generally with HMRC’s predecessors was GSI notepaper, not GSSL notepaper.

85. Under what arrangements were the employees employed? I was given evidence of this both by the witness and in the documents. These included her letter of engagement. The witness told the tribunal that she was not aware of precisely what part of the GS organisation had sought to recruit her or had interviewed her. Her letter of appointment was a GSI letter sent from an executive director at the London GS campus. Like other letters shown to the tribunal it began:

“I am pleased to offer you employment in London with GSSL. You will be seconded by GSSL to GSI in the capacity of Accountant …”

It then goes on to set out other terms and conditions, as do similar letters to others. All the letters are GSI letters but offer appointment with GSSL and secondment to GSI.

86. I was also shown a 1995 resolution of the board of GSSL resolving that certain individuals were authorised to agree terms of and execute on behalf of the company all employment offer letters, and a series of subsequent resolutions to similar effect. But I was shown no offer letter executed by anyone on behalf of GSSL. They were all GSI letters in the form noted above. Nor were all of them executed by persons named in the resolution I was shown. I was shown one letter to a new employee dated 10 February 1997, and another dated 19 March 1997 signed by someone named in such a resolution, Steven Ricci, but the resolution was dated the following year, on 8 January 1998, and the letters was both GSI letters - not GSSL letters - designating Mr Ricci in the heading an Executive Director Personnel of GSI.

87. I conclude on the facts that Mr Housden was correct when he asserted to HMRC that GSSL had no staff working for it in the United Kingdom. HMRC do not dispute that GSSL was the employer, but the only evidence I have seen suggests that GSI acted as agent for GSSL in making those appointments. The evidence also makes clear that the employees did not undertake business for GSSL. They undertook business only for GSI or other GS affiliates. Even the payroll and similar functions were performed for GSSL in the United Kingdom by GSI not by GSSL itself.

2.32 Judge Williams then proceeded to consider other relevant factors that informed his judgment in considerable detail:

An office or other location in the United Kingdom

88. Mr Goldberg QC also sought, through his witness, to suggest that GSSL was present in the United Kingdom at the GS London campus. I find no significant evidence of that. I do not put much weight on the absence of any nameplate on the doors of offices it may use. Many important public and private offices in London do not announce to the public what they are. More important is the absence, in the evidence, of any regular use by anyone of any notepaper or other stationery indicating an address for GSSL in London. I put no weight on the evidence put forward by the witness of leases. The documents were photocopies of extracts of leases, and not the complete documents. The witness had not seen the original documents, and clearly had no specific knowledge, of any part of their contents or the arrangements made by or under those documents. Nor was it in any way her function to deal with such matters for any part of GS. The photocopies do not assist. Nor does her evidence about the parts of the buildings occupied, for example, by the payroll function of the GS group. On the evidence of the agreement noted above, that was a GSI function in any event. I saw nothing suggesting that there was any specific part of the GS campus that could be regarded in any way as occupied by GSSL. I regard as accurate the contemporary statement by Mr Housden noted above that in fact GSSL had no office in London at all. ... there were no suggestions it had any office, place of business, branch or agency, or employees working for it, anywhere else in the United Kingdom.

Banking activities

89. I was also presented with evidence through the witness that GSSL ran bank accounts in London, and paid HMRC from those accounts. Again, I find this of little assistance. The correspondence about setting up the account was not with GSSL but with other GS entities. I was told by the witness that the authority to open accounts rested in New York, not London, or elsewhere. The accounts were operated through powers of attorney, but I was given no evidence about whether those attorneys acted as GSSL attorneys. I do not consider that as a matter of law or fact it can be said that a company that is part of a corporate group is present for these purposes in the United Kingdom because there are individuals who are directors or employees within the group who have powers of attorney to operate its British bank accounts. And the functions for which the payroll accounts were used were in any event being conducted, as a matter of fact and of agreement with GSSL, by GSI. Further, the money in the accounts was largely passing through the accounts from other GS entities to the intended employees or other recipients. Based on the accounts and other documents I was shown, it was not in any sense “GSSL money”.

Service of proceedings

90. I similarly put no little weight on the evidence Mr Goldberg QC sought to introduce through the witness about service of court proceedings. It appeared that all the witness, and indeed her legal advisers, had seen and could produce were redacted photocopies of documents that purported to be parts of court actions involving GSSL. I have no knowledge of the basis on which GSSL accepted service of those documents. I cannot check who the other party was in each case because of the redactions. Nor had the witness seen the originals. Nor did she have any relevant knowledge, because of her employment or otherwise, about the background to any of these documents or about the general GS procedures for receiving and handling such actions. Nor did I receive any evidence from anyone who did have such knowledge. It may have been - I do not know - that the documents were received by GSI or an affiliate and passed to GSSL, and accepted by GSSL within the GS group. Or it may be that GSSL was nominated as the recipient, whether or not it was obliged to accept them, for reasons the GS group considered appropriate. Or maybe England was regarded as a forum conveniens for the cases and no point was taken about jurisdiction. The only issue on record – and the issue on which both Lord Scarman and Lord Wilberforce put weight in Oceanic – was that GSSL did not have a registered address for service because it had chosen some years before to withdraw its registration, and therefore its address for service, from Companies House. I am not satisfied that I have seen anything to persuade me that GSSL had an address for service in Great Britain and I find that at the relevant times it did not have such an address.

91. Mr Goldberg QC addressed the tribunal at some length about the rules for service of proceedings. In particular, he developed an argument about the expansion of the scope of the rules of service through the Civil Procedure Rules and otherwise. I record those arguments, but do not find they assist and therefore do not discuss them in detail. I agree with Mr Gammie QC that on the evidence they are largely irrelevant. ...

92. More important is the consideration that regulation 119 imposes both a continuing administrative obligation and a financial obligation to HMRC for each tax month or other earnings period. It is not limited, in the way section 204 was, purely to an administrative issue. It is an obligation more of a kind that Lord Edmund Davies regarded in that case as penal, and therefore to be construed narrowly. With the greatest respect, I do not consider that this liability can be considered in any way as penal. The test has to reflect continuing enforcement and the administrative and fiscal obligations and not merely the limited kinds of presence adequate for the modern rules of service.

93. I also find of little assistance the correspondence between GS and HMRC and its predecessors. This is for the reasons set out above. Most of the correspondence is represented as being undertaken by GSI and not GSSL, and it was agreed between GSI and GSSL that this should be so. There is no clear pattern of correspondence between HMRC and its predecessors and individuals writing as GSSL employees from a GSSL office or address in Great Britain. I find that the correspondence is between GSI and HMRC.

94. I therefore find that even if it would be adequate to establish that presence for the service of proceedings is an adequate form of presence to meet the test in regulation 119(1)(b) – an approach I do not accept – the evidence put forward does not show even on the balance of probabilities that GSSL could be served in Great Britain by reference to any identifiable location.

The presence of individuals

95. If GSSL is not present by reference to any place, then it can be present only by reference to its servants or agents. A further strand of Mr Goldberg QC’s argument was that GSSL was present because one of its directors, Mr Housden, was present here. Here again I was faced with the limits imposed by this preliminary hearing. I was given little evidence about Mr Housden and none by him. I am prepared to accept that he had a role, in the English and Welsh company law sense, as a director of GSSL although I do not know what that role was beyond the resolutions I have seen. Even so, with only one exception brought to my attention, the documentary evidence shows that he did not correspond with others as a GSSL director but as a GSI director (in, I understand, the GS sense of director not the company law sense). That exception was a letter written on GSSL notepaper on 7 October 1999 by Mr Housden for and on behalf of GSSL. The headed notepaper gave an address in the British Virgin Islands, not in the United Kingdom. That does not take the issue forward.

96. I did not see Mr Housden’s contract of employment. Given the papers I have seen I have assumed in the absence of more specific evidence that he was one of the many individuals seconded by GSSL to GSI. If he did have a further contract directly with GSSL I have not seen it. If he did have specific duties in the United Kingdom for GSSL (rather than in New York, where GSSL’s central management and control was, or the British Virgin Islands, where it is registered) I was not told of them. The tax and related duties he undertook using a British address all appear, from the correspondence, to have been performed for GSI. This was so, as I have noted above, even when he was dealing with the tax and related affairs of GSSL. It is therefore not clear that there is any evidence that he was in any meaningful sense the presence of GSSL in London. Linked with that, although I am prepared to accept or assume that Mr Housden was in the United Kingdom for a significant part of his time, I was given no direct evidence of this or about whether he could be said to be here on the continuing basis noted as reflecting the obligations of a secondary contributor in each tax month or earnings period.

97. I say “the presence” because I was given details of no other individual who was contended to represent GSSL in the United Kingdom, or to provide his or her personal service to GSSL or act as GSSL’s agent. I therefore make the following findings of fact. First, I find that with the possible exception of Mr Housden I was given no significant evidence of any individual present in Great Britain whose presence here could be said to constitute in any way the presence of GSSL for the purposes of regulation 119(1)(b). Second, on the evidence before me I am not persuaded that on the balance of probabilities Mr Housden’s presence in Great Britain was sufficient of itself to constitute a presence in the United Kingdom of GSSL for current purposes even if I assume (as it has not been established in evidence) that he was actually present for a sufficient time in the United Kingdom in each earnings period and that I further assume (as again it has not been established in evidence) that he was actually authorised or charged with carrying out in Great Britain any duties for GSSL (rather than GSI, given the terms of the agreement between the companies set out above that I have seen, or more generally the GS group as a whole) of ensuring payroll compliance with the relevant NI contributions obligations. Without those assumptions, the evidence in my view falls far short of the evidence necessary to show presence of GSSL by his presence. (emphasis supplied)

2.33 In conclusion, Judge Williams found (in paragraph 105) “as fact that GSSL was the foreign employer and that GSI was the host employer of the two named individuals throughout those parts of the period relevant to these appeals when GSI was not directly their employer”.

2.34 GSI appealed the preliminary ruling to the Upper Tribunal whilst the substantive hearing on NICs liability remained pending in the First-Tier Tribunal. The Upper Tribunal listed the appeal for hearing in the middle of 2011. In regard to the related issue of whether the avoidance scheme worked (ie succeeded in avoiding liability to NICs), HMRC succeed in establishing in the Upper Tribunal in a similar scheme (Commissioners for Her Majesty’s Revenue and Customs v PA Holdings Ltd, published on 7th July 2010) that employee bonuses paid as a dividend through a scheme to avoid NIC liabilities were earnings liable to NICs and would therefore expect to be successful in showing NICs liability in the case of Goldman Sachs. That judgment was published on 7 July 2010. Shortly after, HMRC lawyers obtained legal advice from Malcolm Gammie QC (who also represented HMRC in PA Holdings). His advice, based on the present state of the litigation, was “strong” within the terms of the Litigation and Settlement Strategy.

2.35 It is clear from the judgment that Goldman Sachs did not disclose fully and accurately all facts and circumstances material for the decisions of HMRC and the Tribunal. Thus under the LSS and COP 8 the amount of any settlement would be expected to be at least the unpaid NIC (£23.2 million) plus interest (about £20 million as at the end of last year) and an appropriate uplift to cover the penalty element. Moreover, given the value of the case, any such settlement would be expected to be completed between Goldman Sachs and the legal and technical officers dealing with the case. However, it appears that the Permanent Secretary for Tax settled the matter for the unpaid NIC of £23.2 million, and without recourse to the officers dealing with the case.

The Settlement of the Goldman Sachs Case

2.36 On 8 December 2010, a meeting took place in HMRC’s Solicitor’s Office, the note of which is as follows:

Present:Anthony Inglese [AI]Alan Evans [AE] – (Director SCS2 - one of the two representatives of the Solicitor’s Office in the High Risk Corporates Programme)[Team Leader, Solicitor’s Office][Case Lawyer, Solicitor’s Office]

The meeting began with AI reading [Case Lawyer’s] email of 6/12 and Malcolm Gammie’s advice of July 2010.

AE explained that at the High Risk Corporates meeting the previous week a late submission had come in about a deal on which DH had ‘shaken hands’ with GS. The status of this agreement was not clear.

A brief note was prepared for the meeting including at pt 3 a suggestion that, whilst the NIC principal might be protected, the interest might not. [Case Lawyer] said this was not correct; it was all covered, per his note.

It was not clear whether DH had settled on £24m or on whatever the principal was. There was discussion about whether there could be justification for settling without interest, especially in view of the Litigation [and Settlement] Strategy. A particular concern was the 2005 ExCom settlements with all the other scheme users. AI asked if there was a risk of that being re-opened. [Case Lawyer/Team Leader] saying that whilst we would need to see the settlement paperwork, there would appear to have been a commercial deal, with consideration passing, so this seemed very unlikely to be a problem.

It was however, clear that the proposed settlement gave GS no additional penalty for having resisted for 5 more years, including as [Case Lawyer] explained making every conceivable point in the Tribunal, and putting up a “stooge” witness when Mr Housden was the obvious person to answer questions.

Mr Gammie’s advice was broadly positive both on whether we had the right GS company and in relation to the scheme.

[Team Leader] was asked to find out more about what the 2005 settlements said about interest from SI [Specialist Investigations], but only if this took only a day.

GS had apparently suggested the principal might be £16 million. Discussing whether this altered things. [Case Lawyer] pointed out that the claim form and probably the Particulars of Claim in the County Court were public documents and could be copied by anyone interested in comparing the settlement sum with the claim.

AI said that he would always want to assist Mr Hartnett, but not if this were “unconscionable”. He referred to the difficulty all those present at this meeting were having justifying a settlement without an interest element.

Case Lawyer handed AE complete Excel spreadsheet of the sums claimed, obtained from SI.

2.37 The settlement by Mr Hartnett appears to breach the Commissioners’ statutory discretion under the CRCA. As highlighted above, the House of Lords set out the limits of that discretion in the Fleet Street Casuals case. That principle was recently affirmed in Wilkinson v. Commissioners of Inland Revenue (2005) 77 TC 78. In the Court of Appeal, Lord Phillips (at pages 104 to 105) drew “attention ... to Lord Diplock’s statement that the Commissioners’ managerial discretion is as to the best manner of obtaining for the national exchequer the highest net return that is practicable”. Similarly, in the House of Lords, Lord Hoffmann pointed out (at page 114) that “the Commissioners are not ‘the Crown’, owners of the consolidated fund and able to deal with its property like any other owner”.

2.38 It also seems to contravene Article 107 of the Treaty on the Functioning of the European Union which prohibits State aid. State aid is defined as an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities. Paragraph 21 of Commission notice on the application of the State aid rules to measures relating to direct business taxation (98/C 384/03) states that:

“The discretionary practices of some tax authorities may also give rise to measures that are caught by Article [107]. The Court of Justice acknowledges that treating economic agents on a discretionary basis may mean that the individual application of a general measure takes on the features of a selective measure, in particular where exercise of the discretionary power goes beyond the simple management of tax revenue by reference to objective criteria - Case C-241/94 France v. Commission (Kimberly Clark Sopalin) [1996] ECR I-4551”).

2.39 Furthermore, the settlement is inconsistent with HMRC’s Litigation and Settlement Strategy, and HMRC’s evidence to the PAC on 16th November 2010 which led to this conclusion (Eighteenth Report HM Revenue and Customs’ 2009 - 10 Accounts):

20. The Department’s Litigation and Settlement Strategy states that, where its legal advice is strong, it should not accept settlements for less than 100% of the tax and interest due. The Department maintains that it does set out to prove the tax liability, serve its assessment and then collect what is due. The Department told us that the final decision on how to resolve each tax dispute has to be taken by two Commissioners and must involve legal advice. (emphasis supplied)

2.40 In her evidence to the PAC on that occasion, HMRC’s Chief Executive, Dame Lesley Strathie, explaining the settlement process stated that after a negotiation “there then has to be another commissioner and we have to have legal advice”, and emphasised that “there is a considerable amount of process before we would ever get to an end result”. Based on this evidence, there was no binding agreement between HMRC and the Goldman Sachs at the time of the meeting in the Solicitor’s Office on 12 December 2010.

2.41 Thus having been provided with crucial information, including Counsel’s opinion, details of interest protected in the County Court, the settlement reached by ExCom in 2005 with other users of the same scheme, and the conduct of Goldman Sachs in the litigation, Mr Inglese would have been expected to take the necessary steps to remedy what all the lawyers accepted was an unlawful settlement but he seemed to consider it his duty to “assist” Mr Hartnett rather than uphold the law and enforce corporate governance. Ultimately, he ensured that the deal was completed as agreed between Mr Hartnett and Goldman Sachs without recovering the millions of pounds of accrued interest properly due from Goldman Sachs.

2.42 The pivotal role of HMRC’s lawyers in the settlement of tax disputes is underscored by the LSS which states that “in all cases, the legal advice from the Solicitor’s Office will be a critical factor in decision-making”. Ms Strathie made the same point forcefully in the course of her oral evidence to the PAC in November 2010, as the following exchange shows:

[Q221] “Where there is a legal process, who has the authority to vary it?”

Dame Lesley Strathie: I go back to the point about the commissioners. There are six commissioners in Revenue and Customs, and they cover different areas, but on any decision there will be a minimum of two commissioners. We will ensure independence and governance of that. ...

[Q224] And how do you get oversight of potential conflicts of interest?

Dame Lesley Strathie: “Well, I very much hope, first and foremost, that if there was a conflict it would be self-declared and, if not, that our legal team and our governance would pick that up”.

2.43 Incidentally, at the time HMRC’s lawyers were completing the paperwork for the settlement with Freshfields LLP according to Mr Inglese’s order, Mr Inglese published an article on the LSS (jointly written with Mr Geoff Lloyd, HMRC’s Director for Dispute Resolution, in the Tax Journal, 10 January 2011) which appears to contradict the settlement he had just approved. The article stated, amongst other things, that:

It is sometimes said that HMRC’s Litigation and Settlement Strategy (LSS) stands in the way of a collaborative and commercial approach to resolving disputes. This isn’t the case. First of all, to set the context, and as Dave Hartnett made clear in his Tax Journal article on the LSS in June 2007, the LSS is there as a framework to ensure that disputes are resolved fairly and consistently with the law. It underlines the need for a realistic statutory basis for the resolution of any tax dispute rather than, on the one hand, encouraging HMRC to raise enquiries in return for ‘go away’ money, or, on the other, encouraging customers to bend the rules through avoidance and come out of that with a ‘deal’. ...

In its specifics, the LSS stresses the importance of materiality in terms of the tax at risk in the context of the case or wider deterrent or precedent effects. ...

The overriding thrust of the LSS — that we should not do deals or ‘split the difference’ where we believe the law points to a different outcome — ought not to be controversial: our duty is to collect the tax we believe to be due ....

2.44 The article by Mr Hartnett referred to in the paper by Messrs Inglese and Lloyd (Litigation and Settlement” Tax Journal, 11 June 2007) which followed the launch of the LSS states that “there are two rules for HMRC staff that stand out in the LSS as bright lines, not to be crossed”. The first rule is “that each dispute should be settled on its own merits”. The second rule, which is directly relevant to the Goldman Sachs settlement, was explained by Mr Hartnett in these terms:

The second rule is related to the first: where a dispute arises from an all-or-nothing legal point, settlement terms should also be based on all-or-nothing figures. There should be no compromise where our arguments are strong; equally, we will not hold out for low-value settlements if our arguments are not strong enough to support litigation, or if the issue is one that does not justify the use of litigation in the absence of agreement.

HMRC’s Duty of Fairness to the General Body of Taxpayers

2.45 In the Fleet Street Casuals case, Lord Scarman explained (at page 176) that: “the modern case law recognises a legal duty owed by the Revenue to the general body of the taxpayers to treat taxpayers fairly; to use their discretionary powers so that, subject to the requirements of good management, discrimination between one group of taxpayers and another does not arise; to ensure that there are no favourites and no sacrificial victims”. He maintained that: “The duty has to be considered as one of several arising within the complex comprised in the care and management of a tax, every part of which it is their duty, if they can, to collect”.

2.46 This issue of fairness to the general body of taxpayers has been of concern to various Select Committees recently. The following exchange between Mr Hartnett and the MP for Hereford and South Herefordshire before the TSC on 16 March 2011 relates to the application of COP 8 under HMRC Criminal Investigation Policy to the larger business organisations:

Q165. Jesse Norman: In 2008, the Public Accounts Committee was very critical of the Revenue’s failure to charge penalties to big businesses when they understated their tax payable. The number was about £15 million and the Revenue promised to do better. How much better are you doing now?

Dave Hartnett: If better is in terms of amounts of money, the most recent year has been a lot less than that but the crucial issue is that in order to collect a penalty, there has to be at the very least a failure to take reasonable care. Most of the issues we resolve with big business in the UK are very significant differences of view on technical aspects of taxation, and we cannot charge a penalty in relation to those.

Q166. Jesse Norman: The actual number is that six penalties were charged—

Dave Hartnett: I knew it was small.

Jesse Norman: —in 2009/2010 for a total of £442,000, which was one one-hundredth of 1% of the tax that was under declared, which I have to say strikes me as a lamentable failure. It seems to me that it isn’t better than you promised to do in 2008. It feels a lot worse. What is the equivalent percentage of tax under declared for small business?

Dave Hartnett: I don’t know precisely, Mr Norman, but there is a fundamental difference. Small business in the UK makes up about 50% of the tax gap; big business makes up less than half of that. We have more evasion in small business than we do in big business. In fact I cannot remember—maybe if I went away for a couple of hours I could think of something—seeing a case of evasion in very big business in the recent past. The crucial issue—

Q167. Jesse Norman: Could you repeat that? You cannot remember having seen a single case of evasion by big business?

Dave Hartnett: It is mostly avoidance, Mr Norman.

Q168. Jesse Norman: I find that extraordinary, I must say. Okay. The equivalent rate for small business is about 200 times the rate for the large business service. If you fiddle your tax credits you go to jail, if you do it in a systematic and fraudulent way. Why are you so much less tough on big business?

Dave Hartnett: I don’t think we are less tough on big business. We will take penalties from big business—

Q169. Jesse Norman: It is 200 times lighter, the amount they pay relative to the tax that is under declared. That feels like pretty unequal treatment to me.

Dave Hartnett: What we have to measure is the incidence of at least failure to take reasonable care, or worse, and that incidence is higher in small business than it is in big business.

Q170. Jesse Norman: So just to round off, the situation is that you barely fine big businesses who underpay their taxes. You say you take them to the Tax Tribunal but I would be interested to see the numbers on that. Do you think you are offering a credible threat to big business, in line with HMRC’s stated objective of charging people the right amount of tax and collecting it?

Dave Hartnett: I do, because looking at the intervention yield, which I think Mr Clasper referred to earlier on, over the last four years we have increased that in relation to big business by more than 25%. If I look at the list of cases we have taken to the Tribunal—this is all public domain information. Firstly, the Prudential in relation to tax-efficient off-market swaps was a very large avoidance case, which we have won. There were 30 other major companies behind that. They were not named but they funded, in part, the running of that case, so it was not a single case. We are still considering for some of those whether there is a penalty position. If I go back to the £15 million you mentioned earlier on, I happen to know one element of that £15 million rather well, and a large part of that £15 million was one case.

Q171. Jesse Norman: In other words, when you can levy a good fine you do it?

Dave Hartnett: Absolutely, and the advice we get from the private sector is that a big fine puts senior officials in big companies in serious jeopardy, and that is a very big deterrent.

Q172. Jesse Norman: It does raise the question why you do not do more of it to more companies, given that when you do it, you can raise a reasonable sum?

Dave Hartnett: Every time we settle an issue, Mr Norman, we look at the penalty position and if necessary we take legal advice; sometimes external legal advice.

2.47 It would be recalled that on that occasion, Mr Hartnett offered the following two definitions (Q264) of avoidance:

“There are so many ... but the two we favour are planning involving a tax position that is tenable, or appears to be tenable, but has unintended and unexpected tax revenue consequences. The second one is taking a tax position that is favourable to the taxpayer without openly disclosing that there is uncertainty whether the significant matters in the tax return accord with the law. Those are the two practical interpretations of avoidance that we use and we find they work pretty well”.

2.48 It would appear that the second definition provided by Mr Hartnett is wide enough to include cases of misrepresentation and concealment. Where a taxpayer files a return “without openly disclosing that there is uncertainty whether the significant matters in the tax return accord with the law”, the relevant scheme would be more accurately described as evasion. Such cases may not amount to “serious fraud” under COP 8 to warrant a COP 9 investigation or a criminal investigation but they would nevertheless be evasion under the law.

2.49 This can be demonstrated by a short discussion of the common law offence of cheating the Revenue. The authoritative modern formulation of the offence is given the Court of Appeal in R v Less The Times, 30 March 1993:

“The common law offence of cheating the Public Revenue does not necessarily require a false representation either by words or conduct. Cheating can include any form of fraudulent conduct which results in diverting money from the Revenue and in depriving the Revenue of the money to which it is entitled. It has, of course, to be fraudulent conduct. That is to say, deliberate, dishonest conduct by the defendant to prejudice, or take the risk of prejudicing, the Revenue’s right to the tax in question knowing that he has no right to do so”.

2.50 This direction in Less followed the formulation previously approved by the Court of Appeal in R v Mavji [1987] 1 WLR 1388. Maji established that in relation to the conduct element of the offence, there does not need to be any overt act of “deception” on the part of the defendant: it can be satisfied by an omission to report taxable income, or register for VAT. Mr Mavji was the controlling director of a trading company which dealt in large volumes of gold in such a way that, but for charging and retaining large amounts of VAT, the company would have traded at substantial loss. When HMRC discovered the company had charged and not accounted for over £600,000 in VAT, and had neither registered for VAT not kept any VAT accounting records, Mr Mavji was charged with cheating. His defence was that neither he nor the company had made any representations to HMRC and had not therefore “deceived” HMRC in any way. The Crown Court rejected this argument, and the Court of Appeal upheld his conviction.

2.51 The “evasion” element, that is, the diversion of money away from HMRC, need not be successful, and any deprivation need not be permanent. Clearly, the offence still applies where HMRC discovers the fraud and the taxpayer pays the tax. In R v Hunt [1995] STC 819, the Court of Appeal held that cheating is a “conduct” offence therefore no loss to HMRC need be proved. In R v Less the defendant ran numerous companies which incurred substantial PAYE and NIC liabilities. The corporate group was structured in such a way that those companies never had sufficient funds to pay, or assets worth HMRC proceeding against. However the defendant was not aiming to evade the tax permanently, just to delay the payment; he had in fact made large tax payments over the period. Yet the Court of Appeal upheld his conviction for cheating.

2.52 Finally, the mental elements of the offence are that the conduct (the evasion element) must be ‘fraudulent’: that is, the evasion must be deliberate, dishonest, and done in the knowledge that the person has no right to escape payment of the tax. In any event, it is apparent that the Goldman Sachs settlement secured by Mr Hartnett contradicts his evidence that “every time we settle an issue ... we look at the penalty position and if necessary we take legal advice; sometimes external legal advice”.

2.53 Incidentally, Mr Norman returned to this subject at the TSC hearing on 12th September 2011, and highlighted the similar Prudential settlement:

Q709. Jesse Norman: When you last came before us, you said that, in terms of avoidance, some £6.2 billion had been protected through litigation, and I subsequently had a letter from Dame Lesley suggesting a list showing £6.5 billion. Something like just under £6 billion of that was from fighting group litigation challenges. Only about £100 million was on corporation tax avoidance cases. That is £100 million out of the £6.2 billion. In the list of legal decisions that I was sent, just seven cases had been taken to the tribunal since 2000. My question is: can that really be a decent response to issue of corporate tax avoidance, amounting to evasion?

Dave Hartnett: I think, Mr Norman, the first thing I would like to do is look at the analysis of those numbers, because one case-we mentioned it at the last hearing, so it is in the public domain-Prudential, which is about off-market swaps, has produced about £1 billion through the immediate case and the 30 or so following cases. The analysis you have given, which I have not made for myself, so I cannot really comment on now, is not right, in terms of the money that has flowed from some of those cases.

Melanie Dawes: Can I add, Mr Norman, that on corporation tax, we also have a lot of other cases with large businesses that are following on from some of those cases? On VAT, it is more usual to find that each case has to be heard on its own merit, so you will find that there are often a lot of other companies standing behind what may appear to be quite a small number of cases but actually involves quite a large amount of tax.

Q710. Jesse Norman: Thank you for that. You will know from previous discussions that I feel very strongly about the high penalties being imposed on small business, and the small penalties being imposed on large business. My colleague, Mr Blenkinsop, raised the question earlier about percentages being charged in penalties and, of course, when you have a negotiated settlement, almost by definition there is no standard compared to which you can charge penalties, which build in a bias in favour of large companies, who can negotiate their terms of settlement, and against small companies.

However, the Revenue is occasionally successful in these cases, and here is an example: Prudential had a scheme involving deliberate mislabelling of payments in order to arrange a tax break. In that case, there was no penalty charged at all, as far as I am aware, but there are countless cases-every constituency has them-involving small businesses in which HMRC is relentless in chasing large penalties on small business. I am just wondering why you are not charging penalties in cases like Prudential’s. In 2008, you told the House that penalties from large businesses would increase, but in fact they have gone down, haven’t they?

Dave Hartnett: Yes, they have.

Q711. Jesse Norman: Why should that be? That seems to me a pretty poor outcome.

Dave Hartnett: We did touch on this at the last hearing.

Jesse Norman: Let us talk about Prudential then. We do not need to expand on the point; I have made the point about the drop in paying penalties.

Dave Hartnett: Our people will have looked incredibly carefully at every case that we have litigated and won that involves avoidance, or that we have settled, to determine whether the law allows a penalty to be taken. Forgive me, but I do not have the transcript of last time with me; however, one of the points that I know Mr Clasper wanted to make-I cannot remember whether he made it-is that evasion in large business, or dishonesty in relation to taxation, is something that we do not see very often; I certainly made the point first. In order to take a penalty from large business, we have to find that the law can be applied. With smaller business, there is more often dishonesty, or-

Jesse Norman: There is more often provable dishonesty. If someone goes into a negotiation with you with a bunch of numbers that they just want to get away with, and you make your way to a negotiation, it is hard to prove dishonesty, although they may have started miles away from where you were, in terms of negotiation.

Dave Hartnett: We do search out for dishonesty and our investigators are very good at it. Over the years, we have often asked our criminal investigators and other specialist investigators to take up an inquiry into big business avoidance and search out the dishonesty.

Q712. Jesse Norman: The Prudential case is a counter-example to that. I have here a copy of the legal report: “HMRC win on ‘mis-labelling’ (Tax newsflash, June 2009)”. It says that the Court of Appeal affirmed the judgment on the Prudential issue in favour of HMRC. You win the case; where is the money? They should pay the penalty. The Court of Appeal has found for you in this. It seems cut and dried that penalties should be paid. These people have attempted to get away with not paying, and they have been found out.

Dave Hartnett: I am afraid, Mr Norman, that all our legal advice is that winning in the Court of Appeal is not enough for us to be able to take a penalty.

Q713. Jesse Norman: Is that because you fear that it may go to the Supreme Court, or is it because you simply regard a Court of Appeal judgment, uncontested or unreferred successfully, to be an insecure basis for charging a penalty?

Dave Hartnett: No. A decision by the Court of Appeal, or indeed the Supreme Court, is not of itself enough to bring the case within the legislation that leads us to be able to charge a penalty.

Jesse Norman: I would be very grateful if you could have someone write to the Committee on that. It seems to be an extraordinary thing.

2.54 It would be recalled that HMRC’s non-executive Chairman, Mr Clasper, provided the following supporting evidence during the hearing on 16th March 2011:

Q263. On the discussion around avoidance versus evasion, I want to make a point about evasion in the context of large businesses. I can make this point because I sat as a director of two plcs in the FTSE 100, and was chairman of the audit and risk committee of one of them until the end of 2009. Evasion, which implies dishonesty and fraud, is a massive issue for a business. If you are caught with fraud and evasion, it is not about fines and so forth. Everybody on the board is probably in the position of losing their job and the company will go down. There is obviously going to be some case somewhere in the world where this is not true, but companies will not evade. What they will do is construct their affairs in a certain way that they think legally reduces the amount of tax. Our challenge is, first of all, to block some of those ways by things like disclosure regimes and so on, and then, secondly, when they interpret what they have done as legally meaning that they do not have to pay the tax, challenging that interpretation and getting the money in. There is this thought that it is laughable that companies will not evade tax, but the issue is they will not commit fraud because of the consequences.

2.55 Mr Clasper joined HMRC on 1st August 2008 from Terra Firma Capital Partners Ltd where he was Operational Managing Director, and was formally Chief Executive at BAA plc. Similarly, the remaining four members of HMRC’s Non-Executive Directors (described officially as “senior business figures from outside the department who bring a diverse mix of expertise and skills from across both public and private sector” that “HMRC looks to ... to: bring guidance and advice, support and challenge management about the department’s strategic direction, and provide support in monitoring and reviewing progress”) have similar backgrounds in large companies, and comprise a former Chief Information Officer of Tesco, a former Group Human Resources Director of ITV, a former Group Finance Director of HBOS plc and Chairman of Insight Investment, and a previous Managing Director of Business Banking of Lloyds TSB and Chief Executive of Lloyds TSB Scotland.

2.56 The union that represents senior managers and professionals in HMRC appears to detect a Departmental bias in favour of big businesses and high net worth individuals. On 16 June 2011, Mr Graham Black, President of the Association of Revenue and Customs (ARC) issued this statement:

“HMRC is reducing by a further 15% to around half the size it was a few years ago. And while some extra resources are being used, rightly, to target fraud, the number of senior staff capable of dealing with complex avoidance and evasion will tumble yet further, by over 400. There is a huge tax gap, caused in part by well-advised businesses and individuals stepping aside from taking their share of the pain. Why should banks and major businesses be let off the hook, when most citizens in the UK pay their fair share in taxation?”

Refusal by the National Audit Office to Investigate

2.57 On 7 March 2011 I reported the matter to the C&AG, the Chair of the PAC and the Chairman of the TSC. A copy of the letter which was sent by email is set out in full for ease of reference:

Mr Amyas MorseThe Comptroller and Auditor General [email protected]

Rt Hon Margaret HodgeChair, Public Accounts Committee [email protected]

Andrew Tyrie MPChair of the Treasury Committee [email protected]

Dear Sirs and Madam,

RE: PUBLIC INTEREST DISCLOSURE ACT 1998

Until very recently, I worked as a lawyer in the Personal Tax Litigation team in HMRC’s Solicitor’s Office, which deals with appeals before the Tax Tribunals and the Courts on various revenue matters including schemes used by multinational companies to pay bonuses to high net worth employees while seeking to avoid Pay As You Earn (PAYE) and National Insurance Contributions (NICs).

I presently work in the Criminal and Information Law Advisory team, which provides support and legal advice to policy directorates and operational case teams on matters arising from the Freedom of Information Act 2000, the Data Protection Act 1998, the confidentiality and disclosure provisions in the Commissioners for Revenue and Customs Act 2005, the security of information and HMRC’s obligations as a data controller.

Information about the internal administrative arrangements of HMRC indicates that at about the same period during which HMRC’s Chief Executive and Permanent Secretary, Dame Lesley Strathie, told the Public Accounts Committee (in relation to Vodafone) that “it would be absolutely wrong to suggest in any way that the permanent secretary for tax did some deal in private”, said Permanent Secretary for Tax, Mr Dave Hartnett, did a deal in private with another multinational company.

It will be recalled that on 16 November 2010, the following exchange took place between Dame Lesley Strathie and the MP for South Norfolk before the Public Accounts Committee:

Q203. Mr Bacon: Dame Lesley ... Your litigation and settlement strategy is clear on that. Where you have a strong case you should seek full value from the settlement or take the matter to litigation. Where you have disputes that are of an all-or-nothing character—that is to say, it is merely a question of whether the law applies or not—such disputes should be settled on all-or-nothing terms. It goes on to say, “Do not split the difference or offer any discount for an agreement not to litigate”.

Your own controlled foreign corporation specialists believed in the case of Vodafone that the absolute minimum that HMRC should settle for was £2.4 billion. You have referred a number of times to the issue of process. The process that concerns me and may concern others is that, instead of the HMRC’s specialist in controlled foreign corporation law being consulted on the terms of a deal, it is done in private between your permanent secretary for tax, Mr Hartnett, and the company concerned—in this case, Vodafone—without the proper checks and balances that you would expect to see, or to ensure that the right advice from within HMRC, from those who knew about the details of controlled foreign corporation law was taken. That is the problem.

Dame Lesley Strathie: I don’t confirm any of that, Mr Bacon. I think it is quite important and I don’t believe that any decision was taken in private. There comes a point when the commissioners have to decide what the right course of action is in the circumstances that they are in. The director general for business tax was the accountable commissioner in the first instance here, and the business tax senior management team. The permanent secretary for tax is the second commissioner. Then we have counsel, overseen by our senior legal team. It would be absolutely wrong to suggest in any way that the permanent secretary for tax did some deal in private.

The Public Accounts Committee’s Report states (at paragraph 20) that: “The Department’s Litigation and Settlement Strategy states that, where its legal advice is strong, it should not accept settlements for less than 100% of the tax and interest due. The Department maintains that it does set out to prove the tax liability, serve its assessment and then collect what is due. The Department told us that the final decision on how to resolve each tax dispute has to be taken by two Commissioners and must involve legal advice”.

On 8 December 2010, a meeting took place in HMRC’s Solicitor’s Office, the note of which is as follows:

Present:Anthony Inglese CB (General Counsel and Solicitor to HMRC)Director, Solicitor’s OfficeTeam Leader, Solicitor’s OfficeCase Lawyer, Solicitor’s Office

The meeting began with Mr Inglese reading Case Lawyer’s email of 6/12 and the advice provided by Leading Counsel for HMRC in the matter in July 2010.

Director explained that at the High Risk Corporates committee meeting the previous week a late submission had come in about a deal on which Mr Dave Hartnett had ‘shaken hands’ with the Taxpayer Company. The status of this agreement was not clear.

A brief note was prepared for the meeting including at pt 3 a suggestion that, whilst the NIC principal might be protected, the interest might not. Case Lawyer said this was not correct; it was all covered, per his note.

It was not clear whether Mr Hartnett had settled on £[x] or on whatever the principal was. There was discussion about whether there could be justification for settling without interest, especially in view of the Litigation Strategy. A particular concern was the 200[x] ExCom settlements with all the other scheme users. Mr Inglese asked if there was a risk of that being re-opened. Case Lawyer/Team Leader saying that whilst we would need to see the settlement paperwork, there would appear to have been a commercial deal, with consideration passing, so this seemed very unlikely to be a problem.

It was however, clear that the proposed settlement gave the Taxpayer Company no additional penalty for having resisted for [x] more years, including as Case Lawyer explained raking every conceivable point in the Tribunal, and putting up a ‘stooge’ witness when [the Taxpayer Company’s Managing Director] was the obvious person to answer questions.

The advice provided by Leading Counsel for HMRC in the appeal was broadly positive both on whether [HMRC] had the right Taxpayer Company and in relation to the scheme.

Team Leader was asked to find out more about what the 200[x] settlements said about interest from SI [Specialist Investigations], but only if this took only a day.

Taxpayer Company had apparently suggested the principal might be £[x]. Discussing whether this altered things. Case Lawyer pointed out that the Claim Form and probably the Particulars of Claim in the County Court were public documents and could be copied by anyone interested in comparing the settlement sum with the claim.

Mr Inglese said that he would always want to assist Mr Hartnett, but not if this were ‘unconscionable’. He referred to the difficulty all those present at this meeting were having justifying a settlement without an interest element.

Case Lawyer handed Director complete Excel spreadsheet of the sums claimed, obtained from SI.

As you will no doubt be aware, the Public Accounts Committee Report also contains the following conclusion and recommendation:

10. There is little transparency for the taxpayer over the way that tax disputes with large companies are resolved. While we recognise the Department’s obligation to ensure taxpayer confidentiality, 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. We look to the Department to cooperate fully with a National Audit Office review of its procedures for resolving tax disputes.

HMRC’s obligation to ensure taxpayer confidentiality, as provided in section 18(1) of the Commissioners for Revenue and Customs Act 2005 is, by virtue of subsection (3) of that section, “subject to any other enactment permitting disclosure”. Such enactment can impose obligations on HMRC to disclose information for specified purposes. A familiar example is section 8 of the National Audit Act 1983, which enables the National Audit Office (NAO) to require all documents reasonably required for carrying out an examination under sections 6 and 7 of that Act and to require information from any person holding such documents.

It is my considered opinion that the public interest will be better served by the invocation of section 8 of the National Audit Act 1983 (whether as part of the NAO’s ongoing inquiry into the way HMRC settles tax disputes with major corporate taxpayers or otherwise) with a view to determining whether the settlement reached on the matter referred to above complied with:

(a)the statutory obligations of the Commissioners and officers of HMRC under the Commissioners for Revenue and Customs Act 2005;

(b)the assurances given to the Public Accounts Committee by Dame Leslie Strathie and other officials;

(c)HMRC’s published Anti-Avoidance Strategy;

(d)HMRC’s published Litigation and Settlement Strategy; and

(e)All other relevant legal obligations.

Yours faithfully,Osita Mba

cc:Mr Richard Bacon MPPublic Accounts Committee [email protected]

Mr Chuka Umunna MPTreasury Committee [email protected]

2.58 On 25 March 2010, I received a letter from Mr Paul Keane of the NAO. It stated as follows:

Thank you for your email of 7 March. You raise concerns about the way in which HM Revenue and Customs (HMRC) settled a tax dispute with a multinational company. As Director responsible for the NAO’s work on this area, the Comptroller and Auditor General (C&AG) as head of the National Audit Office, has asked me to respond to your email on his behalf.

We are currently carrying out a review of HMRC’s procedures for resolving tax disputes. The work is part of the C&AG’s annual examination of tax and duties systems conducted under section 2 of the Exchequer and Audit Departments Act 1921. We expect to publish the results as part of the C&AG’s Report on HM Revenue and Customs’ 2010-11 Accounts; this is likely to be in mid-July.

As part of our review, we will be examining a sample of tax disputes that have been settled in the past five years. We will be assessing whether the processes followed in these cases complied with relevant legislation and with extant HMRC processes including, where relevant, the Litigation and Settlement Strategy. The case you mention will not necessarily be one of those that we examine, but we intend to study the issues you raise in the cases that we do examine.

Thank you again for bringing this matter to our attention.

2.59 Since the cases provided to the NAO by HMRC for the purposes of the review before my letter to the C&AG were limited to those with more than £100 million tax/NIC at risk and so should not have included the Goldman Sachs case, I considered that Mr Keane had made short shrift of the public interest disclosure. Therefore, on 23rd May 2011, I wrote again to the C&AG, pointing out that the settlement appears to disclose potential criminal offences such as fraud by abuse of office, misconduct in public office and cheating the Revenue in addition to other potential breaches of the law and referred specifically to the C&AG’s legal obligations under the PIDA 1998 to examine disclosures relating to “the proper conduct of public business, fraud, value for money and corruption in relation to” the activities of HMRC.

2.60 The letter which was sent by registered post is also set out in full for ease of reference:

Mr Amyas MorseThe Comptroller and Auditor GeneralNational Audit Office157-197 Buckingham Palace RoadLondon SW1W 9SP

Dear Mr Morse,

RE: PUBLIC INTEREST DISCLOSURE ACT 1998

HM REVENUE & CUSTOMS’ PROCEDURES FOR SETTLING TAX DISPUTES

CONFIDENTIAL

1. I respectfully present my compliment to the Comptroller and Auditor General (“C&AG”) and humbly request that consideration be given to providing the following assistance.

Background

2. On 7 March 2011, I made a disclosure under the Public Interest Disclosure Act 1998 (“PIDA 1998 Act) to the C&AC to the effect that:

“Information about the internal administrative arrangements of HMRC indicates that at about the same period during which HMRC’s Chief Executive and Permanent Secretary, Dame Lesley Strathie, told the Public Accounts Committee (in relation to Vodafone) that ‘it would be absolutely wrong to suggest in any way that the permanent secretary for tax did some deal in private’, said Permanent Secretary for Tax, Mr Dave Hartnett, did a deal in private with another multinational company”.

3. The public interest disclosure (a copy of which is enclosed herewith) was made in the reasonable belief that the information disclosed tends to show one or more of the following situations identified in section 43B of the PIDA 1998:

(a)That a criminal offence or criminal offences (fraud by abuse of office - see section 4 of the Fraud Act 2006 and/or misconduct in public office - see Attorney General’s Reference No. 3 of 2003 [2004] EWCA Crim 868; and/or cheating the public revenue (see R v Less, The Times, 30 March 1993) has or have been committed, is or are being committed or is or are likely to be committed.

(b)That top officials of HMRC have failed, are failing or are likely to fail to comply with HMRC’s statutory functions of collection and management of revenue (taxes, duties and national insurance contributions) as required by section 5 of the Commissioners for Revenue and Customs Act 2005. (See Inland Revenue Commissioners v National Federation of Self-Employed and Small Businesses Ltd [1981] STC 260 at 269 (Lord Diplock):In the exercise of these functions the Board have a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge the highest net return that is practicable having regard to the staff available to them and the cost of collection. ... [H]owever ... if it were established that the Board were proposing to exercise or to refrain from exercising their powers not for reasons of ‘good management’ but for some extraneous or ulterior reason that action or inaction of the Board would be ultra vires”.)

(c)That top officials of HMRC have failed, are failing or are likely to fail to comply with the United Kingdom’s obligations under Article 107 of the Treaty on the Functioning of the European Union, which prohibits State aid ie an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities. (See paragraph 21 of Commission notice on the application of the State aid rules to measures relating to direct business taxation (98/C 384/03): “The discretionary practices of some tax authorities may also give rise to measures that are caught by Article [107]. The Court of Justice acknowledges that treating economic agents on a discretionary basis may mean that the individual application of a general measure takes on the features of a selective measure, in particular where exercise of the discretionary power goes beyond the simple management of tax revenue by reference to objective criteria - Case C-241/94 France v. Commission (Kimberly Clark Sopalin) [1996] ECR I-4551”.)

(d)That top officials of HMRC have failed, are failing or are likely to fail to comply with assurances given to the Public Accounts Committee in November last year “that the final decision on how to resolve each tax dispute has to be taken by two Commissioners and must involve legal advice”.

(e)That top officials of HMRC have failed, are failing or are likely to fail to comply with HMRC’s self-imposed administrative duties under their published Litigation and Settlement Strategy and Anti-Avoidance Strategy.

(f)That information tending to show any matter falling within any one of the preceding paragraphs has been, is being, or is likely to be deliberately concealed.

4. In a letter dated 25 March 2010 (a copy of which is enclosed herewith) Mr Paul Keane, responding on behalf of the C&AG, stated:

“We are currently carrying out a review of HMRC’s procedures for resolving tax disputes. The work is part of the C&AG’s annual examination of tax and duties systems conducted under section 2 of the Exchequer and Audit Departments Act 1921. ....

As part of our review, we will be examining a sample of tax disputes that have been settled in the past five years. We will be assessing whether the processes followed in these cases complied with relevant legislation and with extant HMRC processes including, where relevant, the Litigation and Settlement Strategy. The case you mention will not necessarily be one of those that we examine, but we intend to study the issues you raise in the cases that we do examine”.

5. My disclosure to the C&AG did not reveal vital details such as the identity of the taxpayer company and the amount of national insurance contributions at stake. It is not clear from Mr Keane’s letter whether he already had these details or whether he considered them irrelevant to his decision.

The Role of the C&AG as a Prescribed Person under the PIDA 1998

6. The C&AG is a prescribed person under the PIDA 1998 (by virtue of the Public Interest Disclosure (Prescribed Persons) (Amendment) Order 2003) to whom external disclosures can be made relating to:

“the proper conduct of public business, fraud, value for money and corruption in relation to the provision of centrally-funded public services”.

7. Therefore, the primary issue in this matter is the nature and extent of the C&AG’s role under the PIDA 1998 in deciding whether or not to investigate a public interest disclosure he receives.

8. The NAO’s whistleblower webpage states that the C&AG has a discretion in the matter:

“The Act does not require the C&AG to investigate every disclosure he receives; his decision whether or not to investigate is based upon various criteria designed to ensure the most effective use of the resources at his disposal in safeguarding the public interest”.

9. Mr Keane did not specify whether his decision was based on the PIDA 1998 or whether the “various criteria designed to ensure the most effective use of the resources at [the C&AG’s] disposal in safeguarding the public interest” upon which a decision whether or not to investigate a disclosure received under that legislation were taken into account. Just like the NAO’s webpage, Mr Keane’s letter did not disclose what these criteria are.

10. Parliament must have conferred the C&AG with the discretion under the PIDA 1998 with the intention that the C&AG should use it to promote the policy and objects of the legislation. Thus a decision whether or not to investigate a disclosure that fails to promote the purpose of the PIDA 1998 may be tainted by illegality on public law grounds.

11. In Council of Civil Service Unions v Minister for the Civil Service [1985] AC 374, Lord Diplock (while expounding the classic grounds for the judicial review of administrative decision) stated (at 410):

“By “illegality” as a ground for judicial review I mean that the decision-maker must understand correctly the law that regulates his decision-making power and must give effect to it”.

12. The NAO’s website explains the purpose of the PIDA 1998 in these terms:

“The Act was introduced in response to the major corporate failures of the 1980s and 1990s, where workers had known of the dangers that led to disaster, but were unwilling or unable to warn of them effectively.

It aims to help prevent such disasters and corporate malpractice in general by encouraging workers with relevant information to come forward responsibly.

The Act seeks to achieve this by offering a right to redress in the event of victimisation if workers raise their concerns in the ways specified in the legislation.

It is also hoped that the Act will promote a change in culture amongst employers, and encourage them to establish procedures to receive disclosures in good faith and act on them appropriately”.

13. The need “to establish procedures to receive disclosures in good faith and act on them appropriately” applies also to regulators (such as the C&AG) who are authorised by the PIDA 1998 to receive public interest disclosures. This is evident from the comments of the Nolan Committee (Committee on Standards in Public Life - Second Report, Cm 3270-1 (May 1996) p. 21) which was said during the Parliamentary Debates (Hansard HL 11 May 1998, Lord Borrie QC, col. 889) on the PIDA 1998 to best summarise the purpose of the Act:

“All organisations face the risks of things going wrong or of unknowingly harbouring malpractice. Part of the duty of identifying such a situation and taking remedial action may lie with the regulatory or funding body. But the regulator is usually in the role of detective, determining responsibility after the crime has been discovered. Encouraging a culture of openness within an organisation will help: prevention is better than cure. Yet it is striking that in the few cases where things have gone badly wrong in local public spending bodies, it has frequently been the tip-off to the press or the local Member of Parliament - sometimes anonymous, sometimes not - which has prompted the regulators into action. Placing staff in a position where they feel driven to approach the media to ventilate concerns is unsatisfactory both for the staff member and the organisation”.

14. The NAO’s whistleblowing webpage states that the C&AG’s receipt of disclosures relating to “the proper conduct of public business, fraud, value for money and corruption in relation to the provision of centrally-funded public services” under the PIDA 1998 is consistent with his position as the external auditor for the central government sector. Therefore, the legislation that governs the C&AG’s role as the auditor for the central government sector is relevant to the C&AG’s legal obligations as a prescribed person under the PIDA 1998.

15. Section 6 of the National Audit Act 1983 (“NAA 1983”) authorises the C&AG to carry out an examination into the economy, efficiency and effectiveness with which HMRC (or any other Government department) have used their resources in discharging their functions (the so-called ‘value for money’ study). Section 8 of the NAA 1983 Act gives the C&AG a right of access at all reasonable times to all such documents and information as the C&AG may reasonably require for carrying out this examination.

16. More significantly for the purposes of this matter, section 2 of the Exchequer and Audit Departments Act 1921 (“E&ADA 1921”), referred to in Mr Keane’s letter, provides as follows:

“(1)The accounts of the receipt of revenue by [HMRC], and the accounts of every receiver of money which is by law payable into the Exchequer, shall be examined by the Comptroller and Auditor General on behalf of the House of Commons in order to ascertain that adequate regulations and procedure have been framed to secure an effective check on the assessment, collection, and proper allocation of revenue, and the Comptroller and Auditor General shall satisfy himself that any such regulations and procedure are being duly carried out.

(2)The Comptroller and Auditor General shall make such examination as he thinks fit with respect to the correctness of the sums brought to account in respect of such revenue as aforesaid, and shall, together with his report on the resource accounts of the departments concerned, present to the House of Commons a report on the results of any such examination”.

17. It is apparent that the statutory power conferred on the C&AG by section 2 of the E&ADA 1921 is wide enough to enable the C&AG to investigate all the specified matters relating to the provision of centrally-funded public services under the PIDA 1998, namely: (a) value for money; (b) the proper conduct of public business; (c) fraud; and (d) corruption.

18. However, the NAO’s reports to Parliament on the results of the audits of the financial statements of all central government departments, agencies and other public bodies the expenditure and revenue carried out each year (amounting to some £950 billion across 475 accounts in 2009-10) have not been known to address the question of culpability.

19. In fact, the NAO’s website indicates that their audits under section 2 of the E&ADA 1921 and the NAA 1983 are focused on value for money (with no specific reference to the proper conduct of public business; fraud; and corruption):

“Our work programme is focused on three areas that impact on all departments’ performance in achieving value for money: improving financial management and reporting; making better use of information; and ensuring that services are delivered cost-effectively”.

20. In relation to the matter at hand, Mr. Keane’s letter appears to repeat information attributed to the NAO in the media when the examination under section 2 of the E&ADA 1921 he referred to in his letter was announced (Lucy Farndon, ‘Probe into the taxman’s deals with big business amid claims Vodafone was let off £6bn bill’, Daily Mail, 20 January 2011):

“We are reviewing HMRC’s procedures for resolving tax disputes. Given Vodafone and other similar cases, we thought it would be a good idea to look at the procedures by which the settlements are reached”.

21. But on that occasion it was emphasised that that “the NAO would not be auditing particular settlements” (see Andrew Goodall, ‘HMRC dispute resolution procedures under scrutiny’, Tax Journal, 20 January 2011) but “will look at tax settlements generally rather than at specific cases” (see Sue Cameron, ‘Taxmen in turmoil as pressure mounts’ Financial Times, January 18, 2011).

22. Therefore, it is debatable whether this examination (which was given by Mr Keane as justification for his apparent decision not to investigate the matter) is sufficient for the purpose of the PIDA 1998, which requires a consideration of not only value for money but also of the proper conduct of public business, fraud and corruption in relation to the settlement that forms the subject matter of the disclosure.

23. In all the circumstances of this case, it is respectfully suggested that it is not clear that Mr Keane understood correctly the law that regulates his decision-making power and his duty to give effect to it.

The Role of the C&AG where a Disclosure is made to Parliament under the PIDA 1998

24. Sections 43G and 43H of the PIDA 1998 permit a public interest disclosure to be made to Parliament. Accordingly, my disclosure to the C&AG was also brought to the attention of the Public Accounts Committee and the Treasury Select Committee. Section 1(2) of the NAA 1983 provides that the G&AG “shall by virtue of his office be an officer of the House of Commons”. Therefore, it is respectfully suggested that this disclosure to Parliament ought to be a relevant consideration in the C&AG’s decision whether or not to investigate the matter.

25. The NAO’s website explains the NAO’s “Support to Parliament” in these terms:

The National Audit Office (NAO) works on behalf of Parliament and the taxpayer to hold government to account for the use of public money and to help public services improve performance. The relationship with Parliament is central to the roles of the Comptroller and Auditor General (C&AG) and NAO.

We look to place our skills at the service of Parliament as a whole, supporting the Public Accounts Committee (PAC), other select committees from both Houses and individual Members in their scrutiny of public expenditure and service delivery.

26. Section 8 of the Government Resources and Accounts Act 2000 provides the C&AG with a right of access to documents and information relating to HMRC’s accounts for the purpose of conducting his audit under section 2 of the E&ADA 1921. However, this statutory right of direct access to HMRC papers (just like the similar right of access under section 8 of the NAA 1983) does not itself confer a similar right of access on the Parliamentary Committees which the C&AG serves.

27. It was against this background that the Public Accounts Committee concluded recently (Eighteenth Report: HM Revenue and Customs’ 2009 - 10 Accounts, paragraph 21) that:

The Department did not answer some of our specific questions on tax disputes on the grounds that it has a legal duty not to disclose taxpayer details, except in certain limited circumstances. This applies to all taxpayers, whether they are an individual or a publicly quoted company. This inevitably makes it difficult to obtain assurance that the Department resolves tax disputes appropriately.

28. Therefore, should the Public Accounts Committee or the Treasury Select Committee decide to investigate the subject matter of this disclosure, they may not have access to documents and information that will be readily available to the C&AG. It is significant that the afore-mentioned Report of the Public Accounts Committee contains the following conclusion and recommendation (paragraph 10):

“There is little transparency for the taxpayer over the way that tax disputes with large companies are resolved. While we recognise the Department’s obligation to ensure taxpayer confidentiality, 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. We look to the Department to cooperate fully with a National Audit Office review of its procedures for resolving tax disputes”.

29. It is not clear from Mr Keane’s letter that he took into account the lack of direct access to information and documents on the part of the Parliamentary Committees that have received the disclosure or what may be regarded as the legitimate expectations of Parliament and the taxpayer on such a controversial matter of public interest in arriving at his decision. Indeed, it does appear that Mr Keane’s response dated 25th March 2011 was not copied to the Parliamentary Committees.

The assistance required

30. It is respectfully requested that the C&AG review the decision taken on his behalf by Mr Keane in light of the C&AG’s statutory authority under the PIDA 1998 to consider public interest disclosures relating to “the proper conduct of public business, fraud, value for money and corruption in relation to the provision of centrally-funded public services”.

31. In thanking the C&AG in advance for his assistance in this matter, I avail myself of this opportunity to renew the assurance of my highest consideration.

Osita Mba

cc:Rt Hon Margaret Hodge, Chair, Public Accounts Committee, House of Commons, London SW1A 0AAAndrew Tyrie MP, Chair of the Treasury Committee, House of Commons, London SW1A 0AAMr Richard Bacon MP, Public Accounts Committee, House of Commons, London SW1A 0AAMr Chuka Umunna MP, Treasury Committee, House of Commons, London SW1A 0AA

2.61 As indicated, a copy of the correspondence including my initial letter of 7th March and Mr Keane’s reply of 25th March was also sent to the Chair of the PAC and the Chairman of the TSC and a member of each committee.

2.62 The C&AG maintained the stance communicated in Mr Keane’s previous letter. His reply dated 30th June 2011 is as follows:

Thank you for your letter of 23 May. You raise concerns as to whether proper consideration has been given to the investigation of the disclosure in your email of 7 March under the Public Interest Disclosure Act 1998 (the Act). Your disclosure raised concerns about the way in which HM Revenue and Customs (HMRC) settled a tax dispute with a multinational company.

As you note, the Comptroller and Auditor General (C&AG) is prescribed person under section 34F of the Employment Rights Act 1996 (as amended by the Public Interest Disclosure Act 1998), to whom disclosures can be made relating to “the proper conduct of public services, value for money, fraud and corruption in relation to the provision of centrally-funded public services” (Public Interest Disclosure (Prescribed Persons) (Amendment) Order 2003 (Statutory Instrument 2003 number 1993)).

The C&AG’s receipt of such disclosures is consistent with his position as the external auditor for the central government sector. The Act does not require the C&AG to investigate every disclosure he receives; his decision whether or not to investigate is based upon various criteria designed to ensure the most effective use of the resources at his disposal in safeguarding the public interest.

These criteria include the likely impact of the matter on public funds, including whether the issue is confined to a particular body or whether there is a potential impact across several government bodies. We also consider whether the issue is ongoing or is likely to recur, or whether it relates to a set of circumstances which have passed.

Based on these criteria, I can assure you that we have taken on board the concerns raised in your letter as part of our review of HMRC’s procedures for resolving tax disputes on which we will be reporting in July as part of the Report on the Department’s accounts, as Mr Keane advised in his letter to you of 25 March. FOR REASONS OF TAXPAYER CONFIDENTIALITY, our report will not include details of any named taxpayers. (emphasis supplied)

2.63 A few days earlier, HMRC provided this written evidence to the Treasury Sub-Committee dated 15th June 2011:

6. Q413: Mr Umunna: Now, in relation to Goldmans, there are serious allegations which have been made in the media in relation to HMRC settling this case and also in relation to Mr Hartnett in particular. Would you consider as an organisation publishing or providing to us information about that case so that the public can be assured that the proper procedures have been followed?

7. Q415: Mr Umunna: Could you also tell us in relation to the particular case that I have raised whether the internal procedures were met in relation to the Goldman’s settlement?

HMRC has carefully considered the extent to which they can answer the questions asked and have concluded that they cannot give any information, FOR REASONS OF TAXPAYER CONFIDENTIALITY. (emphasis supplied)

2.64 The similarity of the expressions by HMRC and NAO may be entirely coincidental but it is notable that the exact phrase was used to justify a wrong contention. Moreover, as explained below, in his report (HM Revenue & Customs 2010-11 Accounts: Report by the Comptroller and Auditor General (7 July 2011), paragraph 2.29) the C&AG acknowledged the public and Parliamentary disquiet surrounding the process but claimed that “legal restraints over taxpayer confidentiality mean that the details of these cases cannot be released subsequently”. Furthermore the C&AG referred to section 18 of the Commissioners for Revenue and Customs Act 2005 (which applies to HMRC) as the authority for this contention rather than to section 182 of Finance Act which applies to the C&AG and the NAO, and which authorises them to disclose relevant information to counter allegations that these cases have been settled inappropriately for a lower yield than might have otherwise been achieved. More significantly, the stated nature and scope of the NAO’s examination vindicates my stated concern that the examination may not be sufficient for the purposes of the PIDA.

Part Three: NAO’s Examination of the Exercise of Hmrc’s Collection and Management Powers

3.1 As explained above, section 1(3) of the National Audits Act 1983 (“NAA 1983”) provides that: “subject to any duty imposed on him by statute, the Comptroller and Auditor General shall have complete discretion in the discharge of his functions and, in particular, in determining whether to carry out any examination under Part II of this Act and as to the manner in which any such examination is carried out; but in determining whether to carry out any such examination he shall take into account any proposals made by the Committee of Public Accounts”.

G&AG’s Terms of Reference

3.2 However, the C&AG’s report explains the nature and scope of his recent examination of HMRC’s processes for settling large and complex disputes as follows:

2.4 In November 2010, the Committee of Public Accounts examined the Department on its arrangements for settling tax disputes with large companies. In the light of this, the Comptroller and Auditor General decided to undertake a review of these arrangements.

2.5 Our review considered two questions:

Are the Department’s processes for resolving tax disputes adequate to secure an effective check on the assessment and collection of tax revenue?

Has the Department complied with its processes for resolving tax disputes?

2.6 Our review focused on the Department’s processes for resolving tax disputes with the largest companies. ... We examined a sample of 27 disputes, to assess whether the Department had complied with statutory requirements and its own processes for resolving disputes. Our review considered whether the Department’s processes were adequate to establish a sound position on the amount of tax due; it did not involve coming to an independent judgement on the tax liability in individual cases. (emphasis supplied)

3.3 It is difficult to see how the C&AG could have determined “whether the Department had complied with statutory requirements and its own processes for resolving disputes” merely by considering “whether the Department’s processes were adequate to establish a sound position on the amount of tax due”, and without “coming to an independent judgement on the tax liability in individual cases”. Since section 1(3) of NAA 1983 authorises the C&AG to come to an independent judgement on the tax liability in the individual cases he examined, his failure to do so in this instance raises a number of important issues.

3.4 First, it is significant that the C&AG restricted the scope of his examination in this manner despite the public interest disclosure I made to him and his assurances on the matter. It would appear that the C&AG, who is a prescribed person under the PIDA 1998 to whom external disclosures can be made relating to “the proper conduct of public business, fraud, value for money and corruption in relation to the provision of centrally-funded public services”, has not investigated the matter I reported to him as required by the PIDA 1998 (the C&AG’s discretion under section 1(3) of NAA 1983 being explicitly “subject to any duty imposed on him by statute”) and settled principles of public law. As stated above, the 27 cases examined by the NAO were limited to those with more than £100 million tax/NIC at risk, which would have excluded the Goldman Sachs settlement.

3.5 Secondly, it is also notable that the C&AG limited the scope of his review despite his statement to the PAC regarding the Vodafone settlement on 16 November 2010. It would be recalled that following the Chair’s remark (Q194) that their understanding was that HMRC’s accounts “could be qualified by the National Audit Office if it found that there was a question mark over whether sufficient revenue was collected from Vodafone”, the C&AG said this (Q202):

Before you pass on, the Chair very kindly paraphrased something that I said quite carefully, qualifiedly, earlier on. Since you said it on the record, Chair, I can’t let it go by. What I said was that there might be a case for qualifying on grounds of irregularity if it was seen that a decision had been made unreasonably. I did warn that I thought that that wasn’t very likely. I think I am repeating myself fairly accurately. Thank you.

3.6 Similarly, without “coming to an independent judgement on the tax liability in individual cases” but only considering “whether the Department’s processes were adequate to establish a sound position on the amount of tax due” it is debatable whether the C&AG could have reached an informed decision as to whether “there might be a case for qualifying [the Vodafone settlement] on grounds of irregularity” or “that a decision had been made unreasonably”.

3.7 Thirdly, as explained above, the Litigation and Settlement Strategy states that “in avoidance cases if our legal advice is strong, do not accept settlement for less than 100% of the tax and interest due”. So information on the strength or otherwise of the sample of 27 disputes the NAO examined is critical to any settlement and thereby to any examination of the appropriateness of any settlement. However it is my understanding that the “NAO were pushing very hard for detailed information on the cases where [HMRC] made a provision or contingent liability in the trust statement” but that Mr Hartnett and Mr Alan Evans (the Solicitor’s Officer’s senior representative in the High Risk Corporates Programme) “were able to convince them to accept less detailed information that did not give any indication as to whether [HMRC] thought [its] case was strong or weak”.

3.8 Yet section 8(1)(a) of Government Resources and Accounts Act 2000 vests the C&AG with “a right of access at all reasonable times to any of the documents relating to the department’s accounts” while section 8(1)(b) imposes a duty on the HMRC to give the C&AG “any assistance, information or explanation which he requires in relation to any of those documents”. Furthermore, the PAC had specifically asked HMRC “to cooperate fully with a National Audit Office review of its procedures for resolving tax disputes”.

3.9 It is against this background the C&AG’s contention (paragraph 2.33 of his report) that he “assessed the extent to which the processes applied by the Department were consistent with: statutory requirements, for example, the provisions for the exercise by the Commissioners of their discretion under their statutory ‘collection and management’ powers; the Litigation and Settlement Strategy; and internal guidelines on the arrangements for approving settlements”, and his conclusion (in paragraph 2.35) that he “did not identify any instances where these powers were exercised inappropriately” should be considered.

C&AG’s Explanation of HMRC’s Processes for Settling the Largest Disputes

3.10 The C&AG’s report sets out the details of the High Risk Corporates Programme (which according to HMRC was “established” by Mr Hartnett “for addressing compliance issues in big business”) as follows:

Processes applying to the largest disputes

2.12 The Department has five Commissioners, who have ultimate responsibility for collecting and managing tax revenues. In practice, Commissioners are normally only directly involved in signing off the settlement of the largest tax disputes. ... The resolution of most large and complex tax disputes will involve several Directorates, for example, experts in Corporation Tax and accountancy specialists, and also legal and policy advisers where relevant. Each company in the Large Business Service has a Customer Relationship Manager, who is responsible for managing the Department’s ongoing relationship with the company across all taxes and duties, and for coordinating all the Department’s technical specialists relevant to the company’s tax affairs.

2.13 The Department established a High Risk Corporates Programme (the Programme) in 2006, and settlements totalling over £9 billion have been reached with the companies participating in the Programme since it began. At the time, many large companies had multiple, long-unresolved tax disputes, and in some cases were involved in extensive avoidance activity. The Programme was set up to address this situation, with the aims of:

reducing avoidance and improving the compliance of the largest businesses;

improving the relationship between the Department and the businesses; and

establishing and collecting the right amount of tax.

2.14 The High Risk Corporates Programme involves an intensive process for resolving the participating company’s issues. The approach includes Board-to-Board, or other high level, engagement between the Department and the company with a commitment from both sides to apply high levels of resource to providing information and resolving issues within an accelerated timeframe. In addition, the Department seeks agreement from the Board of a company within the Programme that it will in future work more constructively with the Department.

2.15 The Director General for Business Tax has overall accountability for the Programme and the Director, Large Business Service is the Programme’s owner. There is a Programme Board, responsible for agreeing which companies will be admitted to the Programme (based on factors such as the size, age and wider application of the issues under consideration), endorsing proposed settlements, and for the priorities, development and governance of the Programme. The Programme Board is chaired by the Director, Large Business Service and its membership includes the Directors of VAT; Corporation Tax, International and Anti-Avoidance; and Special Investigations and representatives from the Solicitor’s Office. Each case has an Enquiry Coordinator, whose responsibilities include bringing together the work of the Customer Relationship Manager and all the Department’s technical specialists, policy advisers, caseworkers, consultants and solicitors that have an interest in the case.

2.16 For disputes dealt with outside the Programme, the Customer Relationship Manager is initially responsible for bringing together the relevant specialists in resolving tax issues. The Department encourages these parties to reach consensus on how the issue should be resolved but, if they cannot agree, then the issue is escalated to the relevant Directors for a decision.

2.17 There are defined procedures for signing off settlements for cases within and outside of the Programme. For cases outside the Programme where the tax under consideration is less than £100 million, agreement must be reached between the relevant stakeholders. Since November 2009, cases must be referred to the Programme Board before settlement where the tax under consideration exceeds £100 million, and there is a proposal for the Department to concede one issue or more, or to accept less than 100% of the total tax under consideration, or where the case and issues are particularly sensitive.

C&AG’s Findings

3.11 The C&AG’s report then highlights the “Shortcomings in current processes” in these terms:

2.28 In four of the largest settlements we examined, the Department operated specific governance arrangements. The Department considered each of these cases to involve a single issue, with a range of possible outcomes for the tax due, rather than being the ‘all or nothing’ cases normally dealt with by the Programme Board. The arrangements involved reducing the size of the team dealing with the case, and sign off by Commissioners without a prior reference to the Programme Board. In each case, the team included the relevant Director, supported by Deputy Directors, and Commissioners were involved. These arrangements meant that decisions were taken at the most senior level, and relevant technical and legal expertise remained available. The Department’s view is that the Programme Board would not have added value to the decision-making process in these particular cases given the involvement of senior staff, including the Commissioners and members of the Programme Board, and relevant internal and external experts.

2.29 In two of the four cases, one of the Commissioners approving the settlements had participated in the negotiations and, in another case, both Commissioners had done so. Where Commissioners are directly involved in negotiating settlements, particularly where the Programme Board is not used, there is less independent oversight of settlements to provide assurance, internally and externally, that these have been reached on an appropriate basis. The Department has attracted criticism from Parliament and its own staff because of the absence of adequate separation between the analysis, negotiation and approval processes for major tax settlements. The complexities of the issues in these cases make it more difficult to demonstrate that an appropriate tax liability has been assessed and legal restraints over taxpayer confidentiality mean that the details of these cases cannot be released subsequently. [Commissioners for Revenue and Customs Act 2005, Section 18.]

2.30 We found cases where large companies wanted early engagement with a Commissioner to secure an authoritative view of the Department’s position. The Department’s strategy for board level engagement with large business means that contact between Commissioners and business leaders on specific and general issues will continue to be a feature of its approach. The Department believes that a degree of Commissioner involvement in resolving some tax disputes is inevitable. However, the Department recognises that it needs to build its capacity to negotiate settlements on major cases in staff below Commissioner level. This should help to reduce the frequency of taxpayers requesting the involvement of Commissioners on specific issues as settlement discussions are continuing.

2.31 There is currently a difference between the criteria for referral of decisions to the Programme Board and those for referral to Commissioners. The threshold for referral to the Programme Board is based on the total value of a settlement with a taxpayer, which usually covers more than one issue. The threshold for a referral to Commissioners is, however, based on the value of individual issues. We found a settlement worth more than £400 million, with issues totalling over £400 million conceded by the Department because it considered its position was weak, which was not referred to Commissioners because no single issue exceeded £250 million.

2.32 The Department has a clearly defined approach to settling disputes, as set out in the Litigation and Settlement Strategy. An internal review of the Litigation and Settlement Strategy in December 2009 found that, when it was launched in May 2007, the extent to which it was understood by the Department’s staff varied. Some staff did not appreciate the flexibility it offered, or thought it emphasised litigation. This initially led to delays in some cases, and inconsistent application, creating an adversarial relationship with some taxpayers. The Department does not currently intend to revise the substance of its Litigation and Settlement Strategy as its core message does not need to change, but is planning to relaunch the Strategy to make the messages clearer. This should assist in developing a common understanding within the Department on how to apply the Strategy in the resolution of tax disputes.

3.12 These findings appear to contradict this written evidence submitted by HMRC to the Treasury Sub-Committee dated 15 June 2011:

Q402: Mr Ruffley: The person or persons who decide finally to settle, when to settle and at what quantum to settle: who are they, what grades of officials are they?

All cases within the Programme are overseen by the High Risk Corporates Programme Board which is responsible for selecting suitable cases and for monitoring progress.

It is the Programme Board which takes all the important decisions on individual tax issues and decides how cases are settled, unless the case is so large or sensitive that the matter has to be referred to the Commissioners for a final decision. In this case, the Programme Board will usually make a recommendation to the Commissioners. The Programme Board is a very senior body chaired by the Director of the Large Business Service. All of the business areas of HMRC that have an interest in the cases are represented at Director or Deputy Director level. HMRC’s Solicitors Office is also represented on the Programme Board.

3.13 The findings are also inconsistent with the oral evidence given to the PAC by HMRC’s Chief Executive and other senior officials on 16th November 2010.

3.14 It is important to note the similarities between the shortcomings highlighted in the C&AG’s Report (particularly the four cases referred to in paragraphs 2.28 and 2.29) and the Goldman Sachs settlement. These similarities can be illustrated further by considering the membership of the Programme Board, which provides the formal means for participation by lawyers, technical specialists, policy advisers, caseworkers that have an interest in the case in any settlement. In fact the written evidence 15 June 2011 stated that current membership of the Programme Board comprises:

Director, Large Business Service, SCS2Director, Specialist Investigations, SCS2Director, Corporation Tax, International, Anti-Avoidance, SCS2Director, Solicitor’s Office, SCS2HRCP Programme Team Leader, Large Business Service, SCS1Deputy Director, Charities, Assets and Residence, SCS1Deputy Director, Specialist Investigations, SCS1Senior Tax Specialist, Corporation Tax, International, Anti-Avoidance, SCS1Head of Anti-Avoidance Group, SCS1HRCP Team Head, Solicitor’s Office, SCS1Deputy Director, Local Compliance, Large and Complex, SCS1

3.15 With specific reference to legal advice and governance, any settlement that is not referred to the Programme Board is not likely to benefit from the advice and governance that are supposed to be provided by the two senior representatives of the Solicitor’s Office in the Board. Indeed it was the Director, Solicitor’s Office, Mr Alan Evans, that was quoted as saying at the meeting in Solicitor’s Office on 10th December 2010 that “at the High Risk Corporates Board meeting the previous week a late submission had come in about a deal on which Mr Dave Hartnett had ‘shaken hands’ with Goldman Sachs” and that “the status of this agreement was not clear”.

3.16 It is against this background that the C&AG’s Report should properly be considered. The report disclosed that: “in two of the four cases, one of the Commissioners approving the settlements had participated in the negotiations and, in another case, both Commissioners had done so”. The implication of this could be that in two of the four cases, one of the Commissioners approving the settlements had negotiated the settlement with the taxpayer company without the involvement of HMRC’s legal and technical experts and then signed it off with another Commissioners; and that in the other case, both Commissioners had negotiated the settlement with the taxpayer company without the involvement of HMRC’s legal and technical experts and then signed it off between themselves.

3.17 Although the C&AG reported that: “these arrangements meant that decisions were taken at the most senior level, and relevant technical and legal expertise remained available”, as can be seen from the Goldman Sachs settlement, relevant technical and legal expertise being available does not necessarily mean that the Commissioner(s) negotiating the settlement obtained it at the appropriate time, or at all. Indeed, the mere fact that HMRC employs about 250 lawyers and many more technical specialists means that relevant technical and legal expertise remains available at any point in time. The question is whether relevant technical and legal expertise was obtained. It was not obtained in the Goldman Sachs settlement.

3.18 It is significant that the C&AG has not stated explicitly in his report that it was obtained in these four biggest cases that were not referred to the Programme Board, which presumably includes the Vodafone settlement on which he expressed an opinion at a hearing before the PAC.

3.19 Therefore, it may be helpful to revisit the following evidence given to the TSC by Mr Hartnett on 16 March 2011, regarding Vodafone:

Q154. Jesse Norman: Is there anything you want to add?

Dave Hartnett: ... I think there are allegations that I and my colleagues stood aside, experts and lawyers, in order to reach that settlement. Not true. We escalated the Vodafone matter to the very best people in our organisation, the director of our international division and one of her deputies, and our lawyers were involved throughout. ...

Q158. Jesse Norman: ... Can you tell us how the case was settled? What was the procedure by which you settled the case?

Dave Hartnett: The director of our international division and her deputy began a negotiation with Vodafone and their advisors. When that stalled, I and another commissioner in HMRC became involved and negotiated a settlement with the chief finance officer of Vodafone.

Q159. Jesse Norman: So it was a negotiation. It was not what you thought they actually had to pay, it was what you were prepared to settle for.

Dave Hartnett: What we do most often, Mr Norman, is to negotiate the very best settlement we can. ...

Q162. Jesse Norman: Were the procedures you followed on Vodafone ordinary ones for a case of this kind?

Dave Hartnett: There was nothing special about this case. It was worked by the most senior experts in the field, two commissioners of HMRC.

Q163. Jesse Norman: Are they board members?

Dave Hartnett: Yes. It was me and the director general for business tax, and our lawyers were involved as well.

C&AG’s Conclusions

3.20 The C&AG’s report addressed the question: “Has the Department complied with its processes for resolving tax disputes?” as follows:

2.33 We examined 27 settlements, involving 21 companies and assessed the extent to which the processes applied by the Department were consistent with:

statutory requirements, for example, the provisions for the exercise by the Commissioners of their discretion under their statutory ‘collection and management’ powers. [The Commissioners have a limited discretion with regard to their duty for the collection and management of taxes under Section 5 of the Commissioners for Revenue and Customs Act 2005. In certain limited circumstances, they can forego the collection of tax, for example if there is a higher net return from not collecting the tax. The judgement in Wilkinson-v-Commissioners of Inland Revenue in the House of Lords 2005 set out the limits of the circumstances in which the collection of tax could be foregone.]

the Litigation and Settlement Strategy; and

internal guidelines on the arrangements for approving settlements.

2.34 Fifteen of the settlements we examined were in the High Risk Corporates Programme, and a further three [Four of the cases not referred to the Programme Board for a decision were those subject to the special governance arrangements noted in paragraph 2.28.] were presented to the Programme Board for a decision. The settlements involved between one and 236 issues, with values (which totalled £8.8 billion) ranging from some £70 million to more than £1 billion. In selecting settlements to examine, we aimed to select the largest issues by value, irrespective of the type of tax involved. We selected our sample to include issues where a large amount of tax was under consideration, even if the final settlement value was small. We selected a sample of cases settled since April 2006 meeting one or more of the following criteria:

Settlements reached by companies in the Programme.

Other settlements considered by the Programme Board.

Settlements where the issues involved the tax under consideration of more than £250 million, whether the company was in the Programme or not.

Any settlements where we were made aware of specific concerns about the governance of the dispute resolution.

Collection and management powers

2.35 Our review identified a number of cases where the Commissioners had been asked to exercise powers available to them under Section 5 of the Commissioners for Revenue and Customs Act 2005 to forego the collection of tax. We did not identify any instances where these powers were exercised inappropriately. We noted, however, some differences of view within the Department on the implications of the Wilkinson judgement on the Commissioners’ ability to exercise these powers to resolve tax disputes. If the Commissioners apply powers inappropriately, they may face a Judicial Review of their decision.

2.36 In one case, we identified that Commissioners had been asked to exercise their collection and management powers on the basis of oral advice from the Department’s Solicitor’s Office. In our view, in the particular circumstances of this case, it would have been helpful to have secured confirmation of that advice in writing to provide a clearer audit trail.

Adherence to the Litigation and Settlement Strategy and guidelines for approving settlements

2.37 We found that the Department had complied with the requirements of the Strategy and with internal guidelines for managing cases in a substantial majority of the cases we examined. Technical and legal expertise was sought and received as appropriate and the available documentation indicated that individual issues had been considered on their merits. We did, however, note exceptions in the following cases which were referred to the Programme Board as the tax under consideration exceeded £100 million:

A case was settled before the Department recognised that it should have been referred to the Programme Board. The Board identified a financial error, demonstrating its value as a check on settlement proposals.

A case where the Department came under pressure from a company to agree a settlement on a single issue very quickly. The Department judged that it should not wait until the next monthly Programme Board meeting, so the proposed settlement was put to the Programme Board by email and Board members were given a week to respond. The settlement proposal was agreed even though not all Board members responded by the deadline.

2.38 The High Risk Corporates Programme approach assists in resolving long outstanding issues within an accelerated timeframe. However, there is a risk that the pressure to reach resolution quickly will be at the expense of considering issues properly. There is also a risk that, in settling a range of issues in a short timeframe, weaker issues will be dropped in the wider interest of obtaining a settlement, where they might have been pursued if considered in isolation. We have seen examples where the Programme Board has agreed not to pursue issues involving finely balanced arguments. Whilst this is consistent with the Litigation and Settlement Strategy, the Department accepts that it could be more explicit in describing the criteria used to make marginal decisions.

Case Law on the Commissioners’ Discretion as to the Best Means of Collecting the Highest Net Return of Taxes and Duties

3.21 The scope of the Commissioners’ powers under section 5 of the CRCA 2005 (then under section 1 of the Taxes Management Act 1970 and section 1 of the Inland Revenue Regulation Act 1890) was directly in issue in Commissioners of Inland Revenue v National Federation of Self-Employed and Small Businesses Ltd (1981) 55 TC 133 (the Fleet Street Casuals case). The Commissioners had been concerned at tax evasion to the tune of some £1 million a year by casual workers employed in Fleet Street, a substantial number of whom had been drawing their pay under false names such as “Mickie Mouse of Sunset Boulevard” and “Sir Gordon Richards of Tattenham Corner”. The Commissioners then made an agreement with the employers and the unions in March 1979, which would enable them to collect tax in the future. However, in achieving this, they agreed that they would not attempt to pursue those who had evaded taxes in the past. The Federation sought to challenge this concession and the principal issue was whether it had standing to do so. It was relevant, however, to consider the strength of the case that the Commissioners acted beyond their powers.

3.22 Lord Diplock summarised the nature and scope of the Commissioners powers in this oft-quoted statement (at pages 163-164):

[T]he Board are charged by statute with the care, management and collection on behalf of the Crown of income tax, corporation tax and capital gains tax. In the exercise of these functions the Board have a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge, the highest net return that is practicable having regard to the staff available to them and the cost of collection. The Board and the inspectors and collectors who act under their directions are under a statutory duty of confidentiality with respect to information about individual taxpayers’ affairs that has been obtained in the course of their duties in making assessments and collecting the taxes; and this imposes a limitation on their managerial discretion. I do not doubt, however, and I do not understand any of your Lordships to doubt, that if it were established that the Board were proposing to exercise or to refrain from exercising its powers not for reasons of “good management” but for some extraneous or ulterior reason, that action or inaction of the Board would be ultra vires and would be a proper matter for judicial review if it were brought to the attention of the court by an applicant with “a sufficient interest” in having the Board compelled to observe the law.

3.23 The subsequent case of Wilkinson v. Commissioners of Inland Revenue (2005) 77 TC 78 concerned a different exercise of the Commissioners collection and management powers known as Extra-Statutory Concessions (ECS). The introductory words of the published ESCs highlight the various differences:

An extra-statutory concession is a relaxation which gives taxpayers a reduction in tax liability to which they would not be entitled under the strict letter of the law. Most concessions are made to deal with what are, on the whole, minor or transitory anomalies under the legislation and to meet cases of hardship at the margins of the code where a statutory remedy would be difficult to devise or would run to a length out of proportion to the intrinsic importance of the matter.

The concessions described within are of general application, but it must be borne in mind that in a particular case there may be special circumstances which will need to be taken into account in considering the application of the concession. A concession will not be given in any case where an attempt is made to use it for tax avoidance.

3.24 Despite this difference between ESCs (which are published and available to any qualifying member of the general body of taxpayers) and a private negotiated settlement (such as the one in the Fleet Street Casuals case and in the cases examined by the C&AG), both the Court of Appeal and the House of Lords endorsed the principle set out by Lord Diplock. In the Court of Appeal, Lord Phillips said this (at pages 104 to 105):

45. It seems to us that the effect of these authorities is plain. One of the primary tasks of the Commissioners is to recover those taxes which Parliament has decreed shall be paid. Section 1 of the 1970 Act permits the Commissioners to set about this task pragmatically and to have regard to principles of good management. Concessions can be made where those will facilitate the overall task of tax collection. We draw attention, however, to Lord Diplock’s statement that the Commissioners’ managerial discretion is as to the best manner of obtaining for the national exchequer the highest net return that is practicable.

46. No doubt, when interpreting tax legislation, it is open to the Commissioners to be as purposive as the most pro-active judge in attempting to ensure that effect is given to the intention of Parliament and that anomalies and injustices are avoided. But in the light of the authorities that we have cited above and of fundamental constitutional principle we do not see how s 1 of the TMA can authorise the Commissioners to announce that they will deliberately refrain from collecting taxes that Parliament has unequivocally decreed shall be paid, not because this will facilitate the overall task of collecting taxes, but because the Commissioners take the view that it is objectionable that the taxpayer should have to pay the taxes in question.

3.25 When the case came before the House of Lords, Lord Hoffmann remarked (at page 114) that “on this point the judgment of the Court of Appeal is in my opinion unanswerable”. He further pointed out that “the Commissioners are not ‘the Crown’, owners of the consolidated fund and able to deal with its property like any other owner”. After quoting Lord Diplock’s description of the Revenue’s discretion in the Fleet Street Casuals case, he said this (at page 114):

21. This discretion enables the Commissioners to formulate policy in the interstices of the tax legislation, dealing pragmatically with minor or transitory anomalies, cases of hardship at the margins or cases in which a statutory rule is difficult to formulate or its enactment would take up a disproportionate amount of Parliamentary time. The Commissioners publish extra-statutory concessions for the guidance of the public and Miss Rose drew attention to some which she said went beyond mere management of the efficient collection of the revenue. I express no view on whether she is right about this, but if she is, it means that the Commissioners may have exceeded their powers under s 1 of TMA. It does not justify construing the power so widely as to enable the Commissioners to concede, by extra-statutory concession, an allowance which Parliament could have granted but did not grant, and on grounds not of pragmatism in the collection of tax but of general equity between men and women.

3.26 Therefore the House of Lords’ decision in the Wilkinson case clarified the extent of the Commissioners’ administrative discretion in relation to ESCs. Following that decision, HMRC has reviewed its published ESCs. In anticipation of the need to give legislative effect to some of the ESCs, section 160 of Finance Act 2008 provided an enabling power allowing the tax treatment afforded by existing published concessions (those granted before 21 July 2008) to be given statutory effect. A consultation process was undertaken in 2009 and the ESCs were updated by HMRC in 2009. Most ESCs have continued in their current form, as they are within the scope of HMRC’s collection and management powers. However, where an existing concession exceeds the scope of HMRC’s administrative discretion, as clarified in the Wilkinson case, such concession will be put onto a legislative basis as appropriate.

3.27 It should however be emphasised that the Wilkinson case did not affect the settled principle relating to the negotiated settlements with individual taxpayers as established in the Fleet Street Casuals case. Therefore it is curious that the C&AG reported “some differences of view within the Department on the implications of the Wilkinson judgement on the Commissioners’ ability to exercise these powers to resolve tax disputes”. The Wilkinson judgment has no significant implication on the Commissioners’ ability to exercise their collection and management powers to resolve the tax disputes examined by the C&AG. The duty of the Commissioners remains as set out by Lord Diplock in 1981 in the Fleet Street Casuals case, namely: to exercise their power to forego the collection of tax for reasons of “good management” only rather than for some extraneous or ulterior reason, and to ensure that any such decision is lawful and not ultra vires.

3.28 Thus in Al Fayed and Others v Advocate General for Scotland (representing the Inland Revenue Commissioners) [2004] STC 1703, the Court of Session of Scotland held that an agreement in respect of forward payments was ultra vires. Therefore, HMRC did not act unfairly in terminating it; according to Lord Cullen, “There can be no legitimate expectation that a public body will continue to implement an agreement when it has no power to do so”.

3.29 In Council of Civil Service Unions v Minister for the Civil Service [1985] AC 374, Lord Diplock developed the three classic grounds for the judicial review of administrative decisions, which the Commissioners and their legal adviser would be expected to take into account in the exercise of that discretion. First, the decision must not be vitiated by illegality, which, according to Lord Diplock (at 410), “mean[s] that the decision-maker must understand correctly the law that regulates his decision-making power and must give effect to it”. Secondly, it must not be irrational. In the words of Lord Diplock (at page 410) this means “a decision which is so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it”. Finally, procedural impropriety. He explained (at page 411) that: “susceptibility to judicial review under this head covers also failure ... to observe procedural rules ... even where such failure does not involve any denial of natural justice”.

3.30 Against this background, the apparent “differences of view within the Department on the implications of the Wilkinson judgement on the Commissioners’ ability to exercise these powers to resolve tax disputes” indicates an illegality under the above principles. As explained above, none of the lawyers that constitute the Senior Management Team (SMT) of HMRC’s Solicitors Office is a tax lawyer. In view of the fact that these lawyers are most likely to provide “informal” advice to the Commissioners, the C&AG’s identification (from the relatively small sample of cases they examined) of a case in which “Commissioners had been asked to exercise their collection and management powers on the basis of oral advice from the Department’s Solicitor’s Office” gives cause for concern.

3.31 Indeed, in view of Lord Hoffmann’s statement in the Wilkinson case that “the Commissioners are not “the Crown”, owners of the consolidated fund and able to deal with its property like any other owner”, the exercise of the Commissioners’ power to forego the collection of tax on the basis of oral advice from the Solicitor’s Office raises a real issue as to whether the discretion was exercised for “good management” or “for some extraneous or ulterior reason”. It is difficult to imagine a situation in which an oral advice would have been appropriate, let alone in circumstances in which the C&AG himself found that “it would have been helpful to have secured confirmation of that advice in writing to provide a clearer audit trail”. Therefore, there appear to be real issues of irrationality and procedural impropriety under administrative law grounds.

3.32 The C&AG’s report does not address these issues adequately, and in the final analysis his conclusion that he “did not identify any instances where these powers were exercised inappropriately” appears to lack the credibility the public would expect from his good offices. Indeed, that conclusion itself is arguably susceptible to a challenge on the grounds of illegality and/or irrationality and/or procedural impropriety.

Part Four: HMRC’s Evidence and Submissions on its Duties of Confidentiality and Accountability

Introduction

4.1 As an elected assembly whose members serve as the chosen representatives of the people, the House of Commons exercises the power to impose taxes and duties upon the people and to vote money for public services. The exercise of this power gives to the Commons the chief authority in the State. Select Committees are appointed by the House to perform a variety of functions, generally of inquiry, investigation and scrutiny and they report their findings and recommendations to the House. Most House of Commons Select Committees have a continuing existence and their terms of reference and powers are laid down in Standing Orders of the House. Thus the PAC is appointed by the House to examine “the accounts showing the appropriation of the sums granted to Parliament to meet the public expenditure, and of such other accounts laid before Parliament as the Committee may think fit” (Standing Order No 148). The Committee focuses on value-for-money criteria which are based on economy, effectiveness and efficiency. On the other hand, the TSC is appointed by the House of Commons to examine the expenditure, administration and policy of HMRC.

4.2 The powers of Select Committees derive from the powers of the House and from the Standing Orders. Select Committees (and their Sub-Committees) have power to “send for persons, papers and records” relevant to their terms of reference. The issue of an order for an individual to attend or to provide evidence can exercise these powers, formally. However, the general practice of select committees is to request witnesses to give evidence to them by means of an informal invitation issued through their clerks of the chairman of the committee. Select committees seldom use their formal powers to summon individuals, preferring to keep them in reserve. Select Committees’ own deliberations are held in closed session but Committees usually admit the public and the press to hearings at which they take evidence from witnesses. Committees may, on request from a witness, agree to take evidence in closed session if sensitive or confidential material is likely to be discussed.

4.3 Following a recommendation of the Public Service Committee of the Commons both Houses came to Resolution to the following effect:

That, in the opinion of this House, the following principles should govern the conduct of ministers of the Crown in relation to Parliament: ministers have a duty to Parliament to account, and be held to account, for policies, decisions and actions of their departments ...; it is of paramount importance that ministers give accurate and truthful information to Parliament, correcting any inadvertent error at the earliest opportunity. Ministers who knowingly mislead Parliament will be expected to offer their resignations to the Prime Minister; ministers should be as open as possible with Parliament, refusing to provide information only when disclosure would not be in the public interest, which should be decided in accordance with relevant statute, and the government’s Code of Practice on Access to Governmental Information (second edition, January 1997) [from 1 January 2005 the Freedom of Information Act 2000 ]; similarly, ministers should require civil servants who give evidence before parliamentary committees on their behalf and under their directions to be as helpful as possible in providing accurate, truthful and full information, in accordance with the duties and responsibilities of civil servants as set out in the Civil Service Code.

4.4 As the heads of a non-Ministerial government department, the Commissioners owe similar duties to Parliament as Ministers in charge of Ministerial departments. This is in addition to the Commissioners’ basic accountabilities to Ministers and to the public. According to the authoritative Erskine May’s treatise on the law, privileges, proceedings and usage of Parliament a witness is bound to provide all information and documents requested by a Select Committee even where there would be an excuse in a court of law. If witnesses are bound to disclose any information which a Select Committee sees fit to request of them even where such disclosure would ordinarily be prohibited by law, it is remarkable that HMRC’s officials have refused to disclose information requested by the PAC and the TSC despite the absence of any legal prohibition from such disclosure.

Information withheld is official secrets and not taxpayer confidential information

4.5 The nature and scope of taxpayer confidentiality were also discussed in the Fleet Street Casuals case referred to above. In support of their case, the Federation had sought to get the Inland Revenue to disclose their papers relating to the special arrangement with the casual workers, especially as to the negotiations with the unions and the employers. The Revenue argued that taxpayer confidentiality would be breached if the Federation was granted leave to bring a judicial review and maintained that the Department’s statutory duty of confidentiality indicated that the legislation imposed no duty owed to a taxpayer (or the general body of taxpayers) in respect of the collection of taxes due from another taxpayer.

4.6 However, the issue of taxpayer confidentiality should not have been raised by the Inland Revenue in that case as a defence to the Federation’s claim. As Lord Diplock indicated in his speech referred to above, the Revenue is under “a statutory duty of confidentiality with respect to information about individual taxpayers’ affairs that has been obtained in the course of their duties in making assessments and collecting the taxes”. Thus adopting the argument of the counsel for the Federation, his Lordship pointed out (at page 169) that:

“Consideration of the Federation’s complaint would not involve any departure from the Board’s statutory duty to preserve the confidentiality of information obtained by its inspectors and collectors about individual taxpayers’ affairs, since ex hypothesi the members of this class of taxpayers had made no returns and had not provided any information about their affairs”.

4.7 The same point was made by Lord Scarman. He said: (at 179):

“In the present case, had the Federation shown a sufficient interest, I doubt whether any legitimate objection could have been taken to discovery of documents relevant to the making of the special arrangement. Such documents would be unlikely to contain any information about the affairs of any Fleet Street casual who had succeeded by various devices in avoiding his identity being discovered by the searches of the Revenue”.

4.8 Therefore, just as the Inland Revenue was wrong to seek to hide behind “taxpayer confidentiality” in the Fleet Street Casuals case, HMRC and the NAO are wrong to do so now in order to evade their duties of transparency and accountability on the settlement of recent high profile tax disputes. It is clear from the above report of the C&AG and HMRC’s evidence and submissions (detailed below) that the information withheld recently from Parliament and the public “for reasons of taxpayer confidentiality” is not taxpayer confidential information but HMRC’s official secrets.

4.9 As explained in the enclosed paper, HMRC’s official secrets fall within the general provisions of the Freedom of Information Act 2000 (FOIA) and is thus covered by the Cabinet Office Guidance on the Provision of Departmental Evidence and Response to Select Committees (known as the ‘Osmotherly Rules’). The guidance states that:

“9. Select Committees have a crucial role in ensuring the full and proper accountability of the Executive to Parliament. Ministers have emphasised that, when officials represent them before Select Committees, they should be as forthcoming and helpful as they can in providing information relevant to Committee inquiries. In giving evidence to Select Committees, officials should take care to ensure that no information is withheld which would not be exempted if a parallel request were made under the Freedom of Information Act”. (emphasis supplied)

4.10 Surely, it could not have been the intention of Parliament that information that would be disclosed to anybody, anywhere in the world under the FOIA would be withheld from the Select Committees of the House of Commons.

Taxpayer Confidential Information can be Disclosed Lawfully

4.11 It was also established in the Fleet Street Casuals case that taxpayer confidential information can be disclosed to Parliament and to the public where the public interest in transparency and accountability requires this. In the words of Lord Scarman (at 178): “the duty of confidence can co-exist with the duty of fairness owed to the general body of taxpayers”.

4.12 Section 182 of Finance Act 1989 authorises the C&AG and his staff in the NAO to disclose information (including taxpayer confidential information and HMRC’s official secrets) to Parliament and the public for the purposes of improving the accountability and transparency of the settlement of large and complex tax cases by HMRC. Similarly, section 18 of the CRCA authorises the Commissioners and their staff in HMRC to disclose information (including taxpayer confidential information and HMRC’s official secrets) to Parliament and the public for the purposes of improving the accountability and transparency of the settlement of large and complex tax cases by HMRC.

4.13 Indeed, HMRC’s Information Disclosure Guidance (issued by ExCom) states that:

“The essential point to bear in mind when making a disclosure for the purposes of HMRC’s functions is that confidentiality should not stand in the way of an HMRC officer performing an HMRC duty or function. If you need to disclose information held by HMRC in order to carry out a function of HMRC then such a disclosure can be made for the purposes of HMRC’s functions”.

4.14 Greater transparency is also at the heart of the Government’s commitment to enable the public to hold politicians and public bodies to account and to reduce the deficit. In his first major speech as Prime Minister, on 29 May 2010, the Prime Minister said:

“If there’s one thing I’ve noticed since doing this job, it’s how all the information about government; the money it spends, where it spends it, the results it achieves; how so much of it is locked away in a vault marked sort of private for the eyes of ministers and officials only.

“I think this is ridiculous. It’s your money, your government, you should know what’s going on. So we’re going to rip off that cloak of secrecy and extend transparency as far and as wide as possible. By bringing information out into the open, you’ll be able to hold government and public services to account”.

4.15 In line with these policy objectives, HMRC has also adopted an Openness Policy Statement” approved by ExCom “to encourage all staff to deal with information as openly as they can – in both dealing with FOI requests and in the proactive publication of departmental information”. The statement declares that:

“Openness is a core HMRC value. The department is fully committed to being accountable in its role of serving the public. In both internal and external communications it is important we are open about the way we work, the information we hold, and how we take decisions. Staff should always try to communicate in plain language and release information in an accurate and timely fashion, making full use of the Internet to publicise our role and achievements. Being open with information will enhance our relationship with stakeholders and help maintain the public’s trust in HMRC”.

4.16 Against this background HMRC has a long-established practice of issuing graphic press releases containing sensitive personal information of people convicted of tax offences (including names, date of birth, addresses and photographs) and publishing these on its website. The Department also participated in the recent BBC documentary – Saints and Scroungers – in which a presenter followed “fraud officers as they bust the benefits thieves stealing millions of pounds every year”. It is pertinent to note that the general duty of confidentiality under section 18(1) of CRCA applies to any information held by HMRC in connection with any of its function, including information that may be in the public domain already.

4.17 As the availability of information in the public domain is not an exception to the duty of confidentiality under section 18(1) a specific gateway is required to issue these press releases lawfully. HMRC applies section 18(2)(a) of CRCA which permits a disclosure made for the purposes of its function. The Commissioners consider that the duties of transparency and accountability HMRC owes to the general body of taxpayers override any duty of confidentiality it owes to the individual customers concerned. In these circumstances, such disclosures constitute a lawful interference with the rights of the affected customers to private and family life under Human Rights legislation. In particular, the policy objectives of this measure go beyond deterrence and include the provision of visible assurance to the majority of taxpayers who play by the rules that HMRC is taking action against the minority that break the rules.

4.18 Similarly, the Commissioners have always known that section 18(2)(a) of CRCA also authorises the disclosure of information about corporate customers involved in controversial settlements to Select Committees of the House of Commons that have oversight functions over the Department, such as the PAC and the TSC. Such disclosures are clearly necessary in order to assure Parliament and the public that cases involving large sums of money are being settled correctly. However, in recent evidence and submissions to the PAC and the TSC, senior officials of HMRC have consistently refused to disclose information needed to assure Parliament and the public that due process in the discharge of the Department’s collection and management functions is being followed especially in the way disputes with large companies are resolved.

Oral Evidence to the PAC on 28 January 2008

4.19 At a hearing of the PAC on 28th January 2008 on the C&AG’s report, Management of large business Corporation Tax (HC 614), Mr Hartnett (then Acting Chairman of HMRC) and other officials gave oral evidence. The following exchange is an extract from the record of the proceedings (HC 302-i):

Q2. Chairman: Thank you. Perhaps we could start by looking at how good you are at raising this. If we look at paragraph 2.7 which relates to figure five, I was quite surprised to read, Mr Hartnett, that 58% of open inquiries involve cases where the tax under consideration is less than £500,000. So you have got 58% of your inquiries generating only 1% additional Corporation Tax. Do you really have a grip on this tax?

Mr Hartnett: I think we do, Chairman. We were very conscious that figure was too high. We have been reducing it as we have switched our resource to bigger risks. We have looked at these smaller risks and have closed a great number of them down. I will just ask Melanie if she can give you a number to give you a feel for it.

Ms Dawes: Since February, when the Report was written and that figure was produced, we have cut the number of issues for less than £500,000 by 55%. What we have also done is introduce a more rounded measure of a small issue that takes into account not just the monetary amount but also looks at the probability of success and the impact on the wider tax system. We have set ourselves a target for that in this financial year of cutting those small issues by 75% and so far we have achieved a 70% reduction in the nine months to the end of December.

Q3. Chairman: So it would not be a fair criticism to say you are concentrating on the small fry and letting the big fish get away?

Mr Hartnett: Absolutely not, Chairman. Some of the big fish are very big indeed. We have applied a lot more resource to those, taking a taskforce approach to the biggest risks, recently applying more than 150 of our officers, plus outside counsel and others, on just one case.

Q4. Chairman: You see, what surprises me is that many people will be as astonished by this as I was. If we look at 1.12 what we see there is a third of large businesses pay no Corporation Tax at all. That is extraordinary. Do you think that members of the public, if they were watching this, would find that very strange?

Mr Hartnett: I think members of the public would be interested to know why that is.

Q5. Chairman: I think they would be, so you are now going to tell us.

Mr Hartnett: If we were to explain it to them I think they would begin to understand why it is like that. London, as a financial centre, attracts the headquarters of many corporates but not the economic activity behind it, so there are many large businesses which have very little economic activity to be taxed in the UK. Nearly 38% of the activity of UK quoted groups happens abroad and much of the profit will be taxed abroad. Some great UK corporations have very substantial accumulated losses. Some industries in particular have a lot of losses brought forward from the late 1990s, and I am thinking of telecoms and manufacturing. The UK is regarded as having a relatively generous regime for interest relief as well. Then, of course, there are pension contributions and it would be remiss of me not to say that tax avoidance plays a part in this and we bear down on that.

Q6. Chairman: That is what worries me. Let us look at paragraph 4.9, and you have mentioned tax avoidance: “Our consultation with large businesses indicated that they felt there was a widening gap between the skill set of their tax department staff and that of the Large Business Service”. Could it be that you are simply, not to mince words, being taken for a ride by some big companies?

Mr Hartnett: I do not think so, Chairman. I really do not believe that is a serious proposition. With the introduction of tax disclosure rules in 2004 and with Government having closed a great number of tax avoidance schemes, what we are learning from both business and their advisers is that marketing schemes are substantially in the past, although clearly not entirely. We are seeing fewer disclosed and we test to make sure disclosure is made. I think we have been very effective in countering avoidance. Am I complacent, of course not, I think there is scope for us to do more.

Q7. Chairman: Do you think you really have a proper measure of the gap between what companies are supposed to pay and what they do pay? The technical term is tax gap but, to put it in a way that ordinary people understand, do you actually know whether people are paying the right amount of Corporation Tax?

Mr Hartnett: I think we can be confident in absolute terms that there is a tax gap. What we are less confident about is how to measure it but there are broadly two approaches. We can have a bottom-up approach through random inquiries, a tried and tested method that we used for direct access with small business, but which works much less well with big business, and we can have a top-down approach through our estimates of tax risk. I think we are getting better and better at estimating the tax risk.

Q8. Chairman: You saying you are getting better and better, but if we look at paragraph 2.11 we see that Corporation Tax at risk is now at £8.5 billion. That is a lot of money, is it not?

Mr Hartnett: It is a lot of money.

Q9. Chairman: So compliance amongst large business is a very serious problem, is it not?

Mr Hartnett: Securing compliance is something we are tackling vigorously, but a lot of the £8.5 billion is tax at risk which may be on technical issues, may be cross-border issues. I am afraid I cannot tell you sat here at the moment how much of that is tax avoidance but some will undoubtedly be.

Q10. Chairman: Putting it in simple terms the public might understand, would it not be helpful if these large companies had to publish in their accounts what profits they are making and what tax they are paying?

Mr Hartnett: I think that would ---

Q11. Chairman: It would add transparency, would it not, and reassure the public?

Mr Hartnett: It would certainly add transparency but, Chairman, it is there for many of them already.

Q12. Chairman: It is there, is it?

Mr Hartnett: It is there for many of them.

Q13. Chairman: Sorry?

Mr Hartnett: It is there for many of them already. You can deduce that, and best practice for some ---

Q14. Chairman: What do you mean “you can deduce that”?

Mr Hartnett: You can look at the published accounts, you can look at the tax account and you can work out roughly what tax is paid against what profits, but the big challenge in the UK compared with, say, the United States, Australia and some other countries, is that we do not have a consolidation for tax purposes in the UK of group accounts.

Q15. Chairman: Should we have one?

Mr Hartnett: A consolidation, a merging of ---

Q16. Chairman: Should we have one?

Mr Hartnett: I think it would be quite helpful in terms of measuring compliance, but in the past we have found it very difficult to come up with a proposal that works.

Q17. Chairman: You are working at it?

Mr Hartnett: We are certainly doing that.

Chairman: Thank you, Mr Hartnett.

Q18. Mr Touhig: Mr Hartnett, you will no doubt have seen the headlines generated when the Comptroller and Auditor General published his report last year: “One-third of the biggest UK businesses paid no tax” said the Financial Times on 27 August, “Revealed: how multinational companies avoid tax” from The Guardian on 6 November. Of course, the Chairman has asked the question that was on everybody’s lips, how come one-third of the country’s 700 largest businesses paid no Corporation Tax in 2005-06. You did give some response as to why that should be the case but can you give us a list of the 200 companies which paid no Corporation Tax in 2005-06 or 2006-07? You can write if you do not have them.

Mr Hartnett: We certainly do not have them to hand, Mr Touhig. We will look at that.

Q19. Chairman: You will look at it or you will do it?

Mr Hartnett: No, we will do it if we can. About 10% of those are gone, they no longer exist.

Q20. Mr Touhig: Can you also tell us which of these companies paid no tax because they did not make any profit?

Mr Hartnett: I think we can do that as well.

Q21. Mr Touhig: Can you also tell us which companies paid no Corporation Tax because they successfully applied for tax relief?

Mr Hartnett: You will have to help me, Mr Touhig, because there are innumerable tax reliefs.

Q22. Mr Touhig: Can you give us some examples then?

Mr Hartnett: We can certainly give you some examples.

Q23. Mr Touhig: Can you also tell us which companies paid no Corporation Tax because they used tax avoidance measures which are appropriate and are allowable?

Mr Hartnett: Let me express a concern. You are beginning to ask me to disclose very great details about individual companies where we have a duty of confidentiality and I would be very concerned indeed, Mr Touhig, if suddenly all this information was to be made public.

Q24. Mr Touhig: Do you not think the public has a right to know? The report says on page 19: “Tax avoidance is not easily definable but it can involve highly creative ways of using tax laws to reduce or defer tax”. Should we not know which companies are doing that?

Mr Hartnett: I go back to where I am. I am under a statutory duty of confidentiality, as are my colleagues.

Q25. Mr Touhig: So you cannot tell us which companies are using methods of tax avoidance?

Mr Hartnett: I think we can help you with some details about this, but listing this company by company in the sort of detail you are now asking is very difficult indeed.

Q26. Chairman: This point raised by Don Touhig is very important. You say you have a duty of confidentiality.

Mr Hartnett: Statutory duty.

Q27. Chairman: We understand that it is a duty particularly to individuals but these are public companies.

Mr Hartnett: I am afraid all our legal advice is that they have the same statutory right of confidentiality.

Chairman: We are only trying to help you. Do you not think it helps your job getting this into the public domain. It is not just about naming and shaming, it is ensuring that there is public discussion about some very large companies that are not paying tax and you sheltering behind this blanket of confidentiality. I want you to think very carefully in the answers you give to Mr Touhig whether you cannot be rather more helpful to him. I hand back to you, Mr Touhig.

Q28. Mr Touhig: Perhaps you would like to reflect on the question I have asked and write to us and if we need further correspondence we can do so, but I do think it is in the public interest that we should know this.

Mr Hartnett: Certainly, Mr Touhig.

4.20 Mr Hartnett is well aware that the same legal considerations the Commissioners apply to the publication of information about HMRC’s customers involved in tax offences also apply to the information requested by the PAC on this occasion because both sets of information are available in the public domain. In fact, he explained in that exchange [Q13 and Q14] that much of the information requested was available in the public domain - “it is there for many of them already ... you can look at the published accounts, you can look at the tax account and you can work out roughly what tax is paid against what profits”. Yet the Department refused to provide it to the PAC.

Oral Evidence to the PAC on 28 January 2009

4.21 In the event HMRC refused to disclose the information and by the time of the subsequent hearing on 28th January 2009 on the C&AG’s report HMRC: Management of tax debt (HC 1152) the PAC appeared to have accepted that it cannot obtain relevant information from HMRC(HC 216-i):

Q50. Mr Touhig: ... We have asked before for information about companies that avoid payment of tax and we were told that because of data protection we could not be told, but one hears all sorts of stories about companies who do find all sorts of ways to avoid paying their liability when it is due. ...

Q51. Mr Touhig: Would it be possible for you to provide the Committee with a note on the companies by turnover and the liability and the ones that you are having persistent problems with. I am sure you will not want to give us the names.

Mrs Strathie: No.

Oral Evidence to the PAC on 9 March 2009

4.22 In oral evidence to the PAC on 9 March 2009 on the Report by the Comptroller and Auditor General (HC 942) on HM Revenue and Customs: the Control and Facilitation of Imports, HMRC’s officials including the Chief Executive Ms Lesley Strathie and Ms Melanie Dawes, then Acting Director General Business Tax gave the following evidence:

Q75. Dr Pugh: The last question I have to ask you is about the differential treatment of big business versus small business. I got the impression from the NAO Report that although there was no particular reason for it your focus had been more on smaller businesses than on larger businesses. Am I correct in thinking that?

Ms Dawes: We try to focus on all sizes of business and we actually have very high staff ratios for the large businesses, with just under 100 staff looking after only 650 customers, accounting for about half of trade by value from outside the EU. We actually try to adopt quite a balanced approach and if anything put really very high resources into the large business side.

Q76. Dr Pugh: Why is it then that paragraph 12 says, “The revenue generated from audits of large businesses has decreased by 67% in real terms” and then in paragraph 13 it mentions that the proportion of audits identifying irregularities in smaller businesses has obviously gone up and the amount you are getting from them has also gone up. Have large businesses become very law abiding?

Ms Dawes: They might have done.

Q77. Dr Pugh: What is your reason for thinking that they might have?

Ms Dawes: Behind those figures there are two very large individual repayments of VAT duty that were included in the figures for 2006 and if you take those out the reduction in yield from audits from the large business side is—

Q78. Dr Pugh: Was there a huge serial offender in the previous year?

Ms Dawes: There were two big cases where there had been very large areas where—

Q79. Dr Pugh: What, as a matter of interest, were those two big cases about?

Ms Dawes: We have to be careful here about customer confidentiality. This is an area where, as I understand it, errors were made and where we recently settled quite a large set of issues over a number of years.

Q80. Dr Pugh: But you can tell us who made the errors.

Ms Dawes: I cannot tell you who made the errors no, I am afraid not.

Q81. Dr Pugh: The companies that benefited from the errors then?

Ms Dawes: No, I am afraid I cannot give you any individual names of companies, no. We are not able to do that.

Q82. Dr Pugh: They obviously had a huge significance.

Ms Dawes: It is the sort of thing that happens with large business work all the time. We do get large amounts of money. From the nature of these companies they are accounting for very large amounts of trade and large amounts of duty and so when we have an individual issue with one company it can have a big impact on the figures. I was really just trying to explain that if you take those impacts out there is a fall in the yield from the large business side.

Dr Pugh: It must be a very big company.

Q83. Chairman: Why do you say you cannot give the names of the companies? Perhaps you cannot give them in public session but you can send us a note.

Ms Dawes: We are not able to release those figures in the public domain. I think this is a debate that we have probably had with you before.

Q84. Chairman: We would not release them. You cannot just announce to the Committee that you are not prepared to give a parliamentary committee the names of companies in confidence. You do not have that right.

Ms Strathie: I think you know we are bound by taxpayer confidentiality and you did point out earlier that if we give you something in confidence you then decide whether it stays in confidence.

Q85. Chairman: I am not asking you to reveal the individual’s tax affairs, we are talking about companies. We often get given details about companies, for instance from the Ministry of Defence. Are you refusing point blank to give us this information?

Ms Strathie: That is our position because of taxpayer confidentiality. I know that you often receive information about companies and indeed very often when something is in the public domain, perhaps as a result of prosecution or something else, then those matters become public. However, regarding the tax affairs of individual companies that is not something that we can reveal.

Chairman: We may have to think about that; I may have to take this up with the cabinet secretary I think.

Letter by Mr Edward Leigh MP to Sir Gus O’Donnell

4.23 Mr Edward Leigh wrote to the Cabinet Secretary, Sir Gus O’Donnell KCB, on 25th March 2009. In the letter (copied to Ms Strathie), Mr Leigh contended that the PAC was entitled to information about identified taxpayers for the purposes of its proceedings; that witnesses providing such information would be protected by parliamentary privilege; and that the exemption in section 18(2)(b) of CRCA, together with section 20(1)(a) permitted such a disclosure, provided it was made on the instructions of the Commissioners. Just as he did during the examination referred to above, Mr Leigh suggested that the PAC would be willing to take such evidence in private session.

4.24 The issue was discussed within HMRC and in June 2009, Mr Hartnett approved a memorandum requesting ExCom to maintain the policy of not disclosing identifiable taxpayer information to the PAC. The memo, which provides a useful insight into the modus operandi of Mr Hartnett’s powers (both in regard to the exercise of the Commissioners’ discretion to forego the collection of tax and discretion to withhold information) is set out in full:

Title: Disclosure of HMRC customer information to PACDate of Meeting to be considered: 23 June 2009Decision required:

ExCom are asked to agree that:

HMRC maintains the general policy of not disclosing identifiable taxpayer information, unless the Commissioners agree it is strictly necessary for HMRC’s functions;

A Letter is sent to Gus O’Donnell from Lesley Strathie providing a response to the two points raised by Edward Leigh. A draft letter is attached;

Ministers are made aware of Edward Leigh’s approach and the terms in which we propose to respond before any reply is sent.

Author: [Information Policy Officials]

Signed Off by: Dave Hartnett

Summary:

Edward Leigh, Chairman of PAC, has written to Gus O’Donnell challenging HMRC’s refusal to disclose identifiable taxpayer information to the Committee. We have taken legal advice and considered the risks and possible consequences of such disclosure. We recommend that we maintain the Departmental policy of only disclosing such information where Commissioners are agreed that it is strictly necessary for the department’s functions. This would require very exceptional circumstances which are not present in the particular case which gave rise to Edward Leigh’s letter. We attach a draft letter to Gus O’Donnell suggesting how he should reply to Edward Leigh.

Background

1. Taxpayer confidentiality is a long-established principle consistently upheld by Parliament.

2. During the passage of the Commissioners for Revenue and Customs Act (CRCA) through Parliament in early 2005, both the Lords and the Commons were concerned to ensure that taxpayer confidentiality would not be compromised by the merger. Reflecting these concerns, Government Ministers gave clear commitments that taxpayer confidentiality would not be watered down or eroded. HMRC has a statutory duty of confidentiality protecting customer information and a criminal sanction for the wrongful disclosure of such information.

3. HMRC’s policy (found in the Information Disclosure Guidance on the intranet) is that information that does not enable individual taxpayers to be identified may be disclosed so long as disclosure is conducive to or expedient for HMRC’s functions. So, HMRC officials can and do give detailed anonymised evidence to Select Committees. However, where taxpayer-identifying information is concerned, HMRC’s policy is that disclosure can only be justified if it is strictly necessary for HMRC’s functions, which would be very exceptional in these circumstances.

Options considered:

4. We considered the options of maintaining the departmental policy, or alternatively, disclosing identifiable taxpayer information to the PAC.

5. Section 18 of the CRCA prohibits the disclosure of information held by HMRC unless for specified exceptions. In the current case, the only exception is that permitting disclosure for the purpose of a function. It is difficult to identify an example where it would be necessary for HMRC’s functions to disclose taxpayer identifying information to the PAC.

6. In any case, we sought legal advice from First Treasury Counsel. He advised that as the PAC are a Parliamentary body with an oversight role over HMRC it follows that HMRC’s functions would extend to assist the PAC with that oversight role. So there is no absolute bar on disclosure but this would still be at HMRC’s discretion and wrongful disclosure would still be a criminal offence. Counsel was of the view that Parliamentary privilege would be unlikely to provide protection to an HMRC official charged with such an offence, because the offence is one of strict liability and as such it would only be necessary to give evidence of the fact of disclosure, not the content.

7. There are no legal restrictions on onward disclosure of any information provided to PAC, so any assurances by PAC of keeping information confidential would not be enforceable by HMRC. We would be right to assume that information we provide as evidence to PAC would in all likelihood become public in one way or another. There are also Human Rights Act and Data Protection Act considerations that could make the disclosures very risky. Counsel advised therefore that it was legitimate to take a cautious and strict approach in line with our established policy for HMRC.

8. Dave Hartnett, as Permanent Secretary for Tax has the delegated authority on behalf of ExCom to decide on issues of disclosure of information.

Key Risks:

9. We have identified a number of potential risks in making a change to the departmental policy:

(a)Exposure of HMRC staff to criminal liability. We would risk HMRC staff breaching HMRC’s duty of confidentiality and being subjected to criminal proceedings for wrongful disclosure.

(b)Damaging effect on our relationship with taxpayers. Our long-established practice in this area has created an expectation among taxpayers that we will not normally divulge taxpayer specific information. This has helped foster trust in how our customers engage with us. Any departure from this approach should be resisted. Without adequate safeguards and guarantees about confidentiality some of our customers could refuse to provide us with any information that they are not statutorily obliged to give. In extreme cases our customers might refuse to cooperate with us, claiming any disclosure of their information to others without clear transparent legal authority provides an excuse for non-compliance.

  This would be a particularly retrograde step in the context of our work with large corporates. This breakdown of trust would create a risk to the operation of the tax system which relies on our customers providing real time information to us and could have a detrimental effect on the tax yield we collect. Our confidentiality rules have meant that we have to legislate even to enable us to publish the names of deliberate tax defaulters.

  It would be a major step change in the dynamic of the relationship we as a tax authority have with our taxpayers were we to give such information. Other countries have the same approach we have of not providing this to Parliament, except those countries where a democratic system is not upheld.

  Disclosure of customer information to Parliament could have serious consequences for the reputation of the taxpayer (including the share price of listed companies) depending on the reason for disclosure and what information was disclosed.

(c)Damaging effect on Ministers. Our relationship with Ministers has always been an arm’s length one, and consequently they are told very little about individual taxpayers. By and large Ministers have recognised that it is in their interests not to receive taxpayer information as it distances them from particular cases and protects them from accusations of political interference. If we were to provide taxpayer information to the PAC it could not be withheld from Ministers, who could thereby be drawn into areas they wish to avoid. If there were any possibility of changing our current practice it would therefore be essential to consult Treasury Ministers before doing so.

(d)Damaging effect on our relationship with other government departments and agencies. We operate strict rules in disclosing information to other government departments and agencies. Successive Ministers have insisted upon legal provisions (statutory gateways) being established in line with the policy principles for the supply of HMRC data which provide clarity about the type of information to be disclosed and a criminal sanction for wrongful disclosure by the recipient. We have upheld these principles for some time, often against strong opposition. Although disclosure to the PAC (as a Parliamentary oversight body) would be fundamentally different, any change to our stance on confidentiality risks undermining our position and coming under greater pressure to disclose customer information to others without those safeguard.

(e)Damaging effect on our reputation. Disclosure to the PAC would erode our integrity on confidentiality. Disclosing taxpayer information to a third party who may at times have political reasons for asking for the information risks undermining our reputation for impartiality. Our reputation could be damaged if we were seen to be involved in very political issues.

  Privacy lobby groups such as “Liberty” have been gaining more widespread support over recent times as the public perceive that Government action leads to more undermining of personal privacy. Such lobby groups could be expected to raise considerable concerns about erosion of our traditional approach to maintaining taxpayer confidentiality.

(f)Attitude of Parliament. It is risky to assume that Parliament as a whole (as opposed to the PAC or its chairman) would support the disclosure of taxpayer specific information to the PAC. Parliament has always had a very lively sense of the advantages of the very strict rules that have always protected the confidentiality of tax information. MPs are taxpayers themselves and recent events around expenses will have made Parliament more wary of situations in which the tax affairs of individuals might become the subject of public scrutiny.

Impacts

Financial and Performance

The potential to have an effect on the compliance could impact on tax yield.

Customer

Impact on HMRC’s reputation and our relations with customers are described above.

Internal & External Stakeholder Consultation:

This note and recommendation have been agreed with Solicitor’s Office.

Next Steps

If ExCom are content with the recommendation, we will inform Ministers of our approach, and send the draft letter to Gus O’Donnell to allow him to reply to Edward Leigh before Summer Recess begins on 21 July.

4.25 Apart from the fact that this note is misleading in essence and does not refer to the public interest in transparency and accountability at all, it shows the hallmarks of the shortcomings highlighted above in relation to the exercise of the HMRC’s statutory discretion to forego the collection of tax. First of all, it confirms that Mr Hartnett, “as Permanent Secretary for Tax has the delegated authority on behalf of ExCom to decide on issues of disclosure of information”. Secondly, despite the fact that the objective of this is purportedly to advise ExCom as to the lawful exercise of the Commissioners’ statutory discretion, the note was not written by HMRC’s lawyers or signed off by HMRC’s General Counsel and Solicitor who is “responsible for all legal services to HMRC and for corporate governance”; instead it was written by lay officials in Central Policy and signed off by Mr Hartnett. Thirdly, although it is claimed that the “note and recommendation have been agreed with Solicitor’s Office”, there was no accompanying legal advice either from the Treasury Counsel consulted by the Solicitor’s Office or from the Solicitor’s Office itself. Despite these shortcomings there was sufficient scope to obtain the imprimatur of ExCom, Treasury Ministers and the Cabinet to what is essentially a fait accompli by Mr Hartnett.

4.26 Furthermore, it is conceded in the memo that the legal advice from First Treasury Counsel stated that HMRC’s functions extends to assisting the PAC with that oversight role such that relevant information can be disclosed to it by virtue of section 18 of the CRCA. However, the draft letter enclosed to the note (suggesting how Sir Gus O’Donnell should reply to Mr Leigh) did not include this detail. The draft letter is as follows:

Draft letter for Gus O’Donnell to send to Edward Leigh MP

Thank you for your letter dated 25 March 2009, copied to Lesley Strathie. I understand that the information to which you refer is information in respect of named or identifiable taxpayers. She and I have considered the points you make in your letter very carefully.

HMRC takes very seriously its duty to be as open and as helpful as possible to the PAC. However, the department is subject to statutory constraints on disclosure of taxpayer information which were approved by Parliament as recently as 2005 when the CRCA was passed enabling the merger of the Inland Revenue and HM Customs and Excise. Both Houses of Parliament were very concerned to ensure that the duty and tradition of keeping personal tax information confidential should not be eroded as a result of the formation of the new department.

You suggest that HMRC could disclose information about individual taxpayers to the Committee under the provision in CRCA, which provides an exception to HMRC’s statutory duty of confidentiality for disclosures in the public interest that are made on the directions of the Commissioners. However this exception applies only to disclosures of particular types of information for specific purposes, which are set out in the Act. None of these cover disclosures of the type the PAC is seeking. Dave Hartnett, as Permanent Secretary for Tax has the delegated authority on behalf of ExCom to decide on issues of disclosure of information.

It is HMRC’s established policy that information that does not enable individual taxpayers to be identified may be disclosed so long as disclosure is conducive to or expedient for HMRC’s functions. In line with this policy, HMRC officials regularly provide detailed statistical evidence to Select Committees, including the PAC, about (for example) tax avoidance by size of company or by industry sector. However, where taxpayer-identifying information is concerned, HMRC’s policy is that disclosure can only be justified if it is strictly necessary for HMRC’s functions.

An HMRC official who wrongly disclosed taxpayer information could be liable to criminal prosecution if they breached their duty of confidentiality. HMRC is advised that parliamentary privilege would not necessarily offer, as the offence is one of strict liability and as such it would only be necessary to give evidence of the fact of disclosure, not the content.

Within these constraints, HMRC seeks to ensure that the PAC has the information and evidence it needs to carry out its role, on behalf of Parliament and the taxpayer, of scrutinising and holding the department accountable. In order to be as helpful as possible, HMRC officials will continue to provide information to the PAC about its activities and results in respect of particular sectors or groups of taxpayers, in so far as that is possible without disclosing identities. HMRC assure me they will work with the Committee to try and meet any residual concerns Members may have in a way that does not undermine HMRC’s commitment to taxpayer confidentiality, or breach its statutory obligations, including asking taxpayers for their consent to disclosure where appropriate. I would commend to you this pragmatic approach, respecting the law and the PAC’s position and, at the same time, honouring HMRC’s responsibilities to its employees and the public.

I hope that you and the Committee will understand HMRC’s reasons for seeking to provide information requested by Members in a way that protects taxpayer confidentiality.

4.27 I am not in a position to confirm the content of the letter sent by Sir Gus O’Donnell to Mr Leigh but this draft letter is misleading on a number of grounds.

Sections 18(2)(a) authorises disclosure of the PAC

4.28 In broad terms, section 20 of the CRCA (which Mr Leigh had referred to in his letter) permits disclosures of information in six sets of specified circumstances such as preventing or detecting crime, national security, public safety, public health and the regulation of professions. The purpose of the provision is to provide explicit statutory cover for disclosures that were previously made by HM Customs and Excise in the public interest on the basis of implied. Thus a disclosure to the PAC would not come within the six sets of circumstances specified in section 20 but, as counsel advised, section 18(2)(a) of the CRCA authorises HMRC to disclose information to the PAC.

No credible possibility of criminal prosecution under section 19 of the CRCA

4.29 The draft letter claimed that “an HMRC official who wrongly disclosed taxpayer information could be liable to criminal prosecution if they breached their duty of confidentiality” and stated that “parliamentary privilege would not necessarily offer protection, as the offence is one of strict liability and as such it would only be necessary to give evidence of the fact of disclosure, not the content”. However, where a legal basis for disclosure exists (as in the case of a disclosure to Select Committees under section 18(2)(a) of CRCA), the general prohibition under section 18(1) will not apply, and following from this the criminal sanction under section 19 (which potentially applies where there is a breach of section 18(1)) will not apply either.

4.30 Indeed, there are further grounds why a criminal prosecution for disclosing information to a Select Committee is highly improbable. First, as explained in greater detail in the attached paper, the criminal sanction under section 19 CRCA applies to wrongful disclosure of taxpayer confidential information but not to HMRC’s official secrets, which the PAC requested. Secondly, section 19(3) provides a defence for a person charged with the offence to prove that he reasonably believed that the disclosure was lawful. Thirdly, section 19(5) and (6) provide that a prosecution for the offence under may be instituted in England and Wales only by the Director of Revenue and Customs Prosecutions or with the consent of the Director of Public Prosecutions and in Northern Ireland only by the Commissioners themselves or with the consent of the Director of Public Prosecutions for Northern Ireland.

4.31 In fact, there are no records of a prosecution for wrongful disclosure of tax information in the last 100 years because known breaches of confidentiality and official secrecy have either involved other elements of criminality (such as theft, corruption, fraud) or have been dealt with under the Civil Service Disciplinary Code. Therefore the possibility of the prosecution of HMRC’s Chief Executive, who “runs all aspects of HMRC’s business” and as the Principal Accounting Officer “is accountable to Parliament for the Department’s performance” (or any other official acting on her behalf) for disclosing information to the PAC is so remote that it is misleading to have raised the spectre of prosecution in response to Mr Leigh’s letter.

Refusal to provide information to the PAC in confidence

4.32 It would be recalled that Mr Leigh suggested (Q83) that the requested information could be provided to the PAC in confidence if HMRC could not do so in public session. This request was declined. This opportunity for confidential disclosure was also spurned in the draft letter. However, the Cabinet Office guidance - Departmental Evidence and Response to Select Committees - known as the “Osmotherly Rules” restates the Government’s commitment to being as open and as helpful as possible with Select Committees and emphasises that the presumption is that requests for information from Select Committees will be agreed to. If the problem lies with disclosing information in open evidence sessions or in memoranda submitted for publication, it requires Departments to consider whether the information requested could be provided on a confidential basis. These procedures for providing sensitive information in confidence states, amongst other things, that:

85. It is to the benefit of Committees in carrying out their task of scrutinising Government activities, and to Government in explaining its actions and policies, for sensitive information, including that carrying a protective security marking, to be provided from time to time on the basis that it will not be published and will be treated in confidence. Procedures have been developed to accommodate this.

86. When this arises, the Department should inform the Clerk that the information in question can be made available only on this basis, explaining the reasons in general terms. Such information should not be made available until the Committee has agreed to handle it appropriately, either by treating it wholly in confidence or by agreeing to publish it with a reasonable degree of sidelining (ie with the relevant passages omitted but with the location of the omissions indicated). It is important when submitting such information to make clear that the papers are provided in confidence and are not for publication. Information provided to Committees in confidence will be covered by Parliamentary privilege, and therefore will be exempt from release under FOI, but they will eventually be considered for release under the 30 year rule.

In cases of particular sensitivity, Departments may wish to register a wish to be consulted before release. It should be appreciated, however, that once evidence is given to a Committee, whether in confidence or not, it becomes the property of the Committee, to deal with as it thinks fit.

Clearer accountability recommended by Sir Gus O’Donnell

4.33 As explained above, Chapter 6 of the Sir Gus O’Donnell report that led to the formation of HMRC (Financing Britain’s Future: Review of the Revenue Departments, Cm 6163, HM Treasury, 2004) contained the following recommendations:

Clearer accountability to Parliament

6.37 For Parliament, there would be better clarity about who should be held accountable for which decision. As a result of this clarity, there will be a better opportunity to hold the relevant person to account.

6.38 In addition to appearances before the PAC, the Executive Chairman should be available to appear before the Treasury Select Committee (and other Select Committees as necessary) to account for decisions that his or her department has taken in exercise of their statutory duties, and for progress in achieving the PSA objectives and targets and Remits set for the Executive Chairman by the Chancellor. Ministers and Treasury officials will be primarily accountable for policy.

6.39 The Chancellor should usually ask the Executive Chairman to respond to:

MPs’ letters on matters relating to the administration of the tax system; and

written Parliamentary Questions relating to matters that are the Executive Chair’s responsibility.

6.40 As at present, there will be a Departmental Report presented to Parliament in the spring. The new department will also produce an annual report to Parliament, published in line with Government reporting requirements and timetables. As at present, the Executive Chairman will also be responsible for making a Trust Statement to Parliament, accounting for revenue collected, remitted and written off, and any necessary provisions on an accruals basis, along with a Statement on Internal Control.

Clearer accountability to taxpayers

6.41 The changes proposed in this review should help to bring the new department closer to its customers – taxpayers, tax credit recipients, the travelling public, and others. The new department will be more focussed on its customers because:

it should be more clearly established who is accountable to whom, for what, so taxpayers will have a better idea about who has taken which decision, strengthening democratic control;

central control of the new department will be more strategic, providing more autonomy for the front-line to tailor services to meet customer needs. ...

more performance data should be in the public domain, giving citizens more scope to exercise their rights under the Open Government Code of Practice and Freedom of Information.

6.42 Under Freedom of Information, the new department will provide transparency of information about the performance of different parts of the taxation system, allowing citizens to hold it to account, and in particular to judge when service standard commitments are not being met. It is already possible, for example, to see the performance of Inland Revenue Enquiry Centres on the Internet. The experience of other public sector organisations is that transparency helps to drive performance improvements, to some extent replacing the need for detailed central target setting and monitoring.

4.34 These policy objectives are given full effect by the information disclosure provisions of the CRCA. However, the draft letter referred to above does not reflect these objectives of clearer accountability.

Oral Evidence to the PAC on 16 November 2010

4.35 The implications of the non-disclosure policy of 2009 were thrown into sharp relief by the controversial Vodafone settlement and the dogged refusal by senior HMRC officials to provide information required to assure Parliament and the public that due process was followed in that case, purportedly for reasons of taxpayer confidentiality. The hearing before the Committee of Public Accounts on 16th November 2010 (Public Accounts Committee - Eighteenth Report HM Revenue and Customs’ 2009 - 10 Accounts) is very instructive and is set out in full below. HMRC witnesses were Dame Lesley Strathie DCB (Chief Executive and Permanent Secretary), Sarah Walker (Director, PAYE, Self Assessment and NI Contributions) and Jon Fundrey (Financial Controller).

Q192. Chair: I’m going to move us on to something else. We understand that you have to keep personal tax information confidential, but the tax affairs of companies, particularly publicly quoted companies, are available, one assumes, to their shareholders. I therefore have a slight question about why we cannot discuss them here. It is a question of principle. I am not trying to trip you up on this one, Lesley. I can understand that you don’t want to talk about my tax affairs to the Committee, but I cannot understand why we cannot have an open discussion about the tax affairs of a publicly quoted company in this Committee:

Dame Lesley Strathie: We went through this with your predecessor.

Chair: I know you did. I am quoting from a letter he got.

Dame Lesley Strathie: It is quite important in terms of working with companies to crystallise liabilities and to bring tax in. It is for the companies themselves to discuss whatever they choose to discuss, but it is inappropriate for HMRC—

Q193. Chair: But they do disclose them to their shareholders, publicly. All companies do.

Dame Lesley Strathie: But would they disclose the details of the settlement, or would they disclose to their shareholders what the number in their accounts was?

Q194. Mr Bacon: In the case of Vodafone, it disclosed to its shareholders that following the agreement that it had reached with HMRC it was not expecting to be affected into the future by tax in the particular matter of a controlled foreign corporation. So, it did go beyond the number, didn’t it, in the public domain?

Dame Lesley Strathie: But that’s for Vodafone. We did make a statement to which Vodafone gave us permission to add, which I can read if you want, but it has already been in the press.

Chair: I think that we’ve all seen that—it’s been in the debate. I don’t think that it will help us, given that we’re running out of time.

Dame Lesley Strathie: I would just like to reassure the Committee though, that ultimately the commissioners have to make decisions, and I am satisfied as the accounting officer that the proper processes took place here. I think that in the Court of Appeal this was a huge success for HMRC; this is revenue that could potentially have been forgone.

Chair: You’re discussing the individual case there. Ultimately, our understanding is that the accounts could be qualified by the National Audit Office if it found that there was a question mark over whether sufficient revenue was collected from Vodafone.

Q195. Chris Heaton-Harris: I was wondering whether you could extrapolate “crystallised liability” for me. I thought that if you were a corporation and you did something that was liable for tax you’d probably end up paying it. So, is it just an aspiration of HRMC to get that tax? Do you immediately start in a negotiating position? I’m slightly worried by the phrase “crystallised liability”.

Dame Lesley Strathie: What I was referring to was not the detail of the Vodafone case. The Court of Appeal decision last year confirming the compatibility of a controlled foreign company’s rules with EU law was an important success for HMRC. It paved the way for the settlement—that was the point that I was making—and it will pave the way for other settlements.

Q196. Chair: You can’t let us know the details of the Vodafone negotiations, but can you let us know how many companies you’re currently discussing—

Chris Heaton-Harris: Crystallising.

Chair: Crystallising, sorry—disputed outstanding tax with, where the sum exceeds £250 million?

Jon Fundrey: We intend to disclose in next year’s set of accounts significant litigation in cases that we’re going through, and we’re working with the NAO on what form of disclosure we can make.

Q197. Chair: How many? Can you tell us? They might not be in litigation. I never know. You might be negotiating outside litigation. How many companies are there that HMRC views at present as owing more than £250 million, and with which you’re in discussions through to litigation. How many?

Jon Fundrey: I don’t have that information to hand. I’m not sure that it would be appropriate for us to start disclosing the nature of that kind of case, but we are certainly—

Chair: No, we’re asking for numbers. We’re asking for numbers.

Jon Fundrey: But we certainly intend to disclose in next year’s accounts cases of more than £50 million that we’re currently going—

Q198. Chair: Well, can you let us have that figure now? No one is saying, “Vodafone, Vodafone, Vodafone”, but they are asking, “With how many companies are you in negotiation?”

Dame Lesley Strathie: I can offer the Committee a note in relation to that. We will give you the information that we can in terms of litigation strategy and the cases that we have in the pipeline. We’ll give you as much information as we can.

Q199. Chair: And can you also give us the information as to the quantity?

Dame Lesley Strathie: Yes.

Q200. Chair: Can I ask you one final question? Do you think that it’s appropriate that someone who left HMRC in 2007 should, within a couple of years, be negotiating with an ex-colleague to settle a dispute about debt? As the boss of HMRC, are you happy with that situation?

Dame Lesley Strathie: I’m not sure what you’re referring to.

Mr Bacon: John Connors. He was an HMRC director, and he now works for Vodafone on tax matters and was negotiating with HMRC about Vodafone’s tax liability, was he not?

Q201. Chair: Do you think that that’s appropriate?

Dame Lesley Strathie: I don’t know anything about that and it would be inappropriate for me to comment. I am very happy, if there are any issues on process, to take them back to the commissioners who dealt with this, and to our legal team.

Q202. Chair: I don’t think I am asking you a question completely out of the way. I don’t know a lot about it either. I just read what I read in the press. What hit me in the face was that in my view it is completely inappropriate to have a negotiation of quite a sizeable potential outstanding debt between somebody who was working for HMRC, who has now gone to work for the company, negotiating with an ex-colleague within two years. Ministers wouldn’t be allowed to do that.

Dame Lesley Strathie: All I can say is there has been a lot in printed media on this that is inaccurate. I can’t comment on that.

Amyas Morse: Before you pass on, the Chair very kindly paraphrased something that I said quite carefully, qualifiedly, earlier on. Since you said it on the record, Chair, I can’t let it go by. What I said was that there might be a case for qualifying on grounds of irregularity if it was seen that a decision had been made unreasonably. I did warn that I thought that that wasn’t very likely. I think I am repeating myself fairly accurately. Thank you.

Q203. Mr Bacon: Dame Lesley, may I just pursue this point? You raised the issue of the Court of Appeal case and the fact that that was a great success for HMRC, because it meant that your approach was compatible with European law and you could therefore continue to pursue people whom you deemed had a liability. Your litigation and settlement strategy is clear on that. Where you have a strong case you should seek full value from the settlement or take the matter to litigation. Where you have disputes that are of an all-or-nothing character—that is to say, it is merely a question of whether the law applies or not—such disputes should be settled on all-or-nothing terms. It goes on to say, “Do not split the difference or offer any discount for an agreement not to litigate”.

Your own controlled foreign corporation specialists believed in the case of Vodafone that the absolute minimum that HMRC should settle for was £2.4 billion. You have referred a number of times to the issue of process. The process that concerns me and may concern others is that, instead of the HMRC’s specialist in controlled foreign corporation law being consulted on the terms of a deal, it is done in private between your permanent secretary for tax, Mr Hartnett, and the company concerned—in this case, Vodafone—without the proper checks and balances that you would expect to see, or to ensure that the right advice from within HMRC, from those who knew about the details of controlled foreign corporation law was taken. That is the problem.

Dame Lesley Strathie: I don’t confirm any of that, Mr Bacon. I think it is quite important and I don’t believe that any decision was taken in private. There comes a point when the commissioners have to decide what the right course of action is in the circumstances that they are in. The director general for business tax was the accountable commissioner in the first instance here, and the business tax senior management team. The permanent secretary for tax is the second commissioner. Then we have counsel, overseen by our senior legal team. It would be absolutely wrong to suggest in any way that the permanent secretary for tax did some deal in private.

Q204. Mr Bacon: If I may continue for a minute. Going back to your point about processes, the issue is whether the people who knew what they were talking about with HMRC were consulted on the terms of the deal. That is a process point. It is a fact that the people who knew what they were talking about were not consulted on the terms of the deal.

Dame Lesley Strathie: You are now getting into detail. I would only say in a general manner: there is a huge tendency when people have worked on something for a very long time to hope that they will finally have their day in court. There are many cases that have gone back for years and years, where they have still delivered nothing. Eventually they are part of a settlement strategy.

Q205. Mr Bacon: Going back to your point, it is your settlement strategy that I was reading. It says: “Such disputes should be settled on all or nothing terms”. It is your settlement strategy that says on avoidance cases, “If our legal advice is strong, do not accept settlements for less than 100% of the tax and interest due”.

Dame Lesley Strathie: But wouldn’t that suggest to you that there was a number that was the tax liability due? That’s the last word that I’m going to say on the subject, or I am absolutely in danger of breaking taxpayer confidentiality.

Q206. Mr Bacon: I wanted to ask you about David Cruickshank from Deloitte. Who brought him in—HMRC, or Vodafone?

Dame Lesley Strathie: You read that in the papers. Again, I said you shouldn’t believe everything that you read in the press, Mr Bacon.

Q207. Mr Bacon: Who brought him in?

Dame Lesley Strathie: I don’t know that anybody brought him in.

Q208. Mr Bacon: It was Mr Hartnett who brought him in, wasn’t it?

Dame Lesley Strathie: I don’t know that he was brought in.

Q209. Ian Swales: My question is an extension of that one. It is to do with the control mechanisms. Who authorises such arrangements, especially the ones that fall between the public assessment, if you like, or the clear assessment that the staff would make, and litigation? In other words, what about those cases that fall in between? Incidentally, the Chair was asking for some data. I think it would be important to try and divide that between those cases greater than £250 million, where we think that there is litigation, and those greater than £250 million where we are in the period between assessment and potential litigation.

My real question is about the control system. Who can agree to those huge sums of money going up or down? What is the management control?

Dame Lesley Strathie: This is for the director general, business tax, and the senior management team. There then has to be another commissioner and we have to have legal advice. There is a considerable amount of process before we would ever get to an end result.

Q210. Ian Swales: So if you were in a discussion about potentially settling a case—I am not talking about this case, it could be any case—and a figure of £100 million was being bandied around at a meeting, who would ultimately say, “Okay, settle for that £100 million”? Would it happen before the settlement was made?

Dame Lesley Strathie: I wouldn’t use those words. If we are having a hypothetical case, then you are striving for the liability. What is the proven liability? Then you might settle for 100% of it.

Q211. Ian Swales: That would be the normal process. So you are saying that there are no cases that are settled differently? What Mr Bacon read out is the process—it is the liability or it is litigation. Is that the case?

Dame Lesley Strathie: Our job is to prove the liability, to serve that assessment and to collect the money.

Q212. Mrs McGuire: Do you feel that sometimes, the bigger the organisation and the bigger the company, the more opportunity they have to negotiate? My experience in some situations has been that HMRC is pretty unforgiving when it comes to smaller organisations and companies in pulling back tax or national insurance.

Dame Lesley Strathie: I think we have the same job to do for every customer—large or small business, or individual. I think that global taxation, particularly for foreign companies, is very complex. A huge amount of our work is in nailing down what we believe the law was intended to do and what applies for the UK to protect the UK tax base, versus what other people would contend. That is the huge challenge. Our job is to protect the United Kingdom’s tax base. Clearly, companies will have other drivers.

Q213. Mrs McGuire: So you don’t think that those who have privileged access, whether they are dealing with a national taxation issue or an international one, have greater opportunities to come to an arrangement, whereas smaller companies that find themselves in difficulty find it almost impossible to negotiate with HMRC in how they pay back money?

Dame Lesley Strathie: We have absolutely proven, with the introduction of the business payment support service during the recession, that provided people came to us and told us that they had a difficulty, we would put in place time-to-pay arrangements. We have demonstrated that, and we have greater compliance. We are keeping the business payment support service, now that we are out of recession, because it allowed many more companies to come into a compliance regime and be given time to pay. The return on that has been very high.

We have also demonstrated it in the PAYE reconciliation, where people had debts of more than £2,000. Provided that they come to us on receipt of that assessment we will give them up to three years to pay. We are applying the same for individuals and business customers. I don’t believe that anybody, just because they’re a large corporate, has the opportunity to come to an arrangement so far as liability is concerned. Any arrangement is around time to pay.

Jon Fundrey: To give you some sense of scale, we have in place 371,000 time-to-pay arrangements covering £6.4 billion, and 90% of them are paying.

Chair: Will you say that again?

Jon Fundrey: We currently have 371,000 businesses in our time-to-pay arrangements, covering £6.4 billion. They have time to pay, but we are also collecting in excess of 90% of that at the current rate. I am using those figures to demonstrate that we also look after the other end of the market.

Q214. Mr Bacon: Dame Lesley, you said that your job was to prove liability. Indeed, you had a Court of Appeal case that helped you in that. My belief is that having got that case on your side, you did not pursue things as strongly as you should have done.

Dame Lesley Strathie: On what basis do you say make that assertion?

Q215. Mr Bacon: On the basis that your CFC specialists believed that you could get more money than you did. My question is about forward agreements on tax treatment. They are unlawful, aren’t they?

Dame Lesley Strathie: I’m sorry, but I am not a tax specialist.

Q216. Mr Bacon: You can’t tell me if forward agreements on tax are unlawful?

Dame Lesley Strathie: No, but I would be very happy to find the information for you.

Q217. Mr Bacon: Sarah Walker, can you tell me if forward agreements on tax are unlawful?

Sarah Walker: I think you are talking about the sort of arrangement that Mr al-Fayed had?

Q218. Mr Bacon: Yes, that kind of arrangement.

Sarah Walker: Those were found to be unlawful.

Q219. Mr Bacon: Why are you still doing them with other companies?

Sarah Walker: That’s not my area; I am sorry I can’t answer that.

Mr Bacon: Mr Fundrey?

Jon Fundrey: Also not my area.

Q220. Mr Bacon: Vodafone said in its press release that it is not likely that CFC liabilities will arise in future, as a consequence of the likely reform of CFC rules due to the facts established in the agreement. My question is how can they arise now?

Dame Lesley Strathie: Perhaps you should ask Vodafone what it meant by its statement.

Mr Bacon: Perhaps we will.

Q221. Stephen Barclay: Following on from that, where there is a legal process, who has the authority to vary it? We heard from Richard about the Department’s guidelines. Who has the authority to vary them? Does it require your authority?

Dame Lesley Strathie: I go back to the point about the commissioners. There are six commissioners in Revenue and Customs, and they cover different areas, but on any decision there will be a minimum of two commissioners. We will ensure independence and governance of that. I would never personally be involved in any of these decisions. It would come up the line with the permanent secretary for tax.

Q222. Stephen Barclay: Sure, but we had an exchange at our last meeting about the vagaries of how accountability works and the role of the accounting officer. I want to clarify whether, as the accountable officer, you have to agree to variations.

Dame Lesley Strathie: My job as principal accounting officer is to account for decisions that are made and who made them. It is not for me to make those decisions. Why would I? I’m not a tax professional.

Q223. Stephen Barclay: So you don’t have to sign them off?

Dame Lesley Strathie: No.

Q224. Stephen Barclay: And how do you get oversight of potential conflicts of interest?

Dame Lesley Strathie: Well, I very much hope, first and foremost, that if there was a conflict it would be self-declared and, if not, that our legal team and our governance would pick that up.

Q225. Stephen Barclay: Right. That’s not something you would actually look at. You rely on people self-declaring conflicts of interest.

Dame Lesley Strathie: I have told you already that I have no role in the settlement of tax cases. Therefore, my job is to make sure that there is a process and that the process is governed. I expect the NAO to oversee that process also. I expect anyone in the permanent secretary or tax line to be working with the NAO on any of our approaches for that. In an organisation the size of mine, I can’t do everything personally.

Q226. Stephen Barclay: I appreciate that. One final thing. In terms of these firms always being major employers, one would understand there being other factors considered in terms of whether to pursue an aggressive strategy. Are you satisfied that this case was judged solely on the legal issues in dispute?

Dame Lesley Strathie: I have absolutely no reason to doubt that proper process was followed in this case.

Q227. Chair: It was followed?

Dame Lesley Strathie: Yes. I have no reason to doubt that at all.

Q228. Stephen Barclay: Were there no discussions with the company about impacts on jobs or other factors?

Dame Lesley Strathie: I am not privy to that. I am protected from the taxpayer’s confidentiality as well—just as Ministers are. The detail and the discussions are not something that I am privy to.

4.36 It is the case that section 18(2)(h) of the CRCA permits a disclosure of HMRC information which is made with the consent of each person to whom the information relates but as Ms Strathie is fully aware, section 18(2)(a) equally permits a disclosure which is made for the purposes of a function of HMRC. Clearly, a disclosure of information by HMRC’s Chief Executive qualifies as a disclosure for the purposes of a function of HMRC. In fact, as the particular exchange between Dame Strathie and the MP for South Norfolk shows, the information requested is not confidential information of Vodafone but HMRC’s official secrets. Such information is not protected by taxpayer confidentiality and would be subject to the provisions of the Freedom of Information Act. Thus the Osmotherly Rules require its disclosure to the PAC:

53. The central principle to be followed is that it is the duty of officials to be as helpful as possible to Select Committees. Officials should be as forthcoming as they can in providing information, whether in writing or in oral evidence, to a Select Committee. Any withholding of information should be decided in accordance with the law and care should be taken to ensure that no information is withheld which would not be exempted if a parallel request were made under the FOI Act.

Oral Evidence to the TSC on 16 March 2011

4.37 At the hearing of the Treasury Sub-Committee on 16 March 2011, Mr Hartnett, who has long been aware that HMRC can disclose information lawfully to relevant Select Committees, suggested that he had only just became aware of that fact. The following exchange with the MP for Hereford and South Herefordshire is instructive:

Q150. Jesse Norman: ... Mr Hartnett, do you think the continued public controversy over the Vodafone case has damaged HMRC?

Dave Hartnett: Maybe a little, Mr Norman. Can I preface what I want to say by saying that, before coming here today, I spoke at length to our lawyers because in the past we have normally, under taxpayer confidentiality legal strictures on us, refused to say anything about a particular taxpayer. I thought it might be helpful today if I could say something about the mistakes and misconceptions that are out there, because they are significant. I have legal advice that enables me to answer those questions, but I cannot answer detailed questions about the actual tax liability.

4.38 Furthermore, there was no indication from Mr Hartnett’s evidence as to the factors he had taken into account in exercising the statutory discretion conferred on the Department under section 18(2)(a) of CRCA to disclose information to the Committee on that occasion.

4.39 The subsequent evidence, much of which has since been contradicted by information available in the public domain is set out hereunder for completeness:

Q151. Jesse Norman: If the Chair is comfortable, I would be very interested in that. Thank you.

Chair: The Chair is always comfortable.

Dave Hartnett: Do you want to ask me some questions, Mr Norman?

Jesse Norman: No, if you have a prepared statement.

Dave Hartnett: I do not have a prepared statement but I have some notes for myself.

Q152. Chair: How long is it, David? We only have a couple of hours.

Dave Hartnett: Thank you, Chairman. I thought I might start with the £6 billion, if that was alright, because that seems to have captured the public imagination, but it is not a number we recognise. So I thought I would construct the £6 billion for you, very quickly—how we think it was constructed and why we think it is simply wrong.

The profits to which the £6 billion allegedly relates arose in Luxembourg from activities in Germany and Greece. The calculation is based on gross income, not on profit, so the calculation takes no account of non-taxable amounts—tax losses, overseas tax paid and all the things you would normally set off in getting to a tax liability. There are a lot of roundings and extrapolations in it, and there is no attempt at all to analyse the controlled foreign company legislation and look at exemptions. Our view is that the £6 billion is frankly—I hope this is not an inappropriate word—absurd, and that no serious or reputable practising accountant in this country, be it public sector or private sector, would be able to endorse it.

Q153. Jesse Norman: For the avoidance of doubt, it is much higher than the actual liability although you can’t discuss what the actual liability was?

Dave Hartnett: Vodafone put in the public domain the sum they paid, which we believe to be the actual liability, which is £1.25 billion. That is the real issue, Mr Norman, about the £6 billion. This is—may I repeat myself?—an absurd figure.

Q154. Jesse Norman: Is there anything you want to add?

Dave Hartnett: There are a few other things, if I can pick two or three things at random. There have been allegations, which we haven’t felt able to counter before, that Mr Connors of Vodafone and I met regularly and in secret to cook up the deal. At no stage during my involvement with Vodafone did I meet Mr Connors. I never wrote to him. I never received a letter from him. I never had a text from him, or an e-mail, or telephoned him or received a telephone call. We had nothing whatever to do with each other.

Secondly, I think there are allegations that I and my colleagues stood aside, experts and lawyers, in order to reach that settlement. Not true. We escalated the Vodafone matter to the very best people in our organisation, the director of our international division and one of her deputies, and our lawyers were involved throughout.

The third thing worth saying is that I think I have read somewhere that I brought Mr Cruickshank of Deloitte into the matter. No, not at any stage. Of course I know Mr Cruickshank, he is one of the country’s leading tax accountants, but I did not bring him into anything. We don’t do that.

Q155. Jesse Norman: On that point, do you mean that you did not bring him in, or he was not brought in?

Dave Hartnett: He came in, I think, at the request of the company.

Jesse Norman: So the company brought in Deloitte?

Dave Hartnett: Yes. We don’t do that.

Q156. Jesse Norman: He is someone with whom you have had no other relationship?

Dave Hartnett: No. Over probably 15 years in tax I have seen him on many occasions, on many different matters, because he is one of the country’s leading tax specialists.

Q157. Jesse Norman: He has advised HMRC?

Dave Hartnett: No. He has not advised us. He has always acted for taxpayers.

Q158. Jesse Norman: I understand. Thank you for that. Can you tell us how the case was settled? What was the procedure by which you settled the case?

Dave Hartnett: The director of our international division and her deputy began a negotiation with Vodafone and their advisors. When that stalled, I and another commissioner in HMRC became involved and negotiated a settlement with the chief finance officer of Vodafone.

Q159. Jesse Norman: So it was a negotiation. It was not what you thought they actually had to pay, it was what you were prepared to settle for.

Dave Hartnett: What we do most often, Mr Norman, is to negotiate the very best settlement we can. We had to balance out whether we were going to get more money for the country by litigating or more money by getting the right negotiation, and there were plenty of tax QCs in the UK lined up telling us and the media that we were not going to get a penny through litigation.

Q160. Jesse Norman: How many large business corporate tax avoidance cases have you litigated or taken to the Tax Tribunal in the last five years?

Dave Hartnett: Quite a lot. We protected through litigation last year—most of this number will be big business—about £6.25 billion. I am trying to find a list I have brought because I thought that it might be helpful. Can I just illustrate with one or two?

Jesse Norman: The number that you have taken to the Tax Tribunal is the question I really want to get to.

Dave Hartnett: I will have to let you have that in writing—the number to the Tax Tribunal. But we have, across all our tax litigation, about 10,000 cases in litigation at any one time.

Q161. Jesse Norman: But how many with what you might call your large business service? How many of those were litigated?

Dave Hartnett: I can’t give you a precise number but quite a lot of the 800 or so entities that are in there.

Q162. Jesse Norman: Were the procedures you followed on Vodafone ordinary ones for a case of this kind?

Dave Hartnett: There was nothing special about this case. It was worked by the most senior experts in the field, and two commissioners of HMRC.

Q163. Jesse Norman: Are they board members?

Dave Hartnett: Yes. It was me and the director general for business tax, and our lawyers were involved as well.

Q164. Jesse Norman: Was there any difference of view as to how the case should be prosecuted as between the board members and the team involved?

Dave Hartnett: Not once the case had been escalated. I think one or two of our colleagues—not working on the case but elsewhere in the department—felt that we should have said to everyone in the department how this case was progressing. When you think of the scale of it, this was incredibly market sensitive in terms of an amount of money, so we could not explain to large numbers of people how the matter was being dealt with, but it wasn’t dealt with differently from other cases.

Q165. Jesse Norman: In 2008, the Public Accounts Committee was very critical of the Revenue’s failure to charge penalties to big businesses when they understated their tax payable. The number was about £15 million and the Revenue promised to do better. How much better are you doing now?

Dave Hartnett: If better is in terms of amounts of money, the most recent year has been a lot less than that but the crucial issue is that in order to collect a penalty, there has to be at the very least a failure to take reasonable care. Most of the issues we resolve with big business in the UK are very significant differences of view on technical aspects of taxation, and we cannot charge a penalty in relation to those.

Q166. Jesse Norman: The actual number is that six penalties were charged—

Dave Hartnett: I knew it was small.

Jesse Norman: —in 2009_10 for a total of £442,000, which was one one-hundredth of 1% of the tax that was under declared, which I have to say strikes me as a lamentable failure. It seems to me that it isn’t better than you promised to do in 2008. It feels a lot worse. What is the equivalent percentage of tax under declared for small business?

Dave Hartnett: I don’t know precisely, Mr Norman, but there is a fundamental difference. Small business in the UK makes up about 50% of the tax gap; big business makes up less than half of that. We have more evasion in small business than we do in big business. In fact I cannot remember—maybe if I went away for a couple of hours I could think of something—seeing a case of evasion in very big business in the recent past. The crucial issue—

Q167. Jesse Norman: Could you repeat that? You cannot remember having seen a single case of evasion by big business?

Dave Hartnett: It is mostly avoidance, Mr Norman.

Q168. Jesse Norman: I find that extraordinary, I must say. Okay. The equivalent rate for small business is about 200 times the rate for the large business service. If you fiddle your tax credits you go to jail, if you do it in a systematic and fraudulent way. Why are you so much less tough on big business?

Dave Hartnett: I don’t think we are less tough on big business. We will take penalties from big business—

Q16.9. Jesse Norman: It is 200 times lighter, the amount they pay relative to the tax that is under declared. That feels like pretty unequal treatment to me.

Dave Hartnett: What we have to measure is the incidence of at least failure to take reasonable care, or worse, and that incidence is higher in small business than it is in big business.

Q170. Jesse Norman: So just to round off, the situation is that you barely fine big businesses who underpay their taxes. You say you take them to the Tax Tribunal but I would be interested to see the numbers on that. Do you think you are offering a credible threat to big business, in line with HMRC’s stated objective of charging people the right amount of tax and collecting it?

Dave Hartnett: I do, because looking at the intervention yield, which I think Mr Clasper referred to earlier on, over the last four years we have increased that in relation to big business by more than 25%. If I look at the list of cases we have taken to the Tribunal—this is all public domain information. Firstly, the Prudential in relation to tax-efficient off-market swaps was a very large avoidance case, which we have won. There were 30 other major companies behind that. They were not named but they funded, in part, the running of that case, so it was not a single case. We are still considering for some of those whether there is a penalty position.

If I go back to the £15 million you mentioned earlier on, I happen to know one element of that £15 million rather well, and a large part of that £15 million was one case.

Q171. Jesse Norman: In other words, when you can levy a good fine you do it?

Dave Hartnett: Absolutely, and the advice we get from the private sector is that a big fine puts senior officials in big companies in serious jeopardy, and that is a very big deterrent.

Q172. Jesse Norman: It does raise the question why you do not do more of it to more companies, given that when you do it, you can raise a reasonable sum?

Dave Hartnett: Every time we settle an issue, Mr Norman, we look at the penalty position and if necessary we take legal advice; sometimes external legal advice.

Q173. Jesse Norman: Do you think you have adequate transparency in the derivatives profits made in the big banks—as to the tax creep of those?

Dave Hartnett: Well, it has improved, very significantly. It has improved through the code of tax for banks that we drew up. The top 15 banks and another 190, roughly, have now signed up to that. Transparency is a key part of it, and we are monitoring that transparency very carefully. With a number of the biggest banks we now work in real time.

If I can turn your question ever so slightly; do we necessarily understand all the derivatives? Maybe not as quickly as I would like.

Jesse Norman: We know that in many cases, they do not understand the derivatives so that is not very surprising.

Q174. Mr Love: Can I just come back to Vodafone briefly? How would you explain the widespread reports in the newspapers that Vodafone had set aside double the amount of tax that they actually paid? How did it come about that they estimated it much higher than you did?

Dave Hartnett: I don’t know how they made the estimation, Mr Love, but we frequently see very conservative provisioning in relation to tax; very conservative provisioning indeed, where it is massively more than the sum of money we could possibly collect under the law. We did not collect a penny less from Vodafone than we thought we could.

Q175. Jesse Norman: That cannot be true because you have already said you negotiated. So you had an ambition for how much you wanted to take from Vodafone, which was thwarted by the company and then you went into a negotiation. So what you have just said cannot be true.

Dave Hartnett: No. Mr Norman, with respect, I don’t think I ever said that I had a figure. We looked at the position; we did our calculations during the negotiation and we reached what we thought was the right number.

Q176. Mr Love: You indicated earlier that all the tax lawyers were telling you that—

Dave Hartnett: Half of them, Mr Love. Sorry.

Mr Love: Well that is a slightly different impression than you gave originally, but the overwhelming view of those in the know was that you could not go to litigation. Vodafone would have known that as well. Are you seriously asking us to accept that Vodafone would have made a greater estimate than you about what their tax liability was?

Dave Hartnett: My experience, Mr Love, is that happens regularly. If I can go to another matter, far enough away, to illustrate the point, I remember that we were pilloried in the media some years ago for not collecting every penny of tax under a provision. We couldn’t get there. In law we could not reach the provision. But I think I ought to make way for Mr Clasper.

Simon Bowles: If I may come in, just by way of introduction I have spent 30 years in the private sector, many years as a finance director in public companies, so it has been my practical experience that faced with a tax liability, one would try to be as conservative as possible because what you don’t want is two surprises: first that you make a provision and secondly, you discover you haven’t put enough aside and there is another shock coming. So my experience very much echoes what Dave has described.

Mr Love: So the headline for tomorrow is, “Vodafone got it wrong; they are even more incompetent than HMRC”.

Chair: David, do you want to come in in this area?

Q177. Mr Ruffley: Thank you, Mr Chairman. Can I say, Mr Hartnett, that I think your opening statement has been very helpful to Mr Mudie’s sub-Committee.

Can I just get one thing straight? You described the £6 billion figure in relation to Vodafone as an absurd figure, and I take it that you are saying that £1.25 billion was—did you use the words “real liability”?

Dave Hartnett: I don’t remember using those words.

Q178. Mr Ruffley: What was the £1.25 billion? How did you characterise that?

Dave Hartnett: It was the actual amount of money for which the matter was settled. It was our largest ever cash settlement.

Q179. Mr Ruffley: You are saying the £6 billion was absurd and you suggested that was because it was a gross income figure, and did not take account of exemptions under the Act or any other write-offs or losses, so that—

Dave Hartnett: Yes.

Q180 Mr Ruffley: Okay. Just so I understand that.

I take your point that you are trying your best. I certainly don’t suggest—like some rather cruel commentators—that you have sold out to big business. I am not going to be as populist as that, but I have to say that some facts suggest that there is huge disquiet on the part of technicians in HMRC.

Oral Evidence to the TSC on 11 May 2011

4.40 The lack of transparency in the rationale for HMRC’s exercise of its discretion to disclose information to Parliamentary Committees was highlighted at the hearing before the Treasury Sub-Committee on 11 May 2011, particularly when the MP for Streatham questioned HMRC’s Acting Director-General for Personal Tax about the Goldman Sachs settlement:

Q408. Mr Umunna: Minister, before I move to Mr Banyard, because I have a couple of questions about a case of record, I noticed in the answer that you just gave that you said that you weren’t consulted in relation to settlements in advance of them being made. Do I take it from that answer that after settlements come to perhaps the public’s attention, you do then ask questions? There have been a range of written questions and answers, and also oral ones with, for example, the Member for Haltemprice and Howden, about this. Do I take it that you take an interest after the settlement and ask questions?

David Gauke: Yes. HMRC will not and cannot provide to me information that is not in the public domain. But as I was saying earlier, I have regular conversations with senior HMRC staff and I would need to ensure that I am comfortable or that we can be comfortable with the position that has been taken within the constraints that exist, which are significant. So I have not sat down and had someone talk me through the Vodafone settlement, but nonetheless I, as you would expect, I would seek reassurance on the governance here and ensure that there is nothing that strikes me as being unusual or wrong.

Q409. Mr Umunna: I will come back to you. Mr Banyard, can I just ask you about a case which has been reported, because it was heard in open court, and that relates to Goldman Sachs. For a 26-month period in the late 1990s, that investment bank set up an offshore vehicle to pay bonuses to their London bankers, and under the arrangement London staff who were employed by that vehicle were seconded to the London offices and essentially were employees and worked for Goldman Sachs’ headquarters here. That arrangement was subject to proceedings which were brought by—well, which occurred between HMRC and Goldmans that started in and around December 2002 and continued through to the end of 2009, because HMRC was concerned that this arrangement was being used to avoid the payment of national insurance. Now, all that I have just said is a matter of public record and has been heard and discussed in open court, and there are various judgments in the interlocutory hearings which have formed parts of those proceedings online. Are you familiar with those proceedings?

Stephen Banyard: I am not particularly familiar with them, but the settlement terms are not in the public domain and I couldn’t comment on them here.

Q410. Mr Umunna: I am aware of that, and you will note that I have not asked you anything about the settlement terms. I have just asked you about the case so far. Just in terms of the arrangement that was the subject of those proceedings, which was an employee benefit trust, those were in operation in a number of other companies at that time. You, HMRC, also brought proceedings against them in relation to those arrangements, and again, all of those proceedings are a matter of public record. Now, you will note I have not mentioned the companies, I have not even cited the proceedings, but you will agree, or perhaps you could confirm that what I have just said is correct?

Stephen Banyard: We have taken settlement agreements, or we have worked on EBT with other companies, yes.

Q411. Mr Umunna: With respect to those companies, and these were companies with whom you had similar proceedings at around the same time as Goldmans, you successfully litigated those proceedings and settlements were reached in or around 2005, which secured the full payment of national insurance. Again, I have not named the companies and I have not cited the proceedings. I simply asked you to confirm that what I have just said is correct.

Stephen Banyard: I believe so, but I would need to look into it in detail.

Q412. Mr Umunna: Okay. However—and again, this is a matter of record, because it is all in the Goldman’s interlocutory hearing I have just referred to—Goldmans refused to play ball over EBTs and so the proceedings in relation to them carried on for another four or five years. Again, that is all a matter of public record. I suppose this is a matter of public record, but you may or may not wish to comment on it, but the intention was in that case for Goldmans to use the EBT vehicle to avoid national insurance contributions in the sum of £23 million through a complex share purchase arrangement and, as it stood at the end of 2009, there was around £10.8 million worth of interest owing in addition to that. So we are talking around £40 million. Are you able to confirm any of that?

Stephen Banyard: No.

Q413. Mr Umunna: Could you perhaps tell us why, or could I perhaps invite HMRC to clarify what happened in that case, because there have been details of the settlement or leaked details in the media in relation to this particular issue. You will understand that insofar as the public is concerned and the people we represent are concerned, they would expect large corporates and wealthy individuals to be required to contribute to the Exchequer and meet their tax obligations in the same way as everybody else. Now, when your colleague, Dave Hartnett, has appeared in front of us before, and was, I think, questioned by Mr Norman in relation to the Vodafone case, obviously a view was taken within the organisation that there needed to be clarification to assure the public as to what the terms of that arrangement were. Now, in relation to Goldmans, there are serious allegations which have been made in the media in relation to HMRC settling this case and also in relation to Mr Hartnett in particular. Would you consider as an organisation publishing or providing to us information about that case so that the public can be assured that the proper procedures have been followed?

Stephen Banyard: I think the sensible thing would be for us to take that away and write to you.

Q414. Mr Umunna: Could you perhaps just tell us—Mr Ruffley asked about the people who decide upon the settlements—just a bit about the process and the procedure involved in deciding whether to settle such cases?

Stephen Banyard: I am not a member of the high-risk corporates programme, so I don’t have first-hand knowledge of it. The settlements are settled at a level appropriate to the size and the complexity of the case and the precedent value. It might be at director level, director of a large business service, it might be more senior, depending on the size and the severity of the case. The processes followed are laid down. I can’t personally tell you what they are here, but again, we could let you have a note which would tell you how we go about that.

Q415. Mr Umunna: Could you also tell us in relation to the particular case that I have raised whether the internal procedures were met in relation to the Goldman’s settlement?

Stephen Banyard: We could do that in the letter as well.

Q416. Mr Umunna: Thank you very much. Finally, can I just ask you, Minister, going back to the answer you gave me before in relation to taking an interest in matters that have arisen after settlement, because they become an issue of public interest, are you aware of the subject that I have raised this afternoon?

David Gauke: I am aware that there are a number of press reports and press comments.

Mr Umunna: That wasn’t the question I asked.

David Gauke: On this specific one, I have to say I have not had any specific conversations with HMRC staff about this particular matter. I have not—

Q417. Mr Umunna: So you are not aware of it?

David Gauke: I think I am aware of issues with regard to Goldmans along these lines, but this is not a subject matter which I have discussed with HMRC senior management.

Q418. Mr Umunna: Minister, you said that you speak regularly—almost every day, it would seem—to HMRC officials, including Mr Hartnett, who appears to, according to the report, have settled this case. Given that it is a matter of public interest and you meet regularly with the HMRC personnel I have just cited, why haven’t you asked any questions about this particular case?

David Gauke: I have discussed with HMRC the general governance and the arrangements as far as settlements are concerned with large corporates. I have had discussions that have been about the governance with regard to Vodafone and in advance of Mr Hartnett speaking to this Committee earlier in this year. I was aware that he was going to set out further details to this Committee, but I don’t see it as my role to discuss each and every case just because there has been a press report critical of HMRC in that, as long as I am satisfied that the general approach taken by HMRC is the appropriate one.

Q419. Mr Umunna: But isn’t that a slight contradiction, because you did take an interest in Vodafone, you did ask questions about that, because it was a matter of public interest, and presumably—if you will let me finish—politically sensitive? I would say the same characteristics apply to the Goldman case. You have just confirmed you are aware of this and you are aware of these reports, yet you don’t seem to have asked any questions in particular about this politically and publicly sensitive topic when it has come to your recent conversations with HMRC officials, one of whom has been named in connection with that particular case.

David Gauke: I am conscious that a lot of allegations seem to be made on the basis of little or no evidence, as far as I can see. I also made the point that within the constraints that exist as far as client confidentiality is concerned I don’t expect—indeed, I am not entitled—to be talked through details that are not in the public domain. I do have an interest in ensuring that the overall governance is correct, there is nothing that appears to be out of place, and I do that in a generic case, but I think it would be fair to say that on Vodafone, which has been a particularly high-profile case, I had further discussions, but again, no specific information was provided to me. Of course, in the Vodafone case there were more details that were in the public domain, but I am not in a position to comment on specific cases.

Mr Umunna: But you have said that part of your job is to scrutinise and I would argue although you don’t have operational responsibility for what happens at HMRC, insofar as the public is concerned, they will want to know that you are ensuring that there isn’t one set of rules for wealthy individuals and very large corporates and investment banks and another set of rules for everybody else.

David Gauke: Of course, but as I say, we have the NAO that is looking at the governance in this area. They are able to do that to a considerable degree of depth and we await their report in July.

Mr Umunna: Thank you.

Written Evidence to the TCS on 15 June 2011

4.41 The response promised by HMRC is contained in the written evidence dated 15 June 2011:

6. Q413: Mr Umunna: Now, in relation to Goldmans, there are serious allegations which have been made in the media in relation to HMRC settling this case and also in relation to Mr Hartnett in particular. Would you consider as an organisation publishing or providing to us information about that case so that the public can be assured that the proper procedures have been followed?

7. Q415: Mr Umunna: Could you also tell us in relation to the particular case that I have raised whether the internal procedures were met in relation to the Goldman’s settlement?

HMRC has carefully considered the extent to which they can answer the questions asked and have concluded that they cannot give any information, for reasons of taxpayer confidentiality.

4.42 This terse written evidence is a clear breach of the Osmotherly Rules, which states that:

68. The Government is committed to being as open and as helpful as possible with Select Committees. The presumption is that requests for information from Select Committees will be agreed to. Where a Department feels that it cannot meet a Committee’s request for information, it should make clear its reasons for doing so, if appropriate in terms similar to those in the Freedom of Information Act (without resorting to explicit reference to the Act itself or to section numbers). If the problem lies with disclosing information in open evidence sessions or in memoranda submitted for publication, Departments will wish to consider whether the information requested could be provided on a confidential basis.

4.43 It is instructive that there was no explanation as to why the written evidence of 15 June 2011 differs from the oral evidence given by Mr Hartnett to the TSC on 16 March 2011. There was no indication whatsoever as to the factors taken into account in arriving at the decision not to disclose information on this occasion. There was, once more, a misleading use of “taxpayer confidentiality” to withhold information as to whether the internal procedures were met in relation to the Goldman’s settlement – information that is not confidential information of Goldman Sachs. It would appear that HMRC has abused its statutory discretion on the disclosure of information.

4.44 In the Fleet Street Casuals case, Lord Scarman explained that the Revenue is subject to the writ of mandamus (now mandatory order) to compel performance of a public legal duty on all occasions where the law has established no specific remedy, and where in the interests of justice and good government there ought to be one. He said (at page 175):

It has ... been recognised by the judges as a remedy for certain forms of abuse of discretion, upon the principle that the improper or capricious exercise of discretion is a failure to exercise the discretion which the law has required to be exercised: see Lord Mansfield C.J. in Reg. v Askew [1768] 4 Burr 2186 at pages 2188-9, and, in modern times, Padfield v Minister of Agriculture, Fisheries, and Food [1968] AC 997.

4.45 Thus if any member of the public can approach the High Court of Justice to compel HMRC to exercise its statutory discretion to disclose information necessary for its duty of accountability a fortiori the High Court of Parliament that conferred the discretion on HMRC in the first place should be able to compel it to disclose this information. The powers of Select Committees to send for “persons, papers and records” relating to their field of enquiry are unqualified and authorise the PAC and the TSC to do this.

Oral Evidence to the TSC on 12 September 2011

4.46 Nevertheless, the Select Committees have continued to deal with HMRC with utmost good faith which has not been reciprocated by the Department’s leadership. On 30 July 2011 Treasury Committee published a report (Administration and effectiveness of HM Revenue and Customs Sixteenth Report of Session 2010–12 HC 731) which stated:

159. A particular source of controversy has been HMRC’s settlement of large tax cases involving corporations. Allegations have been made in the press that cases have been settled inappropriately for a lower yield than might have otherwise been achieved. We pressed HMRC witnesses and the Minister on whether the appropriate processes had been used in two high-profile cases. Dave Hartnett, the Permanent Secretary for Tax, vigorously defended the procedures that had been used to achieve a settlement with Vodafone and argued that figures cited in the press lacked credibility. HMRC said they were unable to comment in relation to another high-profile case for reasons of taxpayer confidentiality....

160. We are not in a position to judge whether individual cases were settled appropriately or not. Nor are we challenging the need for taxpayers’ affairs to be kept confidential. However, the sums involved in some of these cases are enormous. ...

161. The National Audit Office has undertaken work on HMRC’s procedures for resolving large tax cases, whilst the Committee of Public Accounts has already recommended that “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”. ....

163. The public needs to be assured that cases involving large sums of money are being settled correctly. Equally it is unfair on HMRC staff and damaging to public confidence that the Department can be the subject of repeated allegations it cannot refute, even if they are groundless. We agree with the Committee of Public Accounts that HMRC should consider how the accountability and transparency of the settlement of large and complex tax cases might be improved. We are taking further evidence on how this might be achieved.

4.47 However, despite this repeat by the TSC in July 2011 of the recommendation by the PAC in February 2011, at the hearing before the TSC on 12th September 2011 (Administration and effectiveness of HMRC: closing the tax gap), HMRC maintained its unlawful policy of non-disclosure and deliberate misrepresentation. The following evidence speaks for itself:

Q691. Jesse Norman: Mr Hartnett, the NAO talks about governance errors. What is a governance error? What does it mean in this case?

Dave Hartnett: A governance error is where there is a process to oversee-I think in the context of the NAO, you are thinking of settlement of an investigation-and that governance does not happen in line with our processes.

Jesse Norman: We are now back in Sir Humphrey world.

Dave Hartnett: I am not.

Q692. Jesse Norman: Perhaps you could be a little bit more explicit as to why the governance has not, in some case referred to by the NAO, gone in accordance with your processes. What does it mean to say that it has not gone in accordance with your processes, and why has that happened?

Dave Hartnett: I think there are two cases that the NAO identified. There was one where a settlement was approved without the whole of the High Risk Corporate Programme Board being consulted before the taxpayer was told that the case was settled. In another, we reached a conclusion on an issue, not realising that an impediment to full application of the relevant law no longer applied and that the official responsible for taking that to the High Risk Corporate Programme Board did not initially realise that was necessary. The governance worked very well, because the High Risk Corporate Programme Board identified that issue.

Jesse Norman: I have certainly misunderstood what you have just said. In the second case, what happened?

Dave Hartnett: In the second case, there was a misunderstanding of a particular aspect of the law.

Jesse Norman: Of the law?

Dave Hartnett: Of the law. There had been an impediment, which had prevented the law being applied in a particular way, and the individuals involved in the case did not realise that that impediment had been removed.

Q693. Jesse Norman: So they could have got more if they had not thought the impediment was there. Then it was discovered the impediment was there, and they then went and got the extra.

Dave Hartnett: In this particular case, the matter was referred to the High Risk Corporate Programme Board later than it should have been-only by days-because the individual responsible for the case did not realise it had to go there.

Q694. Jesse Norman: In the first case, where the board was not consulted-

Dave Hartnett: Not fully consulted.

Jesse Norman: Not fully consulted. What is the problem with that? Why is that an error of governance?

Dave Hartnett: Because we have a process laid down, and it was not fully followed.

Q695. Jesse Norman: I suppose I am asking why the process is the way it is. What problem is the process designed to guard against?

Dave Hartnett: The process is designed to ensure that for cases under a particular amount of money, there is a broad oversight among our tax leaders of a proposed settlement.

Q696. Jesse Norman: In other words, you do not want individual people going off and striking a settlement unless it has been properly shared. You do not want people running off and doing private deals.

Dave Hartnett: Absolutely.

Q697. Jesse Norman: Were you personally involved in doing this particular deal?

Dave Hartnett: The one that was not approved by the whole-

Jesse Norman: Yes.

Dave Hartnett: No.

Q698. Jesse Norman: That is helpful. Are we talking about the Goldman Sachs deal, just so I understand?

Dave Hartnett: Mr Norman, you know I cannot answer that.

Q699. Jesse Norman: Okay. There has been a deal done with Goldman, I think I am right in saying, in which they were-

Dave Hartnett: I am really sorry, but I cannot talk at all about a specific taxpayer. To make sure I could not do that, twice in the last 10 days, I have been to see our most senior lawyers to see whether there was anything I could say about the newspaper reports on this, and they have said no.

Q700. Jesse Norman: Take the case we are talking about. The error has now been put right, is that correct?

Dave Hartnett: Mr Norman, there is huge speculation that the case referred to in the NAO report is Goldman Sachs, and my legal advice says I cannot say anything that adds to or detracts from that speculation.

Q701. Jesse Norman: My last statement was not intended to be dispositive either way on that; it is just a question, which is: if there was a governance error, has the error been corrected, regardless of who the institution or not may be?

Dave Hartnett: I am very sorry, but because of the huge media speculation that that second case is Goldman Sachs, I am unable to answer any questions. I do not want to be difficult with the Committee. I knew this would arise, and colleagues and I got legal advice to see what we should do.

Q702. Jesse Norman: While we are on the issue, which you do not want to talk about and I do, have you ever had corporate hospitality from Goldman Sachs?

Dave Hartnett: I have been to a supper with Goldman Sachs. I would not call it corporate hospitality from them. I went with a managing director from the Treasury to talk to about 20 chief finance officers from FTSE 100 companies about developments in tax policy and tax administration.

Q703. Jesse Norman: Was any dispute with Goldman outstanding while you had this experience?

Dave Hartnett: I knew nothing of Goldman’s tax affairs when I was at that supper. I do not deal with Goldman’s tax affairs.

Q704. Jesse Norman: That is a helpful clarification. By extension, I assume you cannot talk about Vodafone, although we had a conversation about Vodafone when you were last in front of the Committee?

Dave Hartnett: The advice I had then was that because there were a lot of non-issues in the media, I could correct those, and that is what I sought to do.

Q705. Jesse Norman: That is helpful. One of the questions that has been put about the Vodafone settlement is that the Treasury never collected the interest owing on the tax that was payable. I forget if you addressed that issue last time; did it in fact collect the interest that was payable on the tax that was owing?

Dave Hartnett: I am in the same place again, Mr Norman. Can I just say, I would really like to answer these questions for the good of our Department and to make clear my own position, but your interim report in July made clear that the law really does not allow us to defend ourselves when it comes to having to talk about individual taxpayers?

Jesse Norman: I am not seeking to attack you or anyone else. I just need to get the facts straight.

Dave Hartnett: I understand that.

Q706. Jesse Norman: For the record, you cannot clarify whether or not interest was charged on the tax that was payable. Let me ask another question: does the law require that interest be paid on tax that is owing?

Dave Hartnett: Depending on the circumstances, yes.

Q707. Jesse Norman: What kinds of circumstances would release HMRC from this obligation?

Dave Hartnett: Let me try to give you an example, which I hope is helpful. One of the areas where we have not sought tax-I am just trying to find a note I wrote to myself on this-is in relation to certain controlled foreign companies, where following a change in the law on the taxation of overseas dividends in 2009, so that the majority of dividends paid by overseas companies were no longer taxable, we looked again at how certain exemptions applied. We discussed this with our own lawyers, other lawyers, and business extensively, and developed something called the new approach to CFCs. We consulted widely. This applied to the motive test in relation to the CFCs, so that where a company pays a dividend now-post-2009-and elects to be taxed on it, and is therefore regarded as passing the motive test, no interest arises on that. I am sorry that is rather complicated. We can set it out in a letter, if that helps.

Jesse Norman: That would be helpful, if you would. I am grateful for that offer and I accept it. Just to be clear, circumstances under which interest might not legally be required to be paid on tax owing are of the kind you describe.

Dave Hartnett: There are others.

Q708. Jesse Norman: In the case of Vodafone, this interest had been long-standing for a very long period of time, much later than 2009. It is absolutely opaque as to why the treatment of dividends would have any bearing. I suppose that may have been the cause of the tax that was owing?

Dave Hartnett: I am feeling, Mr Norman, as though I am thwarting all your questions, but I cannot answer questions on Vodafone. I am very sorry.

Q709. Jesse Norman: When you last came before us, you said that, in terms of avoidance, some £6.2 billion had been protected through litigation, and I subsequently had a letter from Dame Lesley suggesting a list showing £6.5 billion. Something like just under £6 billion of that was from fighting group litigation challenges. Only about £100 million was on corporation tax avoidance cases. That is £100 million out of the £6.2 billion. In the list of legal decisions that I was sent, just seven cases had been taken to the tribunal since 2000. My question is: can that really be a decent response to issue of corporate tax avoidance, amounting to evasion?

Dave Hartnett: I think, Mr Norman, the first thing I would like to do is look at the analysis of those numbers, because one case-we mentioned it at the last hearing, so it is in the public domain-Prudential, which is about off-market swaps, has produced about £1 billion through the immediate case and the 30 or so following cases. The analysis you have given, which I have not made for myself, so I cannot really comment on now, is not right, in terms of the money that has flowed from some of those cases.

Melanie Dawes: Can I add, Mr Norman, that on corporation tax, we also have a lot of other cases with large businesses that are following on from some of those cases? On VAT, it is more usual to find that each case has to be heard on its own merit, so you will find that there are often a lot of other companies standing behind what may appear to be quite a small number of cases but actually involves quite a large amount of tax.

Q710. Jesse Norman: Thank you for that. You will know from previous discussions that I feel very strongly about the high penalties being imposed on small business, and the small penalties being imposed on large business. My colleague, Mr Blenkinsop, raised the question earlier about percentages being charged in penalties and, of course, when you have a negotiated settlement, almost by definition there is no standard compared to which you can charge penalties, which build in a bias in favour of large companies, who can negotiate their terms of settlement, and against small companies.

However, the Revenue is occasionally successful in these cases, and here is an example: Prudential had a scheme involving deliberate mislabelling of payments in order to arrange a tax break. In that case, there was no penalty charged at all, as far as I am aware, but there are countless cases-every constituency has them-involving small businesses in which HMRC is relentless in chasing large penalties on small business. I am just wondering why you are not charging penalties in cases like Prudential’s. In 2008, you told the House that penalties from large businesses would increase, but in fact they have gone down, haven’t they?

Dave Hartnett: Yes, they have.

Q711. Jesse Norman: Why should that be? That seems to me a pretty poor outcome.

Dave Hartnett: We did touch on this at the last hearing.

Jesse Norman: Let us talk about Prudential then. We do not need to expand on the point; I have made the point about the drop in paying penalties.

Dave Hartnett: Our people will have looked incredibly carefully at every case that we have litigated and won that involves avoidance, or that we have settled, to determine whether the law allows a penalty to be taken. Forgive me, but I do not have the transcript of last time with me; however, one of the points that I know Mr Clasper wanted to make-I cannot remember whether he made it-is that evasion in large business, or dishonesty in relation to taxation, is something that we do not see very often; I certainly made the point first. In order to take a penalty from large business, we have to find that the law can be applied. With smaller business, there is more often dishonesty, or-

Jesse Norman: There is more often provable dishonesty. If someone goes into a negotiation with you with a bunch of numbers that they just want to get away with, and you make your way to a negotiation, it is hard to prove dishonesty, although they may have started miles away from where you were, in terms of negotiation.

Dave Hartnett: We do search out for dishonesty and our investigators are very good at it. Over the years, we have often asked our criminal investigators and other specialist investigators to take up an inquiry into big business avoidance and search out the dishonesty.

Q712. Jesse Norman: The Prudential case is a counter-example to that. I have here a copy of the legal report: “HMRC win on ‘mis-labelling’ (Tax newsflash, June 2009)”. It says that the Court of Appeal affirmed the judgment on the Prudential issue in favour of HMRC. You win the case; where is the money? They should pay the penalty. The Court of Appeal has found for you in this. It seems cut and dried that penalties should be paid. These people have attempted to get away with not paying, and they have been found out.

Dave Hartnett: I am afraid, Mr Norman, that all our legal advice is that winning in the Court of Appeal is not enough for us to be able to take a penalty.

Q713. Jesse Norman: Is that because you fear that it may go to the Supreme Court, or is it because you simply regard a Court of Appeal judgment, uncontested or unreferred successfully, to be an insecure basis for charging a penalty?

Dave Hartnett: No. A decision by the Court of Appeal, or indeed the Supreme Court, is not of itself enough to bring the case within the legislation that leads us to be able to charge a penalty.

Jesse Norman: I would be very grateful if you could have someone write to the Committee on that. It seems to be an extraordinary thing.

Dave Hartnett: Of course.

Q714. Jesse Norman: We have procedures for deciding what is within the law. In some cases it is unclear what the law is. The judges make a decision; the people pay up. ...

Part Five: Conclusion

5.1 It is clear that the recommendations by the PAC and the TSC on HMRC to 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 have not and will probably never achieve the desired result. It is equally clear that HMRC’s Solicitor’s Office and the National Audit Office cannot be relied on wholly to protect the public interest in regard to the provision of internal and external governance over the collection of revenue from the biggest taxpayers in the country by the Commissioners.

6 October 2011

Prepared 19th December 2011